Sunday, December 24, 2006

Fundamentals of FOREX capital control (the end)

7. Defining the ratio between possible profit and losses.

For each potential deal the rate of profit is defined independently. Then this rate should be balanced with the potential losses in case if the market goes in the wrong direction. Usually this ratio is 3 to 1. Otherwise you should forget about entering the market. For example, if the trader estimates the risk from the deal as $100, then the potential profit should be $300.

Since only few deals throughout the year can be profitable, it’s essential to get the maximum profit mainatining the positions as long as possible. On the other hand, it’s necessary to minimize the losses from bad deals.

8. Trading with a few positions.

When entering the market with several contracts (i.e. entering into a contract for more than one lot), the trader should divide them into the so-called trend and trading positions. Trend positions are carried out with quite liberal stop-orders that let keep these positions even in the conditions of price consolidation and correction. These positions give the trader the possibility to get the biggest profit. Trading positions are meant for short-term trading and are limited by quite hard stop-orders. Consequently, after reaching certain price points they are closed and after tendency reopening they are recovered.

9. Conservative and aggressive approaches to trading

Most analytics prefer the conservative approach. For example, Trevels, Harlow and Stone in their book "Play on the commodity futures markets" write:

"... the trader, who has the worst possibilities for getting profit but who observes the conservative style of trading, is likely to achieve long-term success more quickly than the trader who has more possibilities for getting success but who plays aggressively".

10. Rules for opening a position:

a) open a position only having one main and one (not less) additional signal;

b) before opening a position formulate and put down the following things in advance:

· the price when entering the market;

· the price at which the profitable position is closed;

· the price at which the unprofitable position is closed;

· the estimated time of the open position “life”.

c) open against the trend carefully and for a short time;

d) open carefully and for a short time during the flat.

11. Rules for maintaining a position and partial closing before the estimated time:

a) maintain the positions only if the analysis proves the conclusions made before;

b) close step-by-step:

· if you get more losses than expected;

· if the price has reached the estimated point for getting profit;

c) wait:

· if you get fewer losses than expected;

· if the price remains at the same level;

· if the price hasn’t reached the estimated point for getting profit.

12. Rules for closing a position:

· on the expiry of the estimated time;

· after getting the estimated profit;

· after getting the estimated losses;

· after reaching the maximum profit.

Friday, December 22, 2006

Forex fundamentals (part 2)

4. Total margins contributed at opening a position on one market group shouldn’t exceed 20% - 25% of total capital.

The markets, forming one group, move more or less evenly. Opening big positions on each market group trespasses against the principle of diversification, so one should be extremely careful while investing funds into similar markets (for example, software, it-conculting, it-audit and so on). One shouldn’t neglect the very important rule of optimal investments of funds: in a varying degree they should be diversify. The capital should be invested in such way that the losses from one big deal won’t ruin the trader and if possible, will be compensated by the profits from other deals.

On the FOREX markets we can distinguish four main markets inside which the behavior of foreign exchange rates are similar enough: dollar zone, sterling zone, yen zone and euro zone.

5. Defining the degree of portfolio diversification.

Diversification is one of the ways of capital protection. A reasonable compromise between diversification and concentration is always necessary. More or less reliable funds investments can be reached by simultaneous opening positions on 4-6 markets of various groups – but no more. The more the negative correlation value between the markets is, the higher the diversification of invested funds are.

6. Defining the level of stop-loss orders.

Stop-orders are usually positioned over the period of the trader’s absence from his working place. Their main aims are to save the trader form ruining (stop-loss execution) and to provide them with additional (stop-profit).

The stop-loss value depends, firstly, on how much the trader is ready to lose at one deal and, secondly, on his calculations of the market situation.

For example, the trader has S dollar deposit. When opening a position he lets in the losses in the amount of L% of deposit amount.

Suppose that the 100,000 contract was opened with USD buying against CHF selling and at this the opening price was p1.

Buy USD 100,000;

Sell CHF p1 x 100,000.

On what p2 level should the trader position an order not to exceed the level of admissible losses SхL?

If the order on the p2 worked, the position loss would be:

Loss=-CHF (p1-p2)х100,000.

On the other hand, the loss shouldn’t exceed USD SxL, or in CHF - SxLxp2. Consequently, we have:


from where we get the following expression for the order level:

p2=p1-p1 xSxL/(SxL+100,000).

