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Trend Following on Big Timeframes with Xumm

  • #1
  • First Post: Edited Apr 25, 2016 3:34am Apr 22, 2016 2:02pm | Edited Apr 25, 2016 3:34am
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  • #2
  • Apr 22, 2016 2:26pm Apr 22, 2016 2:26pm
The first trade that I'm posting on this thread is:

SHORT USD/CAD

This is the weekly chart

Attached Image (click to enlarge)
Click to Enlarge Name: usdcad22-04-2016.png Size: 18 KB


This pair has been going up for around 3 years, and now changed direction and has already fallen for 14% of its value.
An important thing to underscore it that this new (3 months old) downtrend had only small retracements, so it is relatively safe to trade with a not-too-large stop loss.

Current SL: 1.307
TP: I don't use a fixed take profit, I let the trade run my way until a sizable retracement occurs.
I will post update on this trade as things evolve, and I will write here when I close it.
  • #3
  • Apr 24, 2016 2:48am Apr 24, 2016 2:48am
Hi, Xumm

Thanks for starting the thread. I am also a trend trader and believe it is the best way to trade. I will be following with interest.

MT
  • #4
  • Apr 24, 2016 3:08am Apr 24, 2016 3:08am
subscribed. good luck.
  • #5
  • Apr 24, 2016 4:11am Apr 24, 2016 4:11am
also some ideas for your trading. If you are very confident in the direction of the asset for 8-12 months, you can limit your risks by buying put/call options on the underlying security, this will limit your risks of the spot exposure while preserving same profit potential if the asset will hit your longer-term TP. look into it, fairly simple. )))
  • #6
  • Apr 24, 2016 5:02am Apr 24, 2016 5:02am
yeah I do use options on longer-term trade setups. I don't use binary options brokers I structure my trades via more reliable outfits (Interactive Brokers).

The way put/call longer-term works in simple terms is that there is a break even price which is some distance from your entry - GU for instance 200-300+ pips from current bid, and then once the price moves beyond the price it's pretty much a regular spot position, so say you bought 1 mln notional GBP USD call option to expire end of 2016 it will move to break even once GU is @ 4600 and you will be + 10K USD once we are @ 4700 etc, also option will gain value faster closer to expiry date.

Overall very effective structure longer-term since it trims your risk exposure.
  • #7
  • Apr 24, 2016 6:12am Apr 24, 2016 6:12am
Quoting Xumm
{quote} That's interesting, thanks for the explanation. So basically if the price goes my way, it will act like a regular spot position, while if it goes a lot against me (for instance in a "black-swan" event) my loss will be limited. By that way, are your trades based on trend-following principles too?
yes that's exactly right. Your exposure is limited to the price your pay for your option position upfront, which is a fraction of the spot position entry.

You can use this strategy to trade binary events such as Brexit and limit your risks.

Yes I do use for longer-term trade setups where I see 3-8 months strength/weakness, atm I don't have any trades going in options, all trades are in spot market.
  • #8
  • Apr 24, 2016 11:44am Apr 24, 2016 11:44am
Quoting Xumm
{quote} Hello Asgcorp, you are the first to post in my thread Do you use options yourself? I actually tried to learn more about options in the past, but from what I read about binary options, it seems that brokers offer mostly shorter term options, and that the payout isn't anywhere close to 100% (I read it's usually 65%-70% on longer term trades). But I don't really know much about the topic, so if you know more, please tell.

Hi Xumm,

Below is a copy & paste of a post from a couple years ago referring to options. I used stock/equity options in the example but the same principals apply to forex. Binary options are completely different than what I'm discussing & probably why you didn't hear much good about trading them :-) The profit potential of plain vanilla options can be the same as trading the actual spot but losses can be much less.

I'll delete this post if getting too far away from the topic of your thread :-)

One of the main benefits of options trading is that it requires so much less capital than to trade the underlying stock so I think someone with limited capital is much better off to trade options than stocks. You can get so much more exposure with options than with the stock. The time decay is definitely something to pay attention to but not too difficult to cover that cost. You could take almost any stock portfolio & cut the dollar amount required by 75% and still have the same exposure to the upside & dramatically reduce the downside risk. The reason money managers don't suggest this is because they get paid for AUM (assets under management).

