Even though we believe trading is trading, especially on the short term, effectiveness in the forex markets demands some particulars when it comes to strategy.
Here are some of the guidelines we follow when operating in the forex markets:
Dollar Crosses ONLY.
There are dozens of forex pairs to choose from. Do more pairs mean more opportunity? Absolutely NOT, it is actually the opposite.
Most forex pairs (exotics or non U.S. Dollar crosses) exist only for the broker to profit. Exotic pairs often have very wide spreads. Anything more than 5 pips is ridiculous in our book.
They may have wide ranges and look like they offer a lot of movement on a chart, but after accounting for the spreads, they are hardly worthwhile, especially for strategies that look for shorter term movements.
Transaction costs (spreads) are an important part of our trading criteria. That is why we limit our scope to U.S. Dollar crosses ONLY.
In particular: EURUSD, GBPUSD, AUDUSD, USDCHF and USDCAD.
When it comes to forex trading, we are essentially trading one currency and that is the U.S. Dollar. It is simple, offers plenty of movement, and the cost is reasonable.
Note: Spreads are a reflection of how liquid a market is. The bid/ask spreads often fluctuate. They expand when liquidity is low (low volume) and they contract when liquidity is high (high volume). Broker’s platforms are automated to manage the spreads based on market conditions. This is one way that they control their own risk. This is why when an important economic report is about to come out, the spreads get very wide.
Short Term Momentum.
We are only interested in short term momentum trades. Forex is NOT the best instrument for investment. And because they are so highly leveraged, trying to hold for long term moves is not very attractive. Especially with all of the political turmoil currently in focus.
What is attractive are short term movements. The EURUSD can go from 1.1500 to 1.1750 in a matter of weeks. There is plenty of momentum to capture in such a move while keeping risk relatively minimized.
Technical Trades ONLY.
We only take trades based on particular technical patterns. We DO NOT get mixed up with fundamental opinions or analysis. Over the short term fundamentals mean very little and only serve as a source of confusion. We do not pretend to be economists, we are market timers.
One Pair At A Time.
Since we are ultimately trading the Dollar, having a position in more than one pair either adds more risk to the trade, or it acts like a hedge. For example, being long EURUSD and GBPUSD is the same position. Being long EURUSD and long USDCHF is the opposite and will act like a hedge. Long EURUSD is essentially being short the U.S. Dollar in terms of Euros.
Note: When you buy or sell a currency pair, you are buying/selling the base currency against the counter currency. Long EUR/USD is long Euros / short Dollars. Selling USD/CHF is short Dollars / long Francs.
If you are long EUR/USD and Dollar strong news comes out, your position will lose. If you are short USD / CHF and Dollar strong news comes out, your position will lose also.