Thursday, October 30, 2008

Manage your currency holdings

In my last post I told you I can't really invest. Buy and hold, I tried it for two days but took profits the moment it looked ripe. Still for a few months now I am a kind of long term swing trader as I now come to realize.

I have my IB account for some time now and when I opened that account in 2000 I think it had to be in US-Dollar. I never got around changing it to the Euro base currency, even if I live in Germany and obviously need Euro to pay my bills. For more than 5 years I just held the currencies as they came in. This year it happened to be mainly in Euro and the British Pound, as I traded mostly instruments valued in these currencies. As long as the Euro was rising that was just fine, as my USD-balance went up and I started the trading day with some gains already banked (at least in the USD). But when the Euro started it's slide it got more and more difficult to trade back the USD-loss I started the day with. Actually I changed my daily trading excel sheet, to include the daily E/U exchange rate and converted my USD holdings into Euro. Now I realized, that I wasn't doing that bad. The USD-loss I saw in the morning did not transform into a loss in my Euro holdings, as it was just happening due to a change in the E/U exchange rate.

And finally I realized, it might make sense to set certain levels, where I convert my main currency holdings into one or the other currency. I decided to go long USD, if and when the Euro broke the 1.39 level. I know, that's late, given the Euro had seen the break from 1.60 already, still, you need to set levels at which you react and I thought, If 1.40 holds, then we go up again and I'm better off holding Euro's, otherwise we go a lot further down and it might make sense to hold USD.

You know how it went. The euro broke down to about 1.2350 and while my account remained fairly stable in the USD, when converted into Euro it made a huge difference.

On the way back up, I was quicker. Two days ago the Euro had broken 1.25 to the upside and the Asian markets traded it to 1.2570 when I opened my screen in the morning. I saw that as a double bottom and converted my currency holdings back into Euro.


Now I start the day again with nice USD gains, which translate to no gains at all converted to Euro. But I do not lose on this Euro rise by holding USD, which is something already. We see huge movements at the moment, which took months in the years before and I might have to react fast, if Euro starts to plunge again. Still I'm looking at 60minute and daily charts now in the Euro instead of 250, 50 and 10 tick charts for my intraday business.

I am naturally Euro long living in the Euro area. So holding Euro doesn't do me any good. But making money on a rising Euro is something for my daytrading business until I hold funds in such amount, that I can really hedge against averse movements. Making money on a falling Euro is something different, as I just need to park my money in a different currency. Around 1.29 to 1.30 is the new level, which the Euro should not breach, if we hold above 1.30 today. Actually I see the Euro with an upward bias for the next 7 days until the ECB rate decision next Thursday, when Trichet might decide to follow the FED step in a 0.5% cut in rates, which might trigger the Euro selling again.

Wednesday, October 29, 2008

Investment Plan III

I'm a daytrader, I can go to swingtrading, but monthly investments....that will take time to get used to. The first trade is closed and will be reopened at a lower level. I really can't help it, but a 13% return on investment in 2 days is just too nice to be left floating around. Especially in an environment, where volatility is high and the downside potential is a lot bigger than the upside.


Still I learned quite a few things in this trade. And one is that you can't underestimate greed! I held off selling the Call, because I thought, if we get that 1000 point spike in the Dow, then 12$ on UYG will look shabby and I will regret having sold the 12$ call. I still had the order in at 1$, but there was never a realistic chance to get filled with the call trading 0.25 0.35 for the last 2 days. On the other hand I might get more greedy on the Put side. Not taking one that far out, but a nearer strike, which is priced higher. In case we rally I always can buy it back and resell. The 7.00 Put I sold went down 33% but it was still just 25$ as it went from 0.75 to 0.50 when I bought it back.

Now I will wait for the FOMC and reenter the market. Not necessarily in the Financials, but maybe in the Dow30 (DDM Ultra Proshares). And I actually might do it by selling the Put first.

It's an interesting area of trading, which really moves aside from my daytrading business, as it moves at a different pace.

Will keep you informed.

Tuesday, October 28, 2008

Investment Plan - II.

I started the plan yesterday.

Long UYG at 8.00,
sold the November 7.00 strike put for 0.75, but
held off selling the November 12.00 strike call, as it was trading at 0.25, which I was not willing to accept, considering the upmove potential and the possibility, that we are near a Double or Tripple Bottom.


Charts favor a further downmove, I know. Still this morning we have a huge reversal in the Asian markets and Europe is opening with a Gap-Up. With the FED meeting ahead we might actually see some kind of relief rally and then I should be able to sell my November 12.00 strike call at 1.00$ or more.

I also had a sell order for the DDM (Ultra Proshares Dow30) November 23.00 strike Put in the market yesterday, but wasn't filled.

Only thing I need to get used to now is, that my account window on my trading platform is now always showing open positions, which have nothing to do with my daytrading business. Actually I'm already thinking about opening a second account and moving the longer term stuff there. Might be a good idea, if I do not incur monthly costs in that account at IB. Will have to check, if an account without any market data subscriptions will cost me something.

Sunday, October 26, 2008

Investment plan

Maybe I have been watching CNBC too long, as I am starting to believe, that the current price levels are actually starting to look interesting to begin a longer term investment in the markets. Despite the gloomy economic outlook I'm convinced, that the (financial) world will not end and that we will avoid the Japanese stockmarket pattern in the US. I might be wrong, but then I'm starting small so I will not incur huge losses.

I have no idea which company is worth investing in and actually 8 years ago I lost so much in the stockmarket, that I'm still not willing to trust myself in this regard. But I know a lot about indices and trading indices is what I do for quite some time now. That's the reason, why the Proshares Ultra ETF's look like a good investment vehicle to me. Volatile enough, that even small investments can offer reasonable returns. And the Long ETF's trade at such depressed price levels, that this fact makes them a nice learning vehicle.

