The Monetary Policy Strategy

Part One

Hello All

I want to start my journal by saying I am not a professional trader, I work, I have a family, I am just an average guy that likes trading currency simply because its passive income that I do very little for. If you are looking for a get rich quick scheme, then this isn’t it. If you want to have a go at me or troll me then please move along. I am not trying to change anybody I am sharing with you how I have developed my style over many years.

Let me start by saying that I like structure and solid reasoning behind anything that I do, pure speculation for the sake of it annoys me so hence I have stayed away from the high turnover trading systems of the 5-minute chart and indicator rich schemes.

As the name suggests I have observed over many years that market prices really only follow with any sort of accuracy what monetary policy is doing, so for example lets take AUDUSD as our example pair.

Currently, in fact as of a couple of days back the RBA held firm at 0.75% and said in the commentary that it would be accommodative towards monetary policy with rates remaining low for the foreseeable future. This has been the status quo for some time, the question is what has been the market reaction to this policy been. To answer this question a little bit of history is needed, to illustrate the power of monetary policy.

In May 2015 AUDUSD price was around 0.81 and the RBA cash rate had just gone from 2.25% to 2.00% and commentary coming out of the bank was suggesting much lower rates to come. At a similar time in the US the Federal Reserve rate was between 0.00% and 0.25% but the reserve was indicating the next move to be up.

I am sure by now you can see where I am going with this. I essentially trade the overall trend of the market if the RBA is indicating a lower cash rate that means cheap money flowing into risk (stock market rises) and a lower currency reflects weakness in the economy which is why the RBA is stimulating the market in the first place. If the rate is going up then stock markets will cool some, the economy will get hotter and rates will increase as the reserve tries to stop it from overheating by increasing the price of money.

Essentially with the AUD cash rate low and indicating to the market that it won’t be moving for some time then the market will have a predominantly bearish sentiment. No currency pair trades in a straight line but it’s important to understand the sentiment of the market and what is baked into it.

That’s all for part one. I will try and break this into sections to make it easier to read and grasp. In the next section I am going to talk about actual trading but wanted to get this bit out of the way, so you understand the strategy around overall sentiment first.

Simon

Part Two

Thanks for reading Part One I hoped you enjoyed it and understand the thinking behind my trading strategy.

Trading is the tricky part, if there was certainty then it wouldn’t be called trading so you have to get comfortable with the fact that currency pairs fluctuate up and down widly at times, but the dominant trend will always be more powerful, so therefore if the trend is bearish then the charts over the longer run will indicate this.

Let’s use AUDUSD as our example. As mentioned earlier we know from May 2015 that we have fallen from 0.81 to 0.67. The following chart shows what has happened to this pair since 2015 and when the RBA started its latest round of lowering, accelerating after 2017 and also coincided with the return to around 0.81 and then accelerating down to 0.67, roughly to where we are today. (see Chart)



So with this methodology in mind we can now play the market at its own game, as long you understand what the sentiment is doing to this pair and that there will always be money in the market making this pair bearish for now until monetary policy on either side changes. To understand sentiment you simply need to understand what the respective reserve banks are doing and what commentary they are giving the market participants this decides what is the overall direction of the market.

In Part three we will look at actually placing trades and working out the entry and exit “ranges”.

Simon

Part Three

Placing trades is the difficult bit and where to enter and exit is hard. Appropriate money management techniques, calm rational thought is the only way to trade, so with this in mind I engage the following so I can not be dragged into emotional trading.

1. All trading “aids” i.e. indicators, Fibonacci etc are all bullshit and are not used at all, if you believe in indicators then stop reading now cause this journal is not for you. The only truth is price as this is real money moving the market showing the intention of traders. Indicators all lag price so therefore cant predict the future.
2. I use Pro Real Time charting software (www.prorealtime.com). The reason I use them is for zero cost I have an account which I can see all the charts at yesterday’s close price (GMT 0:00). This may seem strange to not have live charts, but on the contrary it allows you to be clear without the emotion of active charts. Try it for yourself analyse a few pairs on a closed chart during the weekend and you will see the value of having things stop and give you time to think.
3. I use the daily charts to do my analysis on. There is a number of reasons for this but the main reason is that 1 candle per day is normally a clear message and you can see what the price action really is, try comparing 24 x 1 hour candles, it's not that easy.
4. When I enter or exit a trade, I don’t try to get it down to an exact science (to the pip) this is a mugs game, this is silly and foolhardy way to try and guess exactly where thousands of traders across the world are going to land. What is eminently easier and more sensible way to enter and exit is to work out the range of price that makes the most sense. Does this mean you might need a bigger stop loss (perhaps, but keep to proper risk/reward MM) but by doing this you also will get bigger winnings, so the ratio of risk is still acceptable.
5. It's important to recognise that whilst I have already explained my thoughts around sentiment and direction of a currency pair, it's also very important to recognise that you can still and should play both sides. Supply and demand means that pairs will go up and down looking for clusters of orders to test, this is the culmination of all the traders in the market placing their orders.
6. Finally, too much info is too much, I try and stick to just a couple of pairs, think of the way a trader at a bank will work, they would not look at 20 different pairs at once and neither should you, concentrate and specialise.

