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In last week’s Trading Tutors Newsletter I discussed the concept of trading in the currency markets with a long term outlook, looking for both growth and income from a position.
In this week’s article I will discuss techniques that can be used to analyse the long term trend of a currency and also look at ways of holding and managing a position for the long term.
As a Safety in the Market student I predominantly use swing charts to determine the trend of a market. Swing charts can be viewed on any timeframe, whether daily, weekly, monthly or yearly, or even a five minute swing chart.
Let’s take a look at the Euro Futures Contract (EC-Spotv in ProfitSource). The Euro had a strong bull run from 2005 to 2008, as seen in Chart 1 below.
Chart 1
click to enlarge
Notice throughout this bull market that the monthly swing chart showed higher swing tops and higher swing bottoms the whole way – the monthly swing chart trend was up the whole time.
One method of trading for the long pull would be to simply run a trailing stop loss underneath the monthly swing bottoms. Every time the market confirms a higher swing bottom on the monthly chart, you could move your stop loss higher to just underneath the swing bottom.
This is a technique taught at Safety in the Market’s Interactive Trading Workshops.
Trading off a monthly chart is something that many traders overlook, purely because it can seem like an age for each higher bottom to form. If you understand swing chart construction, you know it will generally take at least three months for the next higher swing bottom to form. This is where patience comes into it.
Now if you had bought the Euro around its November 2005 lows at 1.17, and trailed a stop loss underneath monthly swing lows, you would have stayed in that position until August 2008, where you would have been stopped out at around 1.5200. That’s a potential profit of 3500 points, or over $43,000 per contract over three years.
However, if you have studied Gann’s work you would know that he didn’t just take one position and sit on it for years. Instead, he added to his position to make it larger and larger as the market moved further in his favour.
You might add contracts every time the market confirms a higher swing bottom on the monthly chart. You could buy as swing tops are crossed. These are fairly straight forward swing charting techniques.
Or, you might buy every time the market makes a retracement of “X” points or days. The question is, how do I determine “X”?
In his book “The Wall Street Stock Selector” Gann discussed looking at the first major pullback a market made and use that as a guide for future pullbacks. In the Euro example in Chart 1 above, that would be a 524 point pullback, as taken from the monthly swing chart.
I’ve provided a few ideas here but there are many ways of applying them to a market. I would encourage anyone who is interested in applying these techniques on their own markets to go back over previous bull market and bear market ranges and see which trade management style worked best in hindsight, to give you an idea as to what may be the best way to manage your next major campaign going forward.
If your trading plan can’t make money in the past, it is unlikely to make money in the future, which is why back-testing is so important.
Always remember when adding to an existing position that your risk on the position should never be greater than your initial risk on the position. For example, if you enter a trade risking a maximum of $500, then six months later you should not be risking $10,000 on that position! Use the market’s money to increase your position, by only adding after profits have been made.
Be Prepared!
Mathew Barnes
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