Digital Diatribes

A presentation of data on climate and other stuff

Forex Account Update as of 4/30/2012 [Through 12/31/2010]

Posted by The Diatribe Guy on May 2, 2012

Continuing my account updating:

OUTSTANDING ORDERS as of End of Day 11/30/2010 settled by End of Day 12/31/2010
Date of entry / Type of Entry / Lot size / Currency Pair / Entry Price / Date of Settlement / Exit Price / Net Profit
11/12/2010 BUY 0.02 xauusd 1389.74 12/03/2010 1395.73 +11.80

*Net profit means profit after consideration of swap fees (these can be negative or positive)

New Orders since End of Day 11/30/2010, settled by end of day 12/31/2010
Date of entry / Type of Entry / Lot size / Currency Pair / Entry Price / Date of Settlement / Exit Price / Net Profit
12/02/2010 SELL 0.02 xauusd 1389.00 12/02/2010 1387.00 +4.00
12/02/2010 BUY 0.02 xauusd 1385.51 12/03/2010 1396.38 +21.73
12/08/2010 BUY 0.02 xauusd 1388.86 12/13/2010 1396.10 +14.44
12/15/2010 BUY 0.02 xauusd 1393.64 12/28/2010 1404.68 +21.84
12/16/2010 BUY 0.02 xauusd 1376.62 12/20/2010 1385.58 +17.88
12/23/2010 BUY 0.02 xauusd 1375.96 12/24/2010 1384.66 +17.38

New Orders Since end of day 11/30/2010, still outstanding as of end of day 12/31/2010
Date of entry / Type of entry / Currency Pair / Lot size / Entry price
None.

Carried Orders Since before end of day 11/30/2010, still outstanding as of end of day 12/31/2010
Date of entry / Type of entry / Currency Pair / Lot size / Entry price
None.

Equity Balance @ 12/31/2010: $3,290.72
Current Month Return: +3.389%
Initial 10/31/2009 balance: $2,360.46
Current Yield since inception: +39.410%
Annualized Return: +32.933%
Average monthly return: +2.402%

11/1/2009 – 7/31/2010: +89.71%
8/1/2010 – 10/17/2010 (the date at which point I ceased the short strategy and liquidated positions): -34.35%
10/18/2010 – 12/31/2010: +11.94%

Journal Notes:
I trade on the Forex market (XAUUSD pair) through FXDD. Not all brokers offer gold trading via Forex.

The “commission” is the spread on the trade. Right now, the spread is $0.51 per ounce. The moment I buy in at $1389.01 I could close it at $1388.50, and that’s the extent of my transaction costs. The broker pockets the $0.51 on that initial transaction, but there aren’t additional costs to close the trade. There are some small rollover/holding charges that come into play if you hold it for a long period of time. That amounts to roughly one penny per ounce per week.

Margin to control one ounce is 2% of price. So I don’t need to tie up $1388 to get in, I only need to tie up $27.76. However, you need to make sure you have enough money to absorb drops in price, because it’s marked to market every day. 2% is the current standard for most pairs. There are a few currency pairs requiring 5% [“exotic” pairs, such as USDMXN or USDTRY (Turkish Lira)].

One ounce is 0.01 “lots”, which is a micro-lot. Not all brokers will allow trading at those levels, they may require at least a mini-lot (0.1 lots, or 10 oz at a time). Seriously, unless you have at least $15,000 to play with you should not be trading mini-lots.

The platform I use to trade with is MetaTrader 4. There are others, but this one works fine for the simple trading I do, so I don’t know much about them. I actually like MT4 because you can act as though you are trading into and then out of a particular transaction. In reality, trading rules are such that you have to trade First-in, First-Out. You end up in the same spot if you do it right, but it’s much easier to think about trading the way I do it by following each individual transaction as its own buy/close.

There are other ways of trading gold, or to proxy it. Others here have discussed their preferences. I love Forex because it’s 24 hours per day 5 days a week, it’s instantaneous entry/exit at low transaction cost. Others feel differently. One thing I like about the Forex account is that, if I so choose, I can get into some other currency pairs. At times, I’ve entered into trades where there has been a huge spike simply based on initial reaction to some news report. I usually stick with gold, but I’ll take an occasional shot elsewhere here and there.

