Bad jobs numbers, mounting Federal debt, European debt woes and other distressing economic reports caused a Yen rally this morning that I happened to witness. I was in a position to take advantage of this by shorting the Australian dollar versus the Yen, which I did and with great results: I made a little over 1% on my account in under 30 minutes. I was definitely happy with that, but what I was most happy about was how I did it.
In general, my method is to trade a set number of units of whichever currency I am working with at the time when I think I see an entry signal. For me, Bollinger bands are primarily where I find my signals, which are simply the first candle to open and close within the high or low band after a run that takes the candles outside of the bands; I trade reversals, basically. I set take profit orders on all of my trades, and my targets are previous support and resistance points, which I look for simply by seeing where the candles hit either one in the past. Since I am entering after runs have occurred, I look at past resistance as likely being new support, so I target that, and vice versa.
The system works. I hit my trading target most weeks (a 2.5% increase in the account balance, starting from the balance on Sunday morning), and weeks in which I fall short typically get made up for in subsequent weeks when I score much higher than my target.
One thing I've not liked about my method, however, are the "air balls" - times when the price action moves in my favor, but the action runs out of gas before it reaches my take profit order. I came up with the idea to sort of "hedge" my trades a little bit by splitting up each trade into smaller, equal parts, and stacking take profit orders for each of them between the starting point and what I think the ultimate target should be. For example, if I think AUD/JPY long looks hot at 78.5, and I think it can get to 79, if I were trading 10,000 units I would put in 4 entries of 2500 units each, with take profit orders at 78.7, 78.8, 78,9, and 79. That way if I'm right, I profit and each position is closed out. I give up a bit of profit compared to what I would get hitting 79 with the full 10,000 units, but if I'm wrong - say that the price only gets as far as 78.95 - I at least get some profit and some of my capital is free to be used again.
This is definitely not what I would describe as an "elegant" trading method. Indeed, it's actually pretty sloppy and I imagine that most traders would turn their noses up at it. I say that because one of its major flaws is that it does cause losing positions to be created that can hang out in the account for a long time. I tolerate unrealized losses in my portfolio, which I doubt most traders do, basically because I keep each position small relative to the total account and I know from experience that losing positions eventually turn back into winners again. I also take care not to trade multiple crossings of major currencies in the same direction all at once - if I'm trading EUR/JPY long, I won't also trade AUD/JPY long, I look to AUD/JPY as a potential short if EUR/JPY turns against me instead. Ugly though my method might be to some, the basic version of it I used between June 1st and December 31st of last year allowed me to rack up 81% in gains. Sure looks pretty to me!
The title of this post then is actually not about this method, though it does describe what using this method this morning was like. As AUD/JPY plummeted, I was making entries with take profit orders stacked every ten pips. At one point they were being cashed out as fast as I entered them, so I just kept moving them down. When the move finally stopped, I switched over the EUR/JPY and did the same thing on the long side. Rapid fire, very fun. I'm looking forward to the next time.