In the next section I am going to go through an example on AUDUSD and explain my thought process.

Simon

Part Four

In previous sections we have gone through the effect of monetary policy on currency, now we will look at an example. I like and feel like I have deep knowledge on AUDUSD, so this is my choice to use here:

1. Through August, September and October 2019 the bottom of the current range was put in, (see the chart.)


A word of caution, in my experience a support level holds a maximum of three times (not always remember this is not a science), so when price was pushed down into this area it represents
- A place to exit from the short trade
- A place to enter a long trade.

Now that we know where the range is we can start to look at candles and what story price is telling you.

This following chart displays the recent price action and how it affects the direction (see chart)


The next chart displays where I think the current upside could take us, however never automatically enter or exit a trade until the price action (Candles) tell you too, you will notice that on Monday 3rd Feb close the market clearly gave two days that showed momentum to the downside had stopped, so now it was time to either enter or get out.


The most important lesson if price blows right through your area, don’t get upset just accept that price is king and your job is to respect the message and close your trade, but most of the time prices tells you when to act.

Simon

Part Five (Last One on Strategy)

The final part to my overall strategy is extreme patience. Doing nothing in trading is making money - why - because you are not loosing on trades you shouldn't be in. Price will tell you by the types of candles it forms and the ranges it pushes into when it is time to execute an order. Treat your orders like a fine wine save them up for a special occasion, only enter and exit when price is telling you too.

I will use this journal to share my analysis and thoughts, if you get something out of it then terriffic I hope you enjoy it and make less mistakes than I have throughout the years.

Enjoy

Simon

Day to Day

If you are the type of person that spends hours and hours each day with your charts then get a job as an analyst, you really have no business being a trader. A trader by definition is someone that trades something when its is advantageous to do so, if you spend all your time doing analysis, you are essentially searching for trades rather then relaxing and waiting for the market to present it to you.

I would argue that the volume of trades a person does is directly connected to their success, most high volume traders burn out and fail, simply because they get tired and make bad decisions. Take Aviation as an example do you want the pilot of your plane to have been up all night studying the map or working out flight schedules before they take off, no of course not you want someone that has done enough work to be informed to do the job safely and affectively, the same goes for trading just enough analysis to be informed and that's it.

To change your fortune in trading you need to change habbits I learnt this the hard way as I am sure everyone does, work smart not long.

Simon

Have to be Clean

A long time ago I decided that I wasn't going to use any indicators, at all, just lines to mark ranges. The reason for this is that in order to be clear about whats happening you have to remove the noise. One of the things I did to help me prepare to let go of all my trading crutches was a total news blackout for a week, essentially I didn't listen to financial radio, watch financial news TV, or read any financial websites and I can tell you it was a very refreshing world without all that extra crap, you really don't realise the affect all that garbage sprouted by talking heads has on your mind set.

After that it was easy to remove all the indicators from my charts. I realised that I didn't need them, all they were doing is influencing me in the wrong way and not allowing me to see the real picture. I respect people that like and use them and wouldn't criticise people for that but they are not for me. Price is king in our world and the only indicator you need.

Simon

AUD - Today's Analysis 6th February 2020

I look at my charts once per day, as mentioned previous I used closed charts from the previous day at GMT 0:00. so with this mind todays chart looks like this



After the bullish candle of Tuesday indicating strong buying support, yesterday we cooled somewhat, this is only for the reasons that in order for the direction to swing around there must be a retest of the bottom of the range, now its important to recognise events that can assist with this as liquidity is needed for this. This week is NFP so therefore traders might use the liquidity in the market to do this, remembering that from yesterdays close to the bottom of the range is about 80 pips (a nice NFP bump). Once the bottom of the range is tested (and if its holds) then we will have a green light to go up but not before in my opinion, and if you look back at charts history agrees with this analysis.

