Ransquawk

Forming a flexible strategy

As many readers will know already I favour trading strategies that are wide ranging and include as many factors as possible since I believe this provides the greatest chance of success.

Including both technical and fundamental factors creates a better basis for trading as it at least takes most drivers into account.

I have been reading several articles recently based almost entirely on technicals that encourage traders to look at “less common” crosses as a method of diversification. In several scenarios that can be dangerous although for experienced traders with a tried and tested methodology, I would say, “why not”.

In banks, where I began my trading career, traders are given a specific “book” to trade and there are very good reasons for that, some of which apply in the retail world and some don’t. For example, a trader is generally a market maker and therefore needs to be fully focussed on his book not to the exclusion of others since he needs to retain an overview but as he also takes positions, he therefore needs to be aware of the support and resistance levels in a similar way to how retails traders operate.

I believe that concentrating on few currency pairs but understanding everything that drives those pairs, be it certain technical factors that apply or, how the pair reacts to various macro scenarios provides a basis for success.

CAD/JPY or AUD/CHF? Why?

The days when retail trading was a zero-sum game where, if you lost the broker won or vice versa, have long since disappeared as the market has turned into a far more liquidity driven animal. It is odd that even though brokers have become a conduit for passing on the prices provided by a liquidity provider, traders feel more comfortable even though they are not receiving the rates direct form the source.

I have always felt that if I see a strategy that extols the virtue of a setup in a cross which is not normally traded that it is a sign that the creator of that strategy is bored or desperate. That may be a little harsh but if you generally trade EUR/USD or even EUR/GBP, what made you even sider CAD/JPY or AUD/CHF in the first place.

The single most importantly message when you see such a scenario, if it interests you and you see the merits, is to make sure you apply your own risk management tools. Test the scenario using your dummy account.

When you first started out, whether that was six months or six years ago, an important part of setting position size limits should have been understanding volatility and a rudimentary version of “value at risk”. It is vital to understand that not all currency pairs carry the same volatility. This is obviously linked to liquidity.

OK, Go ahead!

They say that “variety is the spice of life”. But did you become a trader to spice up your life?

That is doubtful unless I am addressing someone with very deep pockets. Retail traders are, generally, very serious about their craft and the whole feeling of alchemy has almost vanished.

This is a good thing since although they also say it is better to be lucky than good, it is clear that the more you study the market, the luckier you become.

So, go ahead look at the more esoteric trade but as an, adjunct to your standard trading style and even if successful, remember where your daily bread comes from. Just make sure that you adjust your position sizes and have clearly defined stops in place that you consider to be final. If it doesn’t work so be it. There will be other opportunities and other currency pairs.

Consider your reasoning. If your original strategy is not working, take it back to the drawing board, throwing it out and sailing into uncharted waters would be a mistake.

Remember, there is a lot of information and help available to every level of trader, but it is your capital and therefore your decision how you proceed and whether you allow your chosen path to deviate.

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Alan is a highly experienced banker with an in depth knowledge of Corporate Banking, Treasury and Trade Finance. He has had a varied career in Global markets, Risk management, FX Trading and Sales & Interest Rate Management. He has managed sales teams mentoring his team in both markets and marketing.He has been published in a number of journals and has appeared daily on radio to discuss market movements and events. His first novel was recently published.