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Long term fundamental traders: risk, stops, etc

  • #1
  • First Post: Aug 26, 2015 9:54pm Aug 26, 2015 9:54pm
I have a few questions for people who trade fundamentals/sentiment, or even with a fundamental bias (Eg "in the direction of strength/weakness"). I would really appreciate if anyone could take the time to answer

These questions essentially boil down to trade management.

1. Where do you put your stop? (before a recent high/low, before a certain MA, etc)
If you get stopped out, what would make you re-enter a trade?
I'm assuming that you get stopped out despite no change in fundamentals; after all, if you trade fundamentals, you would get out if sentiment/fundamental bias changed. In case of a stop-out, would you think that maybe fundamentals had changed and seek to confirm/reject your fundamental outlook?

2. What percentage do you risk per trade? Do you scale in? If so, how?

Attached Image (click to enlarge)
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As an example, I've tried to attach a screenshot of AUDUSD earlier this year. This is an hourly chart, showing the period from 20March to 14May, 2015. I wasn't actively watching forex at that time, but I remember the Aussie being weak for a long, long time. However, anyone who entered at the bottom:
- would have been stopped out
- would've had a large drawdown, if the stop was beyond the peak - which brings to mind what lot size/risk percent you'd trade? And what kind of risk:reward you'd seek?

Regardless of being stopped out or in drawdown - after the right edge of this chart, AUDUSD goes down sharply.

How best can you manage such a trade?
  • #2
  • Aug 27, 2015 6:06am Aug 27, 2015 6:06am
Quoting AshR
Where do you put your stop? (before a recent high/low, before a certain MA, etc)
Behind the last swing high/low ..... an uptrend is a sequence of higher highs and lows, a downtrend is a sequence of lower lows and highs ..... keeping my stop outside the last swing means I exit the trade when that sequence is over.


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If you get stopped out, what would make you re-enter a trade?

I don't really re-enter a trade, I wait for the next setup .... which may or may not occur on the same currency pair ....


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would you think that maybe fundamentals had changed and seek to confirm/reject your fundamental outlook?

The fundamentals are always changing, and I'm constantly seeking to confirm/reject my outlook.


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Do you scale in?

No I don't scale in or out. Like martingale/anti-martingale systems, I think scaling in and out is for people who suck at conceptual maths.


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And what kind of risk:reward you'd seek?

I don't seek any particular risk/reward ratio. I define my risk at the start and stay in the trade as long as I can, as long as my directional bias remains and price continues making higher/lower highs and lows in that direction.

Seeking a certain risk/reward doesn't make sense. To put a horizontal line on a chart in a random place and say "that is 2R, so that is where I will exit" - that's dumb, that's just playing accounting tricks on yourself. You obviously had a reason for getting in the market in the first place - get out when that reason is no longer valid, not because the price hit some arbitrary level you just made up based on your initial stoploss.
si hoc legere scis nimium eruditionis habes
  • #3
  • Aug 27, 2015 7:34pm Aug 27, 2015 7:34pm
Quoting numbnuts
{quote} Behind the last swing high/low ..... an uptrend is a sequence of higher highs and lows, a downtrend is a sequence of lower lows and highs ..... keeping my stop outside the last swing means I exit the trade when that sequence is over.
Numbnuts, thanks so much for your reply. I really appreciate it, since I've read a couple of your posts and was wondering how you place/manage trades, especially ones like these: http://www.forexfactory.com/showthre...90#post7926990
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I hope you don't mind a few specific questions - that trade is beautiful
In this case, you saw setups worthy of entering as individual trades? (ie, maybe a Frankfurt/London open that's above the previous swing high or 100EMA?) So, each seperate entry would be managed as an individual trade, which means that at any given point, when a trend is going your way, you might have quite a high % on the table? Do you still use the 100EMA to exit trades, in which case, if you got taken out by a news spike with no fundamentals changing (eg the recent RBA decision not to cut rates, which lead to a jump in AUD), you would be happy to re-enter?

Also - a question slightly unrelated to the specific trade, but do you try to trade the strongest against the weakest, eg GBPAUD instead of AUDUSD? (where GBP might be thought of - at least a month ago - as being "stronger" than USD?)
  • #4
  • Aug 28, 2015 3:56am Aug 28, 2015 3:56am
For 1M I use 5M high/low, for 5M I use 15M high/low, i.e. next timeframe after one I trade on that moment. TP is always bigger than SL including spreads, commissions, slippage etc. Quit trading after reached 3 SL/TP in a day.
  • #5
  • Aug 28, 2015 5:07pm Aug 28, 2015 5:07pm
Quoting AshR
I hope you don't mind a few specific questions - that trade is beautiful c In this case, you saw setups worthy of entering as individual trades? (ie, maybe a Frankfurt/London open that's above the previous swing high or 100EMA?)

I should point out that I don't trade that strategy anymore, my previous post in this thread is referring to the way I trade now.

When I traded that strategy I simply opened a small position every single day before the London open, regardless of what price (or the fundamentals) was doing. It was a very simple, easy to implement system, and it worked - though I believe it was less profitable than the way I trade now, so it didn't make sense to me to have money invested in a less than optimal system.


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Also - a question slightly unrelated to the specific trade, but do you try to trade the strongest against the weakest, eg GBPAUD instead of AUDUSD? (where GBP might be thought of - at least a month ago - as being "stronger" than USD?)

