Attacking Currency Trends by Greg Michalowski

Author:Greg Michalowski
Language: eng
Format: epub
ISBN: 9781118023518
Publisher: Wiley
Published: 2011-02-14T16:00:00+00:00

At the point marked “1,” the market starts what is a trend move. For the dip-buying trader, it represents a dip to buy. The first buy occurs at 91.07. The next buy occurs at the cheaper price of 90.87, the third at 90.35, and so on. A total of five buys are executed. In addition, since the trader is good at buying dips (I will give him the benefit of the doubt), all the price lows are bought. Note that the corrective waves higher are all shallow, which is typical of a trending market, and the trader is never in a position to break even or make a profit. Finally, when the price falls sharply at point 6, the trader's fear is just too high, his account value is largely depleted, and the entire position is liquidated. The total loss on the five dip-buying trades totals minus 1,364 pips, which far outpaces the gains from trading the low-to-high trading range. The time period it took to lose over twice the amount was around eight trading days—the same length of time to make the 504 pips in gains. Trends move quickly and losses accrue quickly too.

What range traders typically find out is that buying low prices and selling high prices only goes so far, especially during trending periods. The price only tells you that the current price is cheaper or more expensive than in the most recent past. It does not tell you how cheap or expensive the market price will get, nor does it define the risk of the trade. In addition, it also leads to trading against the trend. Trends are where the most money is made. It is also where the most money can be lost. As seen in the example, the price in a trending market can get cheaper and cheaper and cheaper, and with it so can your account value.

Although the current price and price direction are no doubt some of the most important things a trader needs to follow, they are not the answer to success as a trader.

Instead, traders, like carpenters, like lawyers, like software programmers, need to apply tools to that price. The tools are filters that take the price and transform it into a meaningful bias for the trader—a bias to be bullish or a bias to be bearish. In the transformation, the tools should make the trader's job easier. They should make the trader more efficient. They should make the trader more profitable. They should not make the trader counterproductive. They should not cause uncertainty or fear but encourage certainty and confidence. Using the analogy from the beginning of the chapter, the hammer head should not fly off the handle and hit the trader in the head.

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