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Adding in to open positions – Mid week update

In this video Kym looks at adding into open positions and analyzes the major pairs.

Transcript

Hi this is Kym Watson of Ezee trader. Welcome to what should have been a midweek review of the markets, but has now turned into a Thursday review.

We’ll be looking at the rest of the month.

I wanted to cover a subject that came up in the trading room yesterday on adding into positions. Quite often, traders will do their best to get out of a position and take profits quite quickly. It’s something we sometimes encourage people to do because targets are being hit and it seems like a logical way to ensure the trade has some money locked in or limit losses.

Let’s assume that you’ve got a target in mind, this 50 MA, and you’re pretty certain that there’s a chance of it getting down there.

Let’s say that you add a sell signal at the bottom and you go in at £1 a point. Let’s assume that you’re adamant that it’s going to get down here in your analysis, the figures have come out and you can see that it’s weak. You’ve already seen quite a nice sell off here.

Let’s say that you’re in 20 points of profit at this point, and you decide that if it breaks the 21 MA then you’ll add in. It does, so you add in, but you add in at £2 a point. You decide that you don’t want to risk too much, so you risk a ten pip stop.

Now, the problem is here, you’ve effectively pyramided the price here. You’ve gone in at one and then two, you’re now at £3 a point, and you’re the wrong side up, effectively. You’ve increased by a bigger number at this point. It needs to come back seven pips to your breakeven point.

Your breakeven point has dropped. If you went in at one and one, your breakeven point is bang in the middle at ten, but if you’re going in at one and two, then your breakeven point is dropping.

You’re effectively increasing the risk of your trade. So if I was wrong and it broke that 21 MA, then bounced, I would certainly be losing £20 on the second entry, my first entry would then be still possibly making £8 or £9 if it’s broken that level, but overall I’m going to be £10 down, even if I closed at that point…

But I wouldn’t close at that point, because I’d be determined that I’m going to trade down to this level. So at that stage I’d be leaving the stop in here.

The point is that you’re increasing your risk significantly by adding in at a bigger sum.

There’s different ways of loading a position. You can load it so that you have the bigger position and then the smaller position. That’s fine, in this situation, by that stage, by the time it’s got down there and you’re 20 pips up, you’re actually £40 up at that point.

So that £1 at ten pips, if it did go wrong – okay you’ve got that reduction in profit from this first place, but the second entry is only taking £10 off your overall profit, and you’re up eight points, you’re still £16 up.

If you decide that actually this trade is wrong, you close at £16 up, and you’re profitable. So you’ve turned a losing position into a profitable position by doing it this way.

Your analysis was right, that’s fine, and you’re gaining something from good initial analysis.

Of course, we can get bounces at any point in these markets and it can just take us out.

The third way of adding to entries is more of a ladder principle. So you go in at one and you add one and you add one later on. So as it goes more and more in your favour, you’re adding positions in.

Of course, then it’s a very flat line risk, in a sense because you have no heavy loading at the bottom level. This is ideal and there are different ways of getting into this situation. It may be that you’re taking your first position here and adding in.

Let’s assume that you’re playing the retrace and there was an initial point of resistance, so you went in then for one unit, but really the ideal point was further up where you can add £2, so you can add it the other way around. So you can still get into this situation if you’re confident, at that point, that it’s going to turn around.

Even so, if it carries on to lose, it’s not going to be losing as much as it would the other way around at £2 then £1. So if you go in at £2 originally then add in £1 you’ve loaded it the wrong way, you should be adding in bigger.

Of course, you don’t use this technique when you’re in a bad trade, it’s just when you’re in a trade where there is resistance at your ideal entry, so you take an initial loading point so that you’re in the trade. If you wait for it to get to your ideal entry, you might not get into the trade at all, then you’ve missed a good opportunity.

So this is another proper way of doing it, it’s not a case of doing it when the trade starts running against you, increasing the size, hoping you’ll get it right because when it does retrace you’ll be okay… I’ve seen people do this and blow accounts very quickly.

It’s a case of, this is the ideal entry, but this is a possible entry. So you add a little bit here, and add the rest of the position that you want to add there. Then, when it gets to the next level and you’ve gone two one, you may want to add half or you may want to add another one and start laddering it effectively from there onwards.

It’s just safe guarding your positions.

Enough about that, let’s have a quick look at the markets and where we are going.

GDP already out, we’re seeing a sell off on the Pound at the moment. The figures came out slightly below expectations. Still looking at this daily 50 as a possibility in the bigger picture, while we’ve got a weekly pivot above us, I’m of the view that it’s quite a distance away from that now, it’s sold off throughout most of this quieter week.

Got to remember that it’s a bank holiday week and it’s school holidays in the UK and this does often have an effect on the volumes and the overall market action. So it’s a slightly weaker market. We’ve got the G7, but there’s not a lot of other news going on.

So reactions are quite low at the moment and quite it’s tricky to get into trades some days.

So we are heading down at the moment, we had the indecision candle yesterday, the spinning top, but it’s a negative one at that, and we’re just seeing it sell off some more. Breaking yesterday’s lows, it might find support into the 34 initially, but if it breaks that then I think we’re on to head towards that 50 MA.

Likewise, if we do have a bit of a rally, with this 21 curling around at the top here and everything still pointing south, I think rallies are going to be difficult to push through this. I know we’ve tested the bands here, but it may be the combination, if it was to run up more quickly, may provide some more resistance there and see us continue to the down side.

So, as I say, relatively bearish on the Pound and the Euro. The Euro for more obvious reasons, it has sold off quite a bit, but running up today at the moment. There is a bit of conflict because the 50 MA is still pointing upwards here, but we haven’t tested the upper bands on the dailies. I would like to see that as a possible sale point.

So any rallies into that sort of level, if there’s some good set up on the smaller time frames as well, I would be looking at a sell point into that daily eight upper band area on here. Otherwise, it looks relatively weak.

Looking at the USD-JPY, we’ve now gone into the 2007 highs. It’s just having a bit of a reaction from that, but each of these highs here, there are chances that we could break these, and there’s probably stops sitting above them from people that are sitting here looking to be short.

Overall, this monthly chart is suggesting multiple continuation moves here. So it’s erring towards the bullish side, daily time frame we may just be, where these bigger wicks on the candles are, getting to a little bit of an exhaustion and it could do with coming down for a bit of a retracement. May look to buy into retracements into the daily eights if it does it at an early point next week.

It’s not a currency I’ve been trading a lot lately because we sat through so much chop here, it came off my radar. Now it’s moving into a trend and maybe a possible retracement and push back up, I’ll be looking at the potential for that again.

You can see from an RSI point of view, we’re quite oversold up here, so there is the chance of any retracements coming up to test that.

Finally, the AUD. The AUD has sold off quite significantly, it does seem like one of the weaker currencies in a sense. It’s probably following the Yen, but the Asian slow down is not helping too much. Saying that, there have been some reasonable figures come out in china in the last few days, but it’s still not sufficient. It’s also the lapse of time, when there is any signs of slight growth for things to actually happen, so we’re just seeing the potential for this to come back down towards these prior lows.

There were some analysts from big city banks looking for 75 as a figure and it could well do that at some point but in the shorter term I’m really looking for it to come down to its monthly S1 area.

News wise for the rest of the week, there’s not significant news. We had the GDP second estimate, we don’t normally see a lot of movement from that but unusually it came out differently than normal, it usually comes out pretty much in line.

Looking forward to Friday when we have the Canadian GDP figure out but it’s a monthly figure so it has less swing.

That’s it really, so a relatively quiet week continues, unless the G7 gives us some shockers.

 

That’s it from me, bye for now.

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