Long trades are in range now but only up to the early 0.69's with entries around 0.67 with a potential SL of around 50 pips to give it enough room to move and a nice 4:1 payoff. The prudent move might be to see where it closes on Friday after NFP is done and look for an entry on Monday or Tuesday next week. Time is your friend and missing the perfect entry by 10 pips is not worth the heartache of getting in too early without waiting for the market to speak.

Good Luck

Simon

Lets Talk about Money Management

One of the most underestimated things in trading is how to deal with money. I have learnt like everyone else that you manage poorly at your own peril. I am not embarrassed to admit that I have been wiped out a few times in my early days, at the time it was terrible but it did teach me a few lessons.

Trading is only about risk, and how much risk should you take, this is always the burning question. I have seen systems displayed here and other places that accept 50% downside risk, for me this is not acceptable. In currency trading I think a 3:1 trade against overall sentiment and 4 and 5:1 with overall sentiment is an acceptable trade, because you won't win them all so when you do loose its really important to cap your losses quickly and move on.

Humans have this funny quirk that we want to be correct all the time, in trading this attitude equals death by a thousand cuts as the market is relentless to those not strong enough to accept when they are wrong.

In terms of actual dollars I like to risk only a few percentage points at a time, now many will say that if you have a big account thats easy, but if you have a small account this isn't possible, well my answer to this is bullshit, your account size reflects where you are in your trading life, your percentage of risk should always be small and manageable so the amount of dollars you have will grow if you keep to this philosophy.

Simon

NZD - Todays Analysis 6th February

I also like and trade the NZDUSD pair, it makes sense to me and fits my strategy quite nicely. In line with Monetary policy strategy it has been steadily falling since the start of 2015, in line with interest rate cuts lowering the price of risk pushing cheap money into share markets and sending the currency down.



Since this time it has settled into a range with a predominant sentiment of bearish controlled by monetary policy decisions. Much like AUD, the NZD trades in ranges for extended periods but this is a good thing as it can make it more predictable, after a huge reserve bank inspired Santa Claus rally (more on that later) NZD has now settled into its bearish trend on the way towards the low 0.62's for now I am holding my short trade until price indicates there is a change.

This chart shows where my ranges are, upside price is weak, hard to see anything but bears for now



Simon

Get Comfortable with the Uncomfortable

One of the reasons that trading is difficult is that it stirs may emotions in you (if you let it). As mentioned earlier you have to accept that you are not in control and for many humans this is a problem. To deal with the uncomfortable I have developed my strategy of detachment (i.e. don't get too involved in the market each day) which essentially means removing yourself emotionally from the machinations of the market, stop looking at charts, your phone, every news broadcast etc.

Trading is in two parts

1. The comfortable Part - which is your analysis, entry and exit

2. Uncomfortable Part - everything else

Once you accept that very little that goes on each day you have any real control over, the better your trading will become

This took me a long time, i probably fought this one the most, you don't really realise you are doing it and I had to dig deep on this one. Trading is fabulously satisfying and a cruel bitch all at once, so the more distance you keep from the action the better off you will be.

Simon

The reason for this Journal

I thought I should explain my reasoning for writing this journal as people might be interested. I started trading Forex in 2007, i can't tell you how many different ways I traded. I have tried trading small TF, large TF, scalping, day trading, indicators etc. I reckon it took me 4 years before I actually stopped and started to develop a proper system. I did a lot of self education about the reason pairs move the way they do. I purposely steered clear of forums like this (not because they arent worth it) and only joined FF in 2017 but still probably wasn't ready to talk publicly even back then.

I don't do this for any other reason now than to share what I have learnt with the traders here. I am comfortable with what and who I am as a trader. I am not rich and don't think I ever will be from forex as I am not prepared to take stupid risk. I am comfortable trading well within myself and making a nice passive income along the way. The wife and I have had a few holidays and luxuries thanks to trading and that's good enough for me.

If I could speak to the 2007 version of myself I would say slow down, relax and work out exactly what it is you are trying to achieve and develop a strategy to attain this.