You need to make sure you are dealing with a reputable broker. There are some decent forums (Forex Factory is a good place to start) where there are a lot of traders who can offer guidance on finding one. FXDD is sizeable and has a good history, but I don’t make recommendations to anyone other than do your own research. That said, if I ever reached a point where I had enough money to actually get nervous about things, I’d split it among two or more brokers and just execute the same trades. It would be a little more hassle, but it would spread the risk of the kinds of issues you’re talking about.

Oanda is a trading platform, I believe, and not the broker. It’s the software you download in order to execute your trades. I’ve never used it.

As for how much capital you need to hold in order to trade microlots, it depends on your desired strategy. The given strategy I laid out, I’d start with a minimum of $1500, just to be safe for those unusual market conditions where it’s dropping and you need to buy in on a number of consecutive days. But you could start with a smaller amount and just decide not to trade nearly as much.

In perspective, do you believe gold will drop $500 in rapid enough fashion where you wouldn’t be able to add funds to your account? If the answer is no, then you could start with $500 and just try trading a single microlot. But you are losing flexibility going this small. It also depends on the broker. Some require a minimum starting amount.

2% margin is the same as 50:1 leverage.

The trading platform is simply the software in which you execute the trades from the front end. Metatrader and Oanda are two such platforms. I use Metatrader. However, the two are linked, because the broker, I believe, ultimately determines which platform you will use. It is possible some brokers allow use of both, but I haven’t looked into that.

There are fronting-desk brokers and then there is the actual trading broker. A fronting desk broker will actually seek clients for the trading broker and offer use of its own version of the platform. You have to use the broker’s version of MT4 or Oanda because the software is designed to execute the trades with that particular broker. So, even if you use MT4 and switch to another broker using MT4, you will need to download their MT4 platform.

A fronting-desk broker usually gets 1 pip of commission of the spread (a pip is just the lowest “tick”) as compensation for securing clients. But your trading agreement is with the trading broker, and your account is with the trading broker rather than the fronting desk broker – that’s just a pass-through. That increases the spread a bit. Many brokers can go direct, which means you download their platform and you can save that pip.

Trying to outline the current (as of Dec 2010) strategy:
As opposed to putting in limitless entry orders and changing the entry points every time a new high is established, and all that stuff, I’ve decided to use the following as guidelines for my trading. I say “guidelines” because I simply will not always be able to check in exactly 24 hours after my last trade. And in some cases I may just decide that there’s enough profit there at the moment to take it, particularly if I know I’ll be gone during my normal “check-in” time. But for the most part, I’ll try to stick to the rules as much as I can.

Basically, I’m trying to accomplish in a simpler way what I was doing before. Since it’s not exactly the same, the results won’t be the same, but I’m expecting similar returns. I have adjusted size of my trades to account for an anticipated fewer number of total trades.

On a per micro-lot basis. Actual time of day as initial start time is not all that relevant. It will adjust anyway:

Initial start time: t=0

1) P(1) = price at t=1, which is 24 hours after t=0.
2) If P(1) = $5.00 then close position. Observe time of highest price in last 24 hours and set that time as t=0. Go to step 1, else go to step 7.
7) If P(2) <= [0.995 x P(1)] then buy and set your take-profit level.

At this point, you may open a few transactions on consecutive days due to a dropping market. Positions stay open until the profit from the original purchase price is at least $5 per microlot or until closed automatically at a $30 gain per microlot.

As to dealing with available capital:
There is always the risk that there are continued declines with absolutely no profit-taking, in such a way that it hasn't happened before since gold started trading on the open markets.

I don't have an endless supply of capital, so there is the risk that at some point I blow my account and I move on with my life.

Unlike the shorting concept that I abandoned, there actually is a floor on how low price can go, irrespective of associated probabilities of price increases and price decreases. So, theoretically, one doesn't need an unlimited capital supply to do this, but you do need a substantial sum to combat the armageddon scenario.