Example:
XYZ stock trading @ $50
Buy 100 shares of stock = $5,000 investment
Buy 1 $45 call(option equivalent to 100 shares)=$500 investment

Stock goes to $60:
Stock investment profit =$1,000 (20% return)
Option investment profit =$1,000 (200% return)

Stock goes to $30:
Stock investment loss = $2,000 (40% loss)
Option investment loss =$500 (100% loss)
***Better to have 100% loss than 40% loss when looking @ the dollar amount.
***I didn't allow for premium (time decay) but going far enough in-the-money removes most of the premium.

GE (General Electric)
Current Stock Price = $26.92
Jan. 25 Call = $1.99
So paying $7 premium for an option that expires in 2 months.
100 shares = $2,692 investment, $25 Call(option) = $199 investment
***Even if I had the money, why invest nearly $2,700 when I can invest $200 & have the same profit potential?
  • #9
  • Apr 24, 2016 11:49am Apr 24, 2016 11:49am
srt +++ good post. Binary options and brokers mostly are scams / con artists.

What you pointed out is vanilla options and it's serious trading business.
  • #10
  • Apr 24, 2016 12:26pm Apr 24, 2016 12:26pm
Quoting Xumm
{quote} Thank you Srt, your post made things more clear to me. I already knew that I could get more exposure using options rather than the underlying asset, but I didn't know that they were so good for reducing the potential losses to a smaller, fixed amount. I wonder why forex options aren't more traded by retail traders than normal forex (or forex CFDs, to be more correct). I guess it's probably because, like Asgcorp said, with options my position will be pretty far from break-even at the start. You don't...
Retail traders don't use options much because most retail traders are scalpers & options are much better for longer-term trading.
Options spreads are wider than spot so transaction costs are higher so getting in & out with 5 pips or less won't happen. Spreads aren't much of a factor with long-term trading when you're going for 50,100, 500 pips. I've traded options for 15-20 years but never for scalping.

The "real" example of using GE stock had only a 7 cent premium so not far at all from BE. So if GE moves from $26.92 to $28.92, the stock investor will have profit of $200 & the option investor will have profit of $193 so not much of a difference. The closer to the money you buy the option, the more premium you'll pay so a bigger move needed to get to BE. Options can be complicated or they can be VERY SIMPLE. Just depends upon how you want to use them. If just buying calls/call spreads or puts/put spreads, then mainly need to understand the basics of options & the premium paid. No need to get too deep into studying the greeks. Best to buy options when volatility is low to pay less in premium. If buying call/put spreads then timing doesn't matter as much since you're selling premium at the same time as buying premium.
  • #11
  • Apr 24, 2016 1:09pm Apr 24, 2016 1:09pm
Quoting Xumm
{quote} I see. I searched the meaning of "near the money" and "put spreads", and I think I understand everything you said now. Probably the best thing for me would be to simply use call/put options (not spreads) with an expiry of like 6 months. By the way, if I want to close my trade before the expiry date of the options, while I am in profit, can I do it without too many penalties? Thanks again for the info.
"American-style" options can be bought/sold @ any time with no penalties. (These are the only options I trade.)
"European-style" options must be held until expiration.

Investopedia is a good site to get information.
Buying 6 month options will have more premium than 3 month options but the decay will be slower.
Buying options closer to the money will have more premium costs than buying options farther away from the money but then there's more upfront cash needed & more loss exposure in case of a large drop. I prefer to buy deeper in-the-money options so I pay less premium. Then it acts just like owning the underlying except you have a limit to the losses & it requires much less capital.

http://www.investopedia.com/articles...ediaSiteSearch
***Don't read too much about the "SPOT" options or you'll get the 2 confused. "SPOT" options is binary.
  • #12
  • Last Post: Apr 24, 2016 1:24pm Apr 24, 2016 1:24pm
Here's a quick example of option prices. (markets are closed so bid/ask not correct so just approximating.)

GE stock price is $30.76.

$28 call = $2.90 so basically buying stock for $30.90 ($28+$2.90). ($14 of premium for option that expires in 54 days.)
$29 call = $1.99 so buying for $30.99 ($23 of premium " )
$30 call = $1.21 so buying for $31.21 ($45 of premium " )

You can see that the premium cost is higher as you get closer to the actual price of the stock but your total potential loss is smaller.

Maximum loss:
$28 call = $290
$29 call = $199
$30 call = $121

Profit if stock goes to $35 & you hold until expiration.
$28 call = $410
$29 call = $401
$30 call = $379
Attached Image (click to enlarge)
Click to Enlarge Name: GE options.png Size: 75 KB
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