Thursday, November 21, 2013


                                         My Game, My Rules

I have previously commented on the FX pairs GBPJPY, EURJPY, and EURAUD. Of the three, EURAUD is probably the better trade, but it really depends on your individual preferences.

When I sent the staff out to round up any/all Forex pairs for analysis, I made a cursory look at the MT4 platform to eyeball spreads. After all, who wants to trade anything in the FX arena that has a high spread [greater than 4 pips]; there is simply too much opportunity throughout the 60+ pairs to give money unnecessarily to the dealer community. Just 1 pip, after a year, can mean a couple of thousand bucks in your pocket you wouldn’t otherwise have to keep.

The one pair I missed, and am recommending now, is GBPAUD. The spread is about 3 pips [give or take a couple of 5th digits] which make this a great instrument to trade. When you consider both AUDUSD and GBPUSD trade at about a 2 to 2 ½ pip spread against the US Dollar, the cross @ approximately 3 gives us 1 ½ pips on each side. Since both pairs move, this is an extremely good spread rate on a non-dollar cross. Observing the trade throughout the European and US trading sessions, I saw the spread between 1 ½ on the low side to 3.7 on the high side at different times; and most of the time the spread hovered between 2.8 and 3.2.

I want to approach the analysis of this pair from a slightly different angle than I did the 3 pairs listed above. I looked at the data since Forex-Metal came into the business around the start of 2006, which is approximately 400 weeks. The Excel spreadsheet below lists the 28 weeks of “tail risk” that I have identified from the data. This represents approximately 7% of all trading weeks. That means that approximately 93% of all trading weeks have moves of 200 pips or greater from the open to the high value. You shouldn’t have any problems making good money 93% of all trading weeks.

                                  [Click On Table To Enlarge]

Both the average and median levels for low value and high value, respectively, are very close to each other, indicating no great skewing of the data from a single data point. Simply put, our tail risk [when we come face-to-face with it] is a low value of about 66 pips and a high value of about 139 pips. The $64,000 question is can you make money in this tail risk?  With a 3 pip spread and an active trade in all 3 major world sessions, I think the answer is a definite yes; of course, not as much as in a “regular” week.

When I designed the original “-vegas Big Bang Algorithm”, and a short time later the “long term VBB Algorithm”, the FX markets [particularly the non-dollar crosses] were what I had in mind; above average volatility with tight spreads and excellent volume in the dealer community. There is no doubt in my mind that you can easily trade up to $10 million in any of these pairs without so much as creating a ripple in a teacup.

You need to be aware, though, of the rollover each day and the “vig” that is either paid out to you or the money you pay to hold the position. Right now, you are going to pay about 2.2 pips to be long through the rollover, and you are going to receive about 0.9 pips to be short through the rollover. This is due to the respective short term interest rate differentials between Cable [GBP] and the Aussie [AUD].

[Note for newbies to FX: “vig” is calculated three times each week; Monday, Tuesday, and Wednesday. Wednesday vig is calculated through the weekend to Monday, so if you forget to get out of a long position at the Wednesday rollover, you will pay 3 times the rate [6.6 pips] even if you get out 2 seconds into the new day.]

This has the potential of becoming an expensive proposition if done every day; I therefore recommend liquidating positions in this pair instead of hedging up on signals from the yellow/plum lines.

In my next post, I am going to go over some examples of the trade in GBPAUD and point out how I think best to trade this instrument. I will give specific rules to follow and show examples of their implementation. I will begin trading this on Monday, the start of the new week.

Have a great day everyone.


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