Not really. If I am fundamentally bullish on a currency - say GBP - I will try to spread the risk by taking smaller position sizes and buying it against all the currencies I am bearish on. So if I am fundamentally bearish on NZD, AUD and JPY, I will try to get long GBP/NZD, GBP/AUD and GBP/JPY ..... then it doesn't matter if one of the other currencies does something silly, all I need is for GBP to generally improve across the board vs the weak currencies, and the law of averages should work in my favour.
si hoc legere scis nimium eruditionis habes
  • #6
  • Aug 30, 2015 6:17pm Aug 30, 2015 6:17pm
Quoting numbnuts
{quote} So if I am fundamentally bearish on NZD, AUD and JPY, I will try to get long GBP/NZD, GBP/AUD and GBP/JPY ..... then it doesn't matter if one of the other currencies does something silly, all I need is for GBP to generally improve across the board vs the weak currencies, and the law of averages should work in my favour.
Thanks for the reply Numbnuts, I hope you had a good weekend!

This sounds like a great idea, and not one I've heard discussed before! I hope you don't mind me asking how you'd manage risk with this method? eg if you'd normally risk 1% per trade, assuming three currency pairs chosen (GBP/NZD, GBP/AUD GBP/JPY) would you risk 1% per trade entered so 3% total, or split it .5/.5/.5 or .3/.3/.3 or ... ? Once you've got a bias, would you tend to enter on breakouts or retracements?
  • #7
  • Sep 1, 2015 2:51am Sep 1, 2015 2:51am
Quoting AshR
....... eg if you'd normally risk 1% per trade, assuming three currency pairs chosen (GBP/NZD, GBP/AUD GBP/JPY) would you risk 1% per trade entered so 3% total, or split it .5/.5/.5 or .3/.3/.3 or ... ?

Quantify the total risk you are willing to take on your belief, then divide that risk by the number of positions. Going back to the example above ..... if you think GBP is going to go up, and you want to bet 2% of your account on that belief, and you are buying GBP against three weak currencies, you should risk 0.67% on each trade. Then in the worst case scenario - you are wrong and GBP goes down - you lose a total of 2% of your account.


Quote
Once you've got a bias, would you tend to enter on breakouts or retracements?

I wait for pullbacks against the fundamental trend, and try to enter as the trend resumes. But that's just me, everyone needs to find their own style.
si hoc legere scis nimium eruditionis habes
  • #8
  • Sep 3, 2015 2:19am Sep 3, 2015 2:19am
Quoting numbnuts
I wait for pullbacks against the fundamental trend, and try to enter as the trend resumes. But that's just me, everyone needs to find their own style.
Thanks for your reply. I agree that everyone needs to find their own style; right now I'm trying to grapple with things like entry/exit points. While I'd like to stay in a trend for months if necessary, the CHF craziness has me thinking that "broker risk" is now another type of risk that needs to be managed, and that I need to close a portion of trades regularly...
  • #9
  • Sep 3, 2015 8:32am Sep 3, 2015 8:32am
If I am fundamentally bullish on a currency - say GBP - I will try to spread the risk by taking smaller position sizes and buying it against all the currencies I am bearish on. So if I am fundamentally bearish on NZD, AUD and JPY, I will try to get long GBP/NZD, GBP/AUD and GBP/JPY ..... then it doesn't matter if one of the other currencies does something silly, all I need is for GBP to generally improve across the board vs the weak currencies, and the law of averages should work in my favour.[/quote]

heloo numbnuts,
nice explanation for me too,
would you explain me about how you judge a currency being" fundamentally bullish"?i mean what kind of factor that can be used as a parameter to claim a currency isbearish or bullish?
thanks
  • #10
  • Sep 3, 2015 9:14am Sep 3, 2015 9:14am
Quoting otnishan
If I am fundamentally bullish on a currency - say GBP - I will try to spread the risk by taking smaller position sizes and buying it against all the currencies I am bearish on. So if I am fundamentally bearish on NZD, AUD and JPY, I will try to get long GBP/NZD, GBP/AUD and GBP/JPY ..... then it doesn't matter if one of the other currencies does something silly, all I need is for GBP to generally improve across the board vs the weak currencies, and the law of averages should work in my favour.
heloo numbnuts, nice explanation for me too, would you explain me about how you judge a currency being" fundamentally bullish"?i mean what kind of factor that can be used as a parameter to claim a currency isbearish or bullish? thanks[/quote]

go at his profile at check for older posts ...he explains there
  • #11
  • Last Post: Sep 3, 2015 6:34pm Sep 3, 2015 6:34pm
Quoting otnishan
heloo numbnuts, nice explanation for me too, would you explain me about how you judge a currency being" fundamentally bullish"?i mean what kind of factor that can be used as a parameter to claim a currency isbearish or bullish? thanks
I'm not Numbnuts But I'll give it a short; here are some ways to judge bullishness/bearishness:
1. News - are news reports suggesting a strong economy, possibility of interest rate increases, etc?
2. Sentiment index - % of large speculators who are bullish
3. COT charts - you can find many charts with graphical depictions of Commitments of Traders. While lagging, it's still an indication of what large speculators expect a currency to do
4. Strength indicators like those coded by Hanover

Personally, I mostly go by (1), since it's the least "lagging", and like to see (3) as confirmation.
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