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.
