Sunday, September 14, 2014

All eyes on Sterling this week | “Live, horse, and you’ll get grass”

Last Monday morning the Foreign Exchange market opened to find that Cable, the pound Sterling – US dollar pair (GBPUSD) had gapped down over the weekend. This was a reminder that, on the one occasion each week when the Forex market cannot be traded, between late on Friday (GMT) and late on Sunday night when the Asian session starts for the week, movements can take place that are highly dangerous to equity, as they can result in Stop Loss orders being ignored.

The reason for the gap was the appearance, on the Sunday, of an opinion poll that suggested that Scotland might well vote for independence from Great Britain.

It is a principle of Technical Analysis (TA) that a gap of this sort is more likely than not to be filled (that the rate will tend to move back to where it was before the gap), and price action this morning seems to suggest that this is exactly what is happening. In the meantime we took the lesson of last weekend on board and entered a hedge order on Friday to protect our long position, in case there was a similar gap down during the weekend just gone.

The hedge is simple – a mirror image order of the long trade, but in the opposite direction. As far as the account is concerned, our GBPUSD trade is now cancelled out, but the measure allows us to hold our long position. The hedge will be cancelled when and if it is apparent that the move upwards is intact. Think of it as insurance.

The referendum in question is this coming Thursday, while on Wednesday we have the FOMC rate decision, monetary policy statement and press conference in the US. It should be an interesting week.

| Live, horse, and you’ll get grass

As regular readers will know, we are very much committed to the idea of risk reduction here at OmiCronFX. To this end our approach to every individual trade is simple: It must prove itself to be a successful one at a very early stage, in order to be maintained.

The analogy is with the mean and cynical farmer who says to his horse: “You will only get fed if you continue to live and work”. While this is cruel and , in many ways, short sighted, it has its attractions. If there were a near-infinite supply of horses, and no inhumane considerations, it would at least mean that only the very strongest of horses would survive. The farmer would, eventually, wind up with a superb team of animals.

In Forex trading there is, in effect, a near-infinite supply of trades, and trades do not have feelings. With the assistance of algorithmic tools, which monitor the market 24/7 (except on weekends when trading is closed, as above), it is indeed possible to say to each position: “Perform, or you will not be kept”.

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