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Saturday 8 February 2014

Tactical trading consideration in GBP/USD and USD/CHF

The routine short-term volatility of cable and Swissy suggest several important tactical trading refinements. The overarching idea here is to adjust your trading strategies to weather the erratic price action and higher overall volatility in these pairs in comparison to the larger EUR/USD.

lt may help to think of sailing a boat on a lake. When the wind is calm, you need to ighten up the sails to catch all the wind you can. But when the wind starts gusting, you need to let out some slack on the sails or you’re liable to get blown over. The same is true when trading cable and Swissy.

Reducing position size relative to margin

This first consideration is especially important in cable, due to its high relative value to the USD. With GBP/USD trading around 1.90 to the dollar ($1 = $1.90) a one-lot position (£100,000) eats up $1,900 in required margin at 100:1 leverage. A similar-size position in EUR,/USD (at 1.30) takes up only $130,000 and costs $1,300 in margin. If you’re going to trade in cable, you’ll need more margin than if you stayed with EUR/USD, USD/JPY, or Swissy.

Cable and Swissy’s higher volatility also argue for overall smaller position sizes. A smaller position will allow you to better withstand their short-term volatility and give you greater staying power relative to margin. If you’re willing to risk $500 in capital on a particular trade, that equates to 50 pips in EUR/USD and GBP/USD. But the chances of an adverse move of 50 pips in GBP/USD are far greater (routine, actually) than a 50-pip move in E.UR/USD.

Allowing a greater margin of error on technical breaks

If you’re basing your trades on technical levels of support and resistance, you need to anticipate that those levels will be tested at the minimum. In sterling and Swissy, tests of technical levels frequently result in false breaks as stops are triggered. If your stop loss is too close to the technical level, it's ripe for the picking by the market. Factoring in a margin of error when placing stop-loss orders can help - allow you to withstand any short-term false break. Using a margin of error may also require you to reduce your position size to give you greater flexibility and margin staying-power.

Anticipating overshoots and false breaks for position entry

When you’re looking to enter a position by selling on rallies or buying on dips, you’re probably focused on selling at resistance and buying on support. You can take advantage of cable and Swissy’s tendency to overshoot or make false breaks of technical levels by placing your limit order behind the technical level (above resistance, below support). If cable and Swissy break through the level, you’d be able to enter at a better price than you would have if you’d adhered to the technical level alone.

Alternatively, you can enter a portion of your desired position at the technical level and enter the rest at better prices if the level is breached, improving the average rate of your position. Worst-case scenario, the market only fills you for half of your desired position and then reverses. Best-case scenario, you establish your full desired position-at a-better rate than you expected and the market reverses. If the market keeps going against you, at least your average position rate is better than it otherwise would have been.

Being quick on the trigger

Cable and Swissy tend to move very quickly and may not spend a lot of time around key price levels. This favors traders who are decisive and quick on the trigger in terms of entering and exiting positions. Having a disciplined trading plan in place before you enter the market helps. Above all, avoid being distracted from your plan by the sharper price movements.

Another way you can take advantage of the short-term volatility of cable and Swissy is by using resting orders to get in and out. You may not be in front of your trading screen, or your click-and-deal trade may not have made it through on a rapid price fluctuation. A standing limit order will accomplish the same trade - only automatically and instantly if the price deals. Trailing stops are especially useful when you have a position that‘s moving the right way.

Resisting the contrarian urge following large directional moves

After an extended directional price move, many traders may feel inclined to trade in the opposite direction, if only for a short-term correction. Maybe you missed -the big move and think it’s ripe for a pullback. Or maybe it looks like the move has gone too far, too fast. Resist that urge in cable and Swissy.

On days with large directional price moves of more than 100 pips, cable and Swissy often finish out the trading day at the extremes of the price move (meaning at the highs on an up-move and at the lows on a decline). So even if you sell the high of a move up, you’re unlikely to get any joy on the day.

Picking your spots wisely

Instead of simply jumping into sterling or Swissy, the way you may in EUR/USD, you’re going to need to do a fair amount of watching and studying to get a handle on where appropriate entry points may be. Short-term volatility in cable and Swissy make for treacherous short-term trading conditions. You’ll greatly improve your chances of catching a favorable move if you step back and look at the medium and longer-term pictures (four-hour and daily) instead of getting caught up in the short-term volatility.
 

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