Minggu, 15 Agustus 2010

Buy Strength – Sell Weakness

If the signals came all at once, we always bought the strongest markets and sold short
the weakest markets in a group.
We would also only enter one unit in a single market at the same time. For instance,
instead of buying February, March and April Heating Oil at the same time, we would
pick the one contract month that was the strongest, and that had sufficient volume and
liquidity.
This is very important! Within a correlated group, the best long positions are the
strongest markets (which almost always outperform the weaker markets in the same
group). Conversely, the biggest winning trades to the short side come from the weakest
markets within a correlated group.
As Turtles, we used various measures to determine strength and weakness. The
simplest and most common way was to simply look at the charts and figure out which
one “looked” stronger (or weaker) by visual examination.
Some would determine how many N the price had advanced since the breakout, and
buy the market that had moved the most (in terms of N).
Others would subtract the price 3 months ago from the current price and then divide
by the current N to normalize across markets. The strongest markets had the highest
values; the weakest markets the lowest.
Any of these approaches work well. The important thing is to have long positions in
the strongest markets and short positions in the weakest markets.

Fast Markets

At times, the market moves very quickly through the order prices, and if you place a
limit order it simply won’t get filled. During fast market conditions, a market can move
thousands of dollars per contract in just a few minutes.
During these times, the Turtles were advised not to panic, and to wait for the market
to trade and stabilize before placing their orders.
Most beginning traders find this hard to do. They panic and place market orders.
Invariably they do this at the worst possible time, and frequently end up trading on the
high or low of the day, at the worst possible price.
In a fast market, liquidity temporarily dries up. In the case of a rising fast market, sellers
stop selling and hold out for a higher price, and they will not re-commence selling until
after the price stops moving up. In this scenario, the asks rise considerably, and the
spread between bid and ask widens.
Buyers are now forced to pay much higher prices as sellers continue raising their asks,
and the price eventually moves so far and so fast that new sellers come into the market,
causing the price to stabilize, and often to quickly reverse and collapse partway back.
Market orders placed into a fast market usually end up getting filled at the highest price
of the run-up, right at the point where the market begins to stabilize as new sellers
come in.
As Turtles, we waited until some indication of at least a temporary price reversal before
placing our orders, and this often resulted in much better fills than would have been
achieved with a market order. If the market stabilized at a point which was past our
stop price, then we would get out of the market, but we would do so without
panicking

Adjusting Trading Size

There will be times when the market does not trend for many months. During these
times, it is possible to lose a significant percentage of the equity of the account.
After large winning trades close out, one might want to increase the size of the equity
used to compute position size.
The Turtles did not trade normal accounts with a running balance based on the initial
equity. We were given notional accounts with a starting equity of zero and a specific
account size. For example, many Turtles received a notional account size of $1,000,000
when we first started trading in February, 1983. This account size was then adjusted
each year at the beginning of the year. It was adjusted up or down depending on the
success of the trader as measured subjectively by Rich. The increase/decrease typically
represented something close to the addition of the gains or losses that were made in
the account during the preceding year.
The Turtles were instructed to decrease the size of the notional account by 20% each
time we went down 10% of the original account. So if a Turtle trading a $1,000,000
account was ever was down 10%, or $100,000, we would then begin trading as if we
had a $800,000 account until such time as we reached the yearly starting equity. If we
lost another 10% (10% of $800,000 or $80,000 for a total loss of $180,000) we were to
reduce the account size by another 20% for a notional account size of $640,000.
There are other, perhaps better strategies for reducing or increasing equity as the
account goes up or down. These are simply the rules that the Turtles used.