It’s necessary to note that at defining the stop-order level the trader should consider the reasonable combination of technical factors, price and considerations for private capital protection. The more changeable the market is, the further the stop-loss order levels should be from the current price level. It is in the trader’s interests to position the stop-order as close to the price level as possible to minimize the losses from bad deals. At the same time too “hard” top-orders can lead to undesirable position liquidation at short-term price fluctuations (“frictions”). The furthest stop-orders are not sensitive to “frictions” but can lead to substantial losses.

Thursday, December 21, 2006

Fundamentals of capital control

Work on financial markets is impossible without effective programs of funds investment. Effective capital management allows the trader to “survive” on the markets with marginal trade. Only observing equal proportion between profits and expenses, the trader gets a chance to work and not to play with money.

Let’s consider general principles and rules of capital management.

1. Total investment shouldn’t exceed 50% of total capital.

This principle prescribes the margin calculation rule for open positions: the size of the required reserve for using in non-standard situations and for normal work continuation shouldn’t be less than half of total capital. Murphy introduced this number (50%) but many analytics consider the percentage of invested capital to be 5% - 30%.

2. Total investment made in one market can’t exceed 10% - 15% of total capital.

In this case the trader is guaranteed against investing excessive funds into one deal that can lead to ruin.

3. Risk rate for each market receiving investment from the trader shouldn’t exceed 5% of his total capital.

Thus, if the deal turns out to be unprofitable, the trader is ready to lose no more than 5% of the total amount of his capital. The number “5%” is taken from Murphy’s work but, for example, Elder talks about 1,5% - 2%.

To be continued...

Wednesday, December 20, 2006

Wednesday news for GBP on FOREX market (12/20/06)

Wednesday will brig a lot of economic data from the UK. The most interesting are the report of Bank of England and the report on retail sales by the CBI. I predict pound to grow toward the recent maximum at 1.9845. But it can be difficult to overcome 1.9700-1.9740 level.

Tuesday, December 19, 2006

Forex forecast factors

To predict the Forex market changes it’s necessary to take into consideration the following upcoming events:

1. Prime rates decision by the Japan Central bank. Most of specialists think that Japan rates will grow before the end of year. If it’ll be so, the exchange rate USD/JPY may fall lower than 118.00. Some even say that it can be lower than 117.40.

2. European currencies are waiting for the publication of indexes by German Ifo. According to forecasts they can influence the decreasing of the European currency.

3. Most of experts are waiting for upcoming American economic indicators such as Producers’ Price Index. They say than it may lead to USD growing.


After all that huge fluctuations of the FOREX market last week, the dollar managed to strengthen its positions/ As a result the European currency went lower than 1.3100. On Monday the situation continued to develop and resulted in EUR/USD = 1.3052 and GBP/USD = 1.9432

Friday, December 15, 2006

UBS Forex analytics


EUR/USD breaking of resistance at 1.3481, which is maximal for March 2005, opens the possibility for further growth up to 1.3663. Support is 1.3193, 1.3219. The resistance levels are at 1.3368, 1.3404 and 1.3481.

USD/CHF breaking of resistance at 1.2035 opens the possibility for further growth at 1.2119. Support is at 1.1989 and 1.2009.

GBP/USD is likely to have further growth up to 2.01 at psychological resistance being at 1.98, 1.99. Critical support for further ascending movement is at 1.9434-1.9462.

USD/JPY is likely to have further growth up to 118.10. Resistance is at 117.80. Support is at 116.90, 116.50 and 116.00.

USD/CAD is likely to have further growth up to 1.16. Strong resistance is at 1.1560 and 1.1575. The support level is at 1.1395 and 1.1379. Breaking of the support level at 1.1379 can lead to the turning point of the ascending tendency.

AUD/USD is likely to have further growth up to 0.7990. Intermediate resistance is at 0.7927. Breaking of support at 0.7817 can lead to the turning point of the ascending tendency and to dropping at 0.7500.

EUR/CHF, after breaking of resistance at 1.5863, is likely to have further growth up to the resistance level at 1.6000. Resistance is at 1.5926. Support is at 1.5890 and 1.5910.

EUR/JPY trading session was within the trading range of 145.71-150.75. At present the price has broken the upper border of the trading range so we suggest closing short positions as further growth up to 156.50 is likely to happen. Support is at 154.90 and 153.90.

EUR/GBP continues to descend. Support is at 0.6718 and 0.6699. Resistance is at 0.6762-0.6766. Breaking of resistance at 0.6762 can lead to a further growth up to 0.6796. We’ll define the trading range at 0.6699-0.6796.