What I did to try and figure out the nightmare scenario and trade accordingly was to literally go back and look at the price movements of gold on a day-to-day basis, and "paper trade" this method. As price declined, positions were added. Quite often, price would decline for a few days in a row, positions would be added, then price would increase and a couple positions would close, but not all of them. Then maybe price would go back down and positions would again be added. There was only one instance where as many as 15 positions were in place at a given time. Even in this scenario, it wasn't a continued fall. There was someprofit taking, then a reversal back down, some profit taking, then a move back down, and so on. But at the low point, 15 positions were open. This only happened once. It was a rare occurrence to see more than 10 positions open at the same time.

More importantly, every step of the way I tracked account value. After all was said and done, I looked at the absolute largest draw-down during the entire time and looked at the number of open positions that accompanied that. It actually wasn't the scenario of 15, so I increased the worst scenario to match what it would be if the average drawdown per position with 15 matched the average drawdown per position under the worst actual occurrence.

Then, I designed a trading system to withstand 20 positions at the maximum level of drawdown per position, based on the historical worst-case.

What I determined was that for every microlot (1 oz) of position held, you need $1600 for this level of protection. You can increase one of those 20 positions by a single microlot for every 4% increase in account value. I looked at likelihoods of where you get the biggest bang for that increase, and add to the plan according to that. My first increase is on the 5th entry position, then 4th, then 3rd, then 6th, and it goes from there. I just printed out a little chart where I need to plan the trades based on account value.

So, at $3,506 all positions would be 2 microlots. At $7,682 all positions would be 3 microlots.

And, also, that 4% increase is conservative. The actual needed was somewhere between 3.5% and 4%, but I rounded up with an idea of capital preservation as account increases.

Quite honestly, I just kind of have a lot of fun with this. I learn a lot about the markets by playing, and I enjoy trying out and planning out new trading strategies. And if I can make some money doing it, all the better.

As to trading on the trend:
The method depends on a somewhat volatile market, and the trending is not particularly relevant as long as that volatility is present.

So, in a case where there is a very consistent trend up, I'll miss that run because I'm not entering the market with new positions. Since I'm taking profits and not holding positions, I'll limit my profits in a huge run up. If there is a very consistent trend down, I'll keep buying in with no profit-taking, and there is the risk that it won't turn around and I drain my account.

I am going long only (at this point, it was still a Gold only strategy) simply because the trend is up and I see no signs of the trend flattening or reversing. One could do this with another currency pair in both directions. Or, if willing to risk the capital, you could do it in this market as well. I've decided for now that the downside of that far outweighs the upside. just a judgment call.

But the wins here simply come from volatility. What we're looking for is that, typically, a drop of some percentage is followed by a similar move back up. In cases where there are continual drops for a few days, we don't even have to get back up to previous levels for a while to profit, because taking profit on movements at lower levels will outweigh the equity loss from the drop in price from positions taken at higher levels. Ultimately, if price eventually comes back, we'll profit from those other positions, but immediate profits aren't necessary, or even expected.

So I'm not really worried about missing out on a run up because eventually price will stall, and then I'll start playing again. And yes, that means that you start playing at near the top levels, and you might carry some of those positions for a while.

I'm actually not all that concerned about that, because holding it isn't any different than buying a piece of gold and seeing the price drop and just holding on to it for a while. While I wait for price to rebound, I'll just trade at the lower levels. Obviously, the concern is a very long and protracted bear market. And if that happens, I may consider getting back into offsetting short positions. There's nothing that says you can't change those strategies up if a trend changes.

Quantifying the risk here is pretty tricky. In looking at all the different markets, I actually don't even feel as if there's a lot of risk in what I'm doing. Now, I admit that moving into shorts during an upward trending market was pretty risky, and I paid the price on that. And it certainly is true that current trends could change. But quite honestly, I "feel" more risk in holding equities than I do in trading gold. (though, that probably has to do with the fact that I have a lot more invested in equities. But I have been moving out of those slowly because I just don't feel that good about them).

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