How to play the medium-term trend? Help!

[Trader01]

Greetings to all here -- please help & advise--very grateful for any ideas, caveats, suggestions, etc.

I play intermediate & medium-term trends in the stock market, sometimes holding positions for weeks and months and have thoroughly enjoyed it -- a serendipitous encounter has empowered me to switch over to the Forex market.

How should I play the Forex for the intermediate and/or medium-term? I am new to the terminology of Forex, but am confident that my Technical analysis skills will shine in this market because everywhere I look I see just plain, delightfully gorgeous trends, up or down -- they look far cleaner to me than what I've thus far been accustomed to in the stock arena.

My initial focus will be on Eur/USD & USD/JPY.

My confusion prevails w.r.t. leverage, rollover costs etc.

My feeling is that once I discover and establish that a new trend is aborning, I can enter in small doses with no more than 2:1 leverage (is this too low?) and giving my positions a wide berth (distant STOPS) and then as the market validates me, I could add more positions -- in wave 3 (elliottwave) I could really turn on the coal in terms of leverage.

But it has not yet clicked in my mind as to how leverage, rollover etc. should be taken into account in this strategy.

Can the pros here help me?

Much obliged.

[Rhody Trader]

My advice, and I'm sure others will say the same, is to get yourself started using a demo account. There are many available.

That said, for a long-term trend trader the roll-over cost is a definite consideration. You'll want to, where possible, have the interest differential on your side. One way to kind of get a view on how the roll-over plays its part is to look at the futures and the spread between the contract and spot. You could use that to help approximate the interest cost/benefit for a given holding period.

Obviously, leverage is a consideration, but you seem to have a good idea of how to handle it. If you understand the risk, then what your actual leverage usage is doesn't really matter too much.

[Trader01]

Originally Posted by Rhody Trader

My advice, and I'm sure others will say the same, is to get yourself started using a demo account. There are many available.

That said, for a long-term trend trader the roll-over cost is a definite consideration. You'll want to, where possible, have the interest differential on your side. One way to kind of get a view on how the roll-over plays its part is to look at the futures and the spread between the contract and spot. You could use that to help approximate the interest cost/benefit for a given holding period.

Obviously, leverage is a consideration, but you seem to have a good idea of how to handle it. If you understand the risk, then what your actual leverage usage is doesn't really matter too much.

Thanks Rhody -- I've been on demo for 5 days now and its going good -- without "emotion" its not the real thing, but far better than having nothing.

W.r.t. the interest rate differential, Long USD/JPY dispenses with the liability mentioned. I've been holding USD since December 10th, so I'm OK in an absolute sense; but I can do much better by adding the leverage factor. Hence my post.

To simplify things, here's a direct question -- you may not wish to answer and that would be OK -- no hard feelings.

If I had entered the equivalent of 100K USD SHORT Eur/Usd on December 10th, 2004 and held a single lone position (for simplicity sake) till the intermediate-term top USD on July 8th, this year, what would the carry costs amount to -- approximately, of course?

Does anybody here hold similar long positions? If so, how do YOU handle leverage? .. 10:1, 20:1 or do you just go all out with 100:1?

Thanks

[idejan]

Originally Posted by Rhody Trader

... If you understand the risk, then what your actual leverage usage is doesn't really matter too much.

I agree with Rhody and I hope this would be of some help, although will most probably be known to you and will just be of help to other, unexperienced traders.
If you know how much you are ready to RISK, as a percentage of your capital or as a fixed dollar amount, then based on your S/L you would be able to calculate the size of your position, thus handling the appropriate leverage for you.
e.g. 100,000 current acct balance, with risk of 5% = 5,000 risk capital, @ 100 Pips S/L gives you 500,000 position or min of 1:5 leverage (using simple calculator, punch in: 100,000*.05/100/.0001). 200 pips S/L with same risk of 5% gives you position size of 250,000. With risk of 40% with 100 pips S/L you get 100,000*.4/100/.0001=4,000,000 and you will need a min of 1:40 leverage to open a position etc.
The point is, you could get a 1:100 or more leverage, but you should always size your positions based on your risk tolerance - Stop Loss levels. In my understanding, long term positions require a good stop loss to allow trend to develop, which translates to low leverage.
The other very important thing to consider is when your broker will close your positions if the market goes against you (Margin Call). There should always be an explanation on how they calculate and practice Margin Calls on their web sites.
Regards,
ID

[Trader01]

Originally Posted by idejan

I agree with Rhody and I hope this would be of some help, although will most probably be known to you and will just be of help to other, unexperienced traders.
If you know how much you are ready to RISK, as a percentage of your capital or as a fixed dollar amount, then based on your S/L you would be able to calculate the size of your position, thus handling the appropriate leverage for you.
e.g. 100,000 current acct balance, with risk of 5% = 5,000 risk capital, @ 100 Pips S/L gives you 500,000 position or min of 1:5 leverage (using simple calculator, punch in: 100,000*.05/100/.0001). 200 pips S/L with same risk of 5% gives you position size of 250,000. With risk of 40% with 100 pips S/L you get 100,000*.4/100/.0001=4,000,000 and you will need a min of 1:40 leverage to open a position etc.
The point is, you could get a 1:100 or more leverage, but you should always size your positions based on your risk tolerance - Stop Loss levels. In my understanding, long term positions require a good stop loss to allow trend to develop, which translates to low leverage.
The other very important thing to consider is when your broker will close your positions if the market goes against you (Margin Call). There should always be an explanation on how they calculate and practice Margin Calls on their web sites.
Regards,
ID

That's good stuff there, idejan -- I'm getting the hang of this pretty quick. Demo off 4-hr & 1-hr charts is just too easy, but I don't like spending too much time watching; will go live in about a month and by then should have my "weeks to months" style worked out. I had been thinking about position size along the lines you've outlined -- instead of 5% I'm going to risk only 2% for each of the first several trades. I'll review my success/failure then.

