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.