THE RISKS OF TRADING IN THE FOREX MARKET

Although every investment involves some risk, the risk of loss in
trading off-exchange forex contracts can be substantial. Therefore,
if you are considering participating in this market, you should
understand some of the risks associated with this product so you
can make an informed decision before investing.
As stated in the introduction to this booklet, off-exchange foreign
currency trading carries a high level of risk and may not be suitable
for all customers. The only funds that should ever be used to spec-
ulate in foreign currency trading, or any type of highly speculative
investment, are funds that represent risk capital – i.e., funds you
can afford to lose without affecting your financial situation. There
are other reasons why forex trading may or may not be an appro-
priate investment for you, and they are highlighted below.
The market could move against you
No one can predict with certainty which way exchange rates will
go, and the forex market is volatile. Fluctuations in the foreign
exchange rate between the time you place the trade and the time
you close it out will affect the price of your forex contract and the
potential profit and losses relating to it.
You could lose your entire investment
You will be required to deposit an amount of money (often referred
to as a “security deposit” or “margin”) with your forex dealer in
order to buy or sell an off-exchange forex contract. As discussed
earlier, a relatively small amount of money can enable you to hold a
forex position worth many times the account value. This is referred
to as leverage or gearing. The smaller the deposit in relation to the
underlying value of the contract, the greater the leverage.
If the price moves in an unfavorable direction, high leverage can
produce large losses in relation to your initial deposit. In fact, even
a small move against your position may result in a large loss, includ-
ing the loss of your entire deposit. Depending on your agreement
with your dealer, you may also be required to pay additional losses.
You are relying on the dealer’s
creditworthiness and reputation
Retail off-exchange forex trades are not guaranteed by a clearing
organization. Furthermore, funds that you have deposited to
trade forex contracts are not insured and do not receive a priority
in bankruptcy. Even customer funds deposited by a dealer in
an FDIC-insured bank account are not protected if the dealer
goes bankrupt.
There is no central marketplace
Unlike regulated futures exchanges, in the retail off-exchange
forex market there is no central marketplace with many buyers
and sellers. The forex dealer determines the execution price, so
you are relying on the dealer’s integrity for a fair price.
The trading system could break down
If you are using an Internet-based or other electronic system to place
trades, some part of the system could fail. In the event of a system
failure, it is possible that, for a certain time period, you may not be
able to enter new orders, execute existing orders, or modify or
cancel orders that were previously entered. A system failure may also
result in loss of orders or order priority.
You could be a victim of fraud
As with any investment, you should protect yourself from fraud.
Beware of investment schemes that promise significant returns
with little risk. You should take a close and cautious look at the
investment offer itself and continue to monitor any investment
you do make

Can I trade options on foreign currency transactions?

A number of firms are presently offering options on off-exchange
foreign currency contracts. Buying and selling forex options pres-
ent additional risks, many of which are similar to those inherent
in buying options on futures contracts. Therefore, you should
consult NFA’s brochure, Buying Options on Futures Contracts:
A Guide to Uses and Risks, which discusses the mechanics and
risks of options trading.
There are two significant differences between buying off-exchange
forex options and buying options on futures contracts. First, when
you exercise an option on an exchange-traded futures contract, you
receive the underlying exchange-traded futures contract. When
you exercise an off-exchange forex option, you will probably receive
either a cash payment or a position in the underlying currency.
Second, NFA’s options brochure only discusses American-style
options, which can be exercised at any time before they expire.
Many forex options are European-style options, which can be exer-
cised only on or near the expiration date. You should understand
which type of option you are purchasing

How do I calculate profits and losses?

When you close out a trade, you can calculate your profits and
losses using the following formula:
Price (exchange rate) when selling the base currency – price
when buying the base currency X transaction size = profit
or loss
Assume you buy Euros (EUR/USD) at 1.2178 and sell Euros at
1.2188. If the transaction size is 100,000 Euros, you will have a
$100 profit.
($1.2188 – $1.2178) X 100,000 = $.001 X 100,000 = $100
Similarly, if you sell Euros (EUR/USD) at 1.2170 and buy Euros
at 1.2180, you will have a $100 loss.
($1.2170 – $1.2180) X 100,000 = – $.001 X 100,000 = – $100
You can also calculate your unrealized profits and losses on open
positions. Just substitute the current bid or ask rate for the action
you will take when closing out the position. For example, if you
bought Euros at 1.2178 and the current bid rate is 1.2173, you
have an unrealized loss of $50.
($1.2173 – $1.2178) X 100,000 = – $.0005 X 100,000 = – $50
Similarly, if you sold Euros at 1.2170 and the current ask rate is
1.2165, you have an unrealized profit of $50.
($1.2170 – $1.2165) X 100,000 = $.0005 X 100,000 = $50

If the quote currency is not in US dollars, you will have to con-
vert the profit or loss to US dollars at the dealer’s rate. Further, if
the dealer charges commissions or other fees, you must subtract
those commissions and fees from your profits and add them to
your losses to determine your true profits and losses.
How much money do I need to trade forex?
Forex dealers can set their own minimum account sizes, so you will
have to ask the dealer how much money you must put up to begin
trading. Most dealers will also require you to have a certain amount
of money in your account for each transaction. This security
deposit, sometimes called margin, is a percentage of the transaction
value and may be different for different currencies. A security
deposit acts as a performance bond and is not a down payment or
partial payment for the transaction.
Dealers who are regulated by NFA are required to calculate and
collect security deposits that equal or exceed the percentage set by
NFA rules. Although the percentage of the security deposit remains
constant, the dollar amount of the security deposit will change
with changes in the value of the currency being traded

How do I close out a trade?