Simon

Todays analysis AUD Friday 7th February 2020

Fridays are often a bit of nothing day, traders will often close out positions, so its not a great day to trade. However today is NFP day so we could get some fireworks later on. As mentioned in my previous analysis my thoughts were that after establishing the bullish candle(s) earlier in the week price action would continue downwards retesting the bottom of the range around 0.67.

Todays Chart, (remembering I use closed charts, so this is as of GMT 0:00 close) looks like this



Today is the pivotal day as to whether the support holds. I see price at 0.6680 needing to hold and close above this level for the range to stay in tact. My trading gut feel tells me it will stay above this but nonetheless if it dosent we will play what comes next. I have exited all short trades but I am holding a long trade on AUDUSD with a stop below 0.6650 with a target of 0.69 over the coming days and weeks.

See how its goes

Simon

Todays Analysis NZD 7th February 2020

Not a great deal to report here other than to say that NZD continues on it bearish sentiment the last couple of days have been weak price action, however nothing seems convincing to me to exit the current short trade. Here is the chart



NFP will offer some extra liquidity so we should get to see a bit more force in this pair.

for now the status quo, watch and act.

Simon

Is it a business or a hobby

I decided in 2011 that after yet another wipeout and failure that my trading needed to become a business. I say business but I dont live off trading nor do I intend to but, a business in the sense that I wanted to take it seriously, work out my strategy, work out my money management, and understand where I wanted to go with it.

Once you go through this process suddenly everything becomes a bit clearer at least it did for me as finally i think i worked out what type of trader I am and where I wanted to go, through a clear strategy and a plan that I have documented most of it in this thread.

It was important for me to recognise that without a plan, without a way forward there was only backwards.

I hope you are getting something from my ramblings, as forex can be confusing and fast paced a deadly mix if you go in under prepared.

Simon

Beware Low Liquidity Trading

Christmas time is a really interesting time of the year starting around the first week in December, its interesting because the liquidity that exists in the market all year suddenly goes on holidays and the main source of liquidity is the reserve bank.

Take this chart as an example



This is the December 2019 rally of AUD, now look closely at the tiny pull backs and the huge bullish candles in this month long rally, thats about as one sided as Forex gets without some sort of news event to drive it. Given how quiet the markets are at this time of year, this is pure reserve bank action, for months and years they have been in the market buying against the selling keeping the currency stable, this lull in the market represents a chance for the reserve to cash in a few chips.

Low liquidity is dangerous as all bets come off to a degree as agendas can get played out.

Simon

Define the behaviour then devise the strategy

Hello All

Most traders I have seen get their strategy/systems around the wrong way, just like in business those that go broke mostly develop a product first and then go in search of a customer. The same philosophy is true in trading, if you develop your system first then see if it stacks up through backtesting then you are doing exactly what most people in business do.

In trading I have found that it is super important to define the behaviour that the market exhibits rather than devise your system and backtest. Take my strategy as an example I have defined the behaviour of a few pairs that move depending on the action and commentary of the reserve bank (behaviour) so from there all I do is observe the price action to work out when to enter and exit. If I had tried to devise my entry and exit strategy first by just observing price action how would I know what the triggers for sentiment would be (see the problem)

Simon

Todays Analysis AUD Sunday 9 February 2020

Well it was a very powerful friday with strong downward PA, I think i put in one of my first posts that monetary policy decides the sentiment and at the moment we are in a downside movement for AUD, so even though I telegraphed earlier in the week that I though AUD would retest the bottom of the range around the high 0.66, but thought we might of got a bit more of a bounce off this level.

Here is the chart



So what to do with my open long trade on AUD my stop is below 0.6650 and depending on what happens on monday I will probably get stopped out on this one with a loss. I am sure I have already said this before today but you have to listen to the price action, and that downside push on AUD is a big signal. Anyway lets see what happens. Monday is a new day and we will see where it takes us.

Simon

Todays Analysis NZD Sunday 9 February 2020

NZD continues down with overall sentiment towards 0.6250. I dont see any reason to close the short trade, price action suggests that downside will continue.

Here is the chart



Price action suggests no reasons to change course.

Simon

Todays Analysis AUD Monday 10th February 2020

One thing in trading is that two days are rarely the same, and 24 hours is a long time in the markets. Friday seen a very big fall in AUD and that sort of price action shouldn't be ignored.



So I am at the cross roads with my current long trade, I think 90% i get stopped out and 10% it goes my way after friday's action. I think the US session today will decide it. Price is king and we have to respect the message it is giving us.

Simon