Take 100 UYG long now, which are the Ultra Financials, and even when the Financial sector is nationalized, the maximum you risk is 825$.

But just owning stock is not what I look for nowadays. I'm a greedy bastard, which means, if I decide to become a stock owner I want to be paid for the risk taken and that means Covered Call writing.

So after I take the long UYG at 8.25, I will decide that I am content with a 30% profit in 20 days.

That would mean a price for UYG of 10.73. Selling a 10$ call for 0.75, for which I will get 75$ gives me exactly that. If UYG trades above 10$ at expiration, I have to deliver my UYG shares and give up the additional gains, but as I said I'm content with a 30% profit in 20 days. It's like taking a target in my futures trades. I usually miss 50+% of a good move in any trade taken, but I'm more than content with a nice profit made. And if UYG trades below 10$ at expiration I got a nice 75$ for holding something worth 825$. That's 9% interest paid in 20 days! Try to get that for just holding your stock in your account.

Ok, that's a fine return, but in November I plan to buy another 100 UYG.

Now Art Cashin on Friday said something very interesting: If he would like to invest in this environment, then he would sell a put and wait until the stock is given to him.

I first did not understand him, to tell the truth, but it's actually ingenious!

I know, that I have an investment plan, which tells me to buy 100 shares every month and I have the money to do so.

Now I think about the investment I am willing to make and about the price I think it's reasonable to add. 30% below the current price level is a price I consider worth adding to the financial sector. So I think UYG is worth another investment at 5.78$. That means I will sell the 7.00$ put at 0.80, which gives me 80$. If UYG trades below 5.45 at expiration, I pay more for UYG than necessary (I included my profits for the expiring call here). But considering my belief, that the US can and will avoid the Japanese stockmarket syndrome, which shows us a declining stockmarket for 2 decades now, I think, I will see a time in the future, when the financial sector is sound again and the UYG will trade above my average.

And if UYG trades above 5.45$ or even better above 7.00$ my next investment in UYG is already 80$ cheaper.


In the unlikely event, that UYG trades above 7$ but below 10$ at expiration, I receive 155$ for owning stock I want to have and consider worth adding to. Not a bad return for 20 days doing nothing.

Obviously I'm not the first thinking these thoughts and I'm sure some of you reading this can point me to errors in my thinking, as I really have not a lot of understanding in options trading. Please let me know, if my basic thinking is wrong, if I take on higher risks than I see now following this plan.

Saturday, October 18, 2008


It doesn't matter how bad your screw-up was, if you recognize it as a screw-up, if you are able to see, why it happened, you are already on your way out of the woods.
Losing 30% of your account in one day? With the recent turmoil in the markets it can happen and has happened to more than one trader I know.
But the question is, what do you do next? Why did it happen? Was it your system, which made you consistently money in the past, only to be lost within a few bad bad trades, or did you change your own behavior, your own responses to the market.

Certain trading techniques work great in a ranging or slightly trending market. But if the range/trend goes 500 points as you see in the YM recently only to reverse within the next 30 minutes, any trading method designed to scale into a trade, when it is at a loss, might not work, because the range is just too high. It worked in calmer markets, but it does not work right now, as you can't afford the risk involved.

Did you ever try to swim in the ocean, when the waves are between 1 and 2 or 3 meters? When they go beyond? If you are not careful and a wave breaks over you, and you are pressed under water, struggle to come up, only to have the next wave break above you again, you might feel real panic. Only by calming yourself and diving below the next wave instead of tumbling around, will you reach the surface again and be able to swim to shore.

Using trading methods, which worked for years will kill your account in this environment. But the problem is not your trading approach, your trading rules. They are most likely still sound, even if we have very high volatility.
Good trading rules work on small intraday timeframes as well as on daily charts. The only difference is, that the risk and the possible reward increase the higher the timeframe becomes.
Currently we see daily or weekly ranges made within minutes and hours. But that doesn't mean, you won't get good trade entry signals.
But your money management rules, they need adjusting!

Why are you a daytrader? I know, why I'm a daytrader. I can't afford the risk associated with holding overnight. My targets are smaller and the risk I take is smaller, as I place the stop nearer. But right now -as we all know- we see daily ranges within minutes. That means you need to adjust your stop or you get stopped out a lot more often than you are used to. Most of us trade with targets. If the Internet connection breaks down, at least a stop and a target order are placed. But did you adjust your target to the higher volatility, to compensate for the wider stop?
Most likely not, because you trained yourself to be content with 10 or 20 points even if the market ran another 100 points after you exited. Adjusting this is very difficult, as you need to overcome your fear of losing paper profits.
And, at least I, can sit calmly in a trade in the red, as long as my stop is not hit, waiting for it to return to green, while sitting in a green trade for a longer time always urges me to take profits now, instead of waiting for the next leg and the continuation of the trend.
Adjust your maximum position size. If you scale into a trade adjust the levels at which you scale in. be prepared to go out in a moments notice, if the trade does not work, because some moves just don't stop at the moment.

If you lost high, do what you always do, see where you failed and continue trading your signals. You can't climb out of a 30% loss in a day. But if you have a sound system, it will work in this environment, if you adjust your money management rules. And once you made it back, don't relax, continue doing what you did to climb out of the hole, so you can start the next leg up in your account.

Friday, October 10, 2008


You ever wondered how Money is created?

Take a seat and watch these videos

Part 1:

Part 2:

Part 3:

Part 4:

Part 5: