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team Graham Parlane

Systematic trading (avoiding the BIG losses)

Posted by Graham Parlane on 2 October 2012

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Over the years I have developed structure around my trading to avoid waking bolt upright, in a hot sweat at 3.00am wondering if my trading account has been destroyed. Trust me, I’ve had too many of those occurrences early in my trading career and they are to be avoided.

The market is never the most rational of places to risk your capital and strange short term moves always occur. With that in mind I thought last week’s action in the NZD/AUD would be a great example to document.

The method I employ now for my FX trading is for example, that if I am bullish, I will stay long whilst the price action is above a couple of shorter term moving averages. In effect this method is beneficial in two ways, one it creates a point to place my stop loss orders and two it avoids me ‘falling in love’ with a position (We see the pitfalls of trading through the actions of so many trading clients and one thing that often crops up is that the more a client believes in a trade the more likely it is that big losses will occur because the trader thinks his view MUST eventually happen so he won’t let go of the idea when wrong).

I’ve been long NZD/AUD from 0.7730 as I have been particularly opinionated about the prospects for this cross for many months now. My short term moving averages guided me to have my stop loss working at 0.7795. The unexpected happened early last week with a billion dollar flow from one of the local banks repatriating profits back to their Australian parent – the cross fell (alarmingly, to me !) triggering my stop loss order. Whilst obviously disappointed I knew the trade wasn’t necessarily over because, as the moving averages were still pointing up I needed to place a stop entry order above them to return to the trade should the price action reclaim the ‘model’.

Sure enough the big flow only had a fleeting impact on the trend of this cross rate and I was soon knocked back into being long.

NZDAUD – click here to view chart

Thus as it panned out I was cut from my long at 0.7792 and returned to the trade at 0.7818. So whilst annoying, the wash up means that I have only missed participating in 0.0026 points of this uptrend whilst avoiding the potential for a much bigger loss (it’s the big losses that see traders ruined). And importantly this trade still looks like it has much further to run with Australia likely to cut rates sometime ahead whilst NZ remains firmly on hold.

There’s two obvious ways to trade the market, get on the ‘rich list’ so that you can cope sitting on offside trades until they ultimately come right, or for mere mortals, trade systematically with appropriate risk profiles and watch your trading account slowly build, avoiding major losses along the way.

Avoid the hot sweats, talk to me and learn how.

G.

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