Much obliged for your explanations.

[idejan]

Good luck Trader01
The one also important thing to consider with trading, especially with long term trades, is hedging your home currency (account base currency).
Just as an example let us take 1:1 trade of $100,000 US
If you have entered
Long 100,000 EURUSD on feb 2002 @ .8687 (close feb bar on monthly chart) and,
Close 100,000 EURUSD on jan 2005 @ 1.3576 (open jan bar monthly chart)
for a total of +4889 PIPs
you would've walked with total of $48,890 US
or your starting amount would have grown 1.4889 times (48.89%)

But your 100,000 US$ on feb 2002 were equal to 115,114 EUR (.8687 rate) and,
at the end of the transaction your 148,890 US$ equals 109,671 EUR
while your dollar amount grown 1.4889 times, your EUR amount shrunk .9527 or almost 5% less in value.
More detail explanation on this issue and how it is handled is appreciated.

Once again I wish you successful trading,
ID

[Trader01]

Originally Posted by idejan

Good luck Trader01
The one also important thing to consider with trading, especially with long term trades, is hedging your home currency (account base currency).
Just as an example let us take 1:1 trade of $100,000 US
If you have entered
Long 100,000 EURUSD on feb 2002 @ .8687 (close feb bar on monthly chart) and,
Close 100,000 EURUSD on jan 2005 @ 1.3576 (open jan bar monthly chart)
for a total of +4889 PIPs
you would've walked with total of $48,890 US
or your starting amount would have grown 1.4889 times (48.89%)

But your 100,000 US$ on feb 2002 were equal to 115,114 EUR (.8687 rate) and,
at the end of the transaction your 148,890 US$ equals 109,671 EUR
while your dollar amount grown 1.4889 times, your EUR amount shrunk .9527 or almost 5% less in value.
More detail explanation on this issue and how it is handled is appreciated.

Once again I wish you successful trading,
ID

Thank you idejan.

Taking the same example -- after successfully playing Euro Long from 2002 to Jan 2005 and closing out the position in early January, there would be no need to convert to Euro for the simple reason that Euro would thereafter be in Primary Wave 2 down for 1-2 years. It would be better to hold USD during this period and/or go SHORT Euro.

Do you agree with this? Perhaps I'm missing something?

We are now in September 2005 and the way I see it, this scenario is playing out beautifully -- Intermediate wave (A) completed on July 8 (at the same time as the USD Index) -- and we are currently in Intermediate wave (B) up. When this completes we still have the best portion of the run for the Dollar coming up in Wave (C).


I had switched out of all other currencies into USD in early December and am still holding only Dollars -- waiting for wave (C).

Now if I can duplicate my success @ 1:1 (4 entries into the USD in December); being just a one-man show -- and add a broker/dealer, some leverage (perhaps 2:1, upto 5:1), not get my capital stolen or chiseled by the broker, I'd be really smiling.

Daily & weekly timeframes -- that's my focus -- holding for months. Heck, I'm already holding USD for 9 months.

Hence my origination.

[idejan]

Originally Posted by Trader01

Thank you idejan.

Taking the same example -- after successfully playing Euro Long from 2002 to Jan 2005 and closing out the position in early January, there would be no need to convert to Euro for the simple reason that Euro would thereafter be in Primary Wave 2 down for 1-2 years. It would be better to hold USD during this period and/or go SHORT Euro.

Do you agree with this? Perhaps I'm missing something?

You are perfectly right, and the example is good only to show have the value appreciates/depreciates apart from the the equity curve. It is obvious that one could not hedge 1:1 position since it is kind of a hedge it self .
Being with artistic professional background I'm still grasping the real issue here and how to handle it. The truth is how ever that at the end of this transaction you would have less purchasing power no matter what you expect in the future. So if you let say decide to close the account and walk with your money, you would have walked with less then when you started back in 2002 (compared to the EUR value). It's most probably that I'm missing something and just as I write I can see the possible mistake right in the parentheses i.e using EUR as a benchmark. While there is no question that your value will depreciate if your base currency depreciates, the real question for me is what do you use as a benchmark. (I've stopped here to dig the net and here what I've found http://www.stablecurrencybenchmark.com/)
Now only how could this be used in forex trading.
I believe I've at one time in some forum heared of a guy holding two accounts in different currencies and transferring funds between .
Any comments appreciated.
ID

As for the other part of you message, I hold the same or similar view on the EURUSD as yours (I'd appreciate if you could post your charts here or mail me, I'd be interested to see your longer term charts) it is posted in my threads here on MoneyTec.