Retail forex transactions are normally closed out by entering into
an equal but opposite transaction with the dealer. For example, if
you bought Euros with U.S. dollars, you would close out the trade
by selling Euros for U.S. dollars. This is also called an offsetting or
liquidating transaction.
Most retail forex transactions have a settlement date when the
currencies are due to be delivered. If you want to keep your posi-
tion open beyond the settlement date, you must roll the position
over to the next settlement date. Some dealers roll open positions
over automatically, while other dealers may require you to request
the rollover. Most dealers charge a rollover fee based upon the
interest rate differential between the two currencies in the pair.
You should check your agreement with the dealer to see what, if
anything, you must do to roll a position over and what fees you
will pay for the rollover.

What transaction costs will I pay?

Although dealers who are regulated by NFA must disclose their
charges to retail customers, there are no rules about how a dealer
charges a customer for the services the dealer provides or that limit
how much the dealer can charge. Before opening an account, you
should check with several dealers and compare their charges as well
as their services. If you were solicited by or place your trades
through someone other than the dealer, or if your account is man-
aged by someone, you may be charged a separate amount for the
third party’s services.
Some firms charge a per trade commission, while other firms
charge a mark-up by widening the spread between the bid and ask
prices they give their customers. In the earlier example, assume that
the dealer can get a EUR/USD spread of 1.2173/75 from a bank.
If the dealer widens the spread to 1.2170/78 for its customers, the
dealer has marked up the spread by .0003 on each side.
Some firms may charge both a commission and a mark-up. Firms
may also charge a different mark-up for buying the base currency
than for selling it. You should read your agreement with the dealer
carefully and be sure you understand how the firm will charge you
for your trades.

How does the off-exchange currency market work?

The off-exchange forex market is a large, growing and liquid finan-
cial market that operates 24 hours a day. It is not a market in the
traditional sense because there is no central trading location or
“exchange.” Most of the trading is conducted by telephone or
through electronic trading networks.
The primary market for currencies is the “interbank market”
where banks, insurance companies, large corporations and
other large financial institutions manage the risks associated
with fluctuations in currency rates. The true interbank market
is only available to institutions that trade in large quantities
and have a very high net worth.
In recent years, a secondary OTC market has developed that per-
mits retail investors to participate in forex transactions. While this
secondary market does not provide the same prices as the interbank
market, it does have many of the same characteristics

What are foreign currency exchange rates?

Foreign currency exchange rates are what it costs to exchange one
country’s currency for another country’s currency. For example, if
you go to England on vacation, you will have to pay for your hotel,
meals, admissions fees, souvenirs and other expenses in British
pounds. Since your money is all in US dollars, you will have to use
(sell) some of your dollars to buy British pounds.
Assume you go to your bank before you leave and buy $1,000
worth of British pounds. If you get 565.83 British pounds
(£565.83) for your $1,000, each dollar is worth .56583 British
pounds. This is the exchange rate for converting dollars to pounds.
If £565.83 isn’t enough cash for your trip, you will have to
exchange more US dollars for pounds while in England. Assume
you buy another $1,000 worth of British pounds from a bank in
England and get only £557.02 for your $1,000. The exchange rate
for converting dollars to pounds has dropped from .56583 to
.55702. This means that US dollars are worth less compared to the
British pound than they were before you left on vacation.
Assume that you have £100 left when you return home. You go to
your bank and use the pounds to buy US dollars. If the bank gives
you $179.31, each British pound is worth 1.7931 dollars. This is
the exchange rate for converting pounds to dollars.
Theoretically, you can convert the exchange rate for buying a cur-
rency to the exchange rate for selling a currency, and vice versa, by
dividing 1 by the known rate. For example, if the exchange rate for
buying British pounds with US dollars is .56011, the exchange rate
for buying US dollars with British pounds is 1.78536 (1 ÷ .56011
= 1.78536). Similarly, if the exchange rate for buying US dollars
with British pounds is 1.78536, the exchange rate for buying
British pounds with US dollars is .56011 (1÷ 1.78536 = .56011).
This is how newspapers often report currency exchange rates.
As a practical matter, however, you will not be able to buy and sell
the currency at the same price, and you will not receive the price
quoted in the newspaper. This is because banks and other market
participants make money by selling the currency to customers for
more than they paid to buy it and by buying the currency from
customers for less than they will receive when they sell it.

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