Forex are traded in many different ways on many different platforms. Currencies, generally known as Forex, is a sub-category of the Commodities markets and is traded on the Chicago Mercantile Exchange (or CME in short). If you are a Forex trader you may see the same information on your trading platform as the CAD/USD currency pair. On this page we are going to take a position in this market, anticipating a continuation of a trend in this market and trade it two ways. First as an outright Buy in the currency market and then second by looking at what the Options Matrix Plus suggests and trading it that way.
You will see how the Matrix Plus method allows us to reduce the risk in the trade and put the probability of success in our favour - we are still trading the currency market, we just employ a more robust strategy..
CAD/USD, 4th May 2015
The CAD/USD has been trading flat since February, but mid April it broke out of this trading range to the upside and it looks like it is forming a new trend channel. It made a high, then a correction, another high (point 1) and another correction. We want to be part of the upward move as this trend continues. Instead of waiting for the market to broke through that last high, we will attempt to enter the market, going LONG on the CAD/USD just above the second from last bar on the chart - as indicated by the little red arrow. Thus, we enter a break-order, or a stop-order (depending on the terminology that your trading platform uses) to go LONG the CAD at a price of 0.8290. In case we are wrong, we want to keep our losses small, thus we are willing to risk a maximum of $300 on this trade. We will carefully monitor the situation and take action as appropriate.
What happens in the trade is a little bit disturbing.
We enter the market at a price of 0.8290 on the next day as prices trade up through our stop-order. Prices drop towards the close
of the day and we are sitting at a price of 0.8281, a loss of 9 points or -$90 at the close (Graph 1). This is perfetly normal.
On the next day prices continue up, as expected the up-trend continues (Graph 2). However, and this is the disturbing part - prices just break through the high point, but then sharply retrace towards the close of the day. We don't like that.., but we are still into the trade at a prce of 0.8300, which is $100 profit. On the next day we see a sharp drop in the prices, taking out our stop-loss and we take a $300 loss on the trade...
What happened here? This type of behaviour occurs frequently in the market. We see a case of stop
running. The "big" currency traders knows that there are a lot of stop-orders just above the previous high point.
Firstly we have all the stop orders from the guys that are SHORT the CAD, that is the natural place to put protective stop orders.
Secondly, all the different trading methods that the small guys so eagerly purchase all across the globe has indicated to them that
they should place stop orders just above, or at the high to enter the market. The "big guys" therefor knows there are a lot of stop
orders placed at that point. Through the day they engineer a move up, collect all those stop orders (if everyone else buys there it
means they are selling there), then let the price drop and they make a nice intra-day profit. For you - a small guy, it unfortunately
means a loss on your small account.
(Yes you could have salvaged this trade, if you had your computer open all the time and if you were sitting in front of it staring at the screen all the time and if you were very sharp in your trade management strategy, then you would have seen the move and as the prices started dropping after the false breakout you could have exited the position with a nice profit. The problem with this is the bit of having your computer open all the time with you staring at the screen all the time - for most of us that is just not possible- we are at work, we have got other stuff to do, we simply cannot be there all the time. Eight hours in front of your PC, staring at your screen! Really!? I simply can't do that, I'll go out of my mind...)
Matrix Plus - Trading the CAD/USD with Options
OK, let us invoke our Matrix Plus solution and see what it says about this trade opportunity. First thing, notice that the price graphs I have shown you I took off BarChart, which is a free charting service on the Internet. In the matrix plus we do not have full pricing information (open, high, low, close for every day, but we also do not need that). We only have (and only need) the closing price every day. Thus if you draw a line through the daily close prices you'll get a line chart which is what we use in the Matrix Plus
Shown above is the LONG (Buy CAD) position on the day that you entered it (left) and how it looks like at the moment (right). The yellow line shows you your break-even position on this trade - if the CAD trades ABOVE the yellow line, you are making money. If it drops BELOW the yello line you will be losing money on the transaction. The two feint red lines indicate a -$300 loss and a -$500 loss respectively for this position - in other words it indicates to you the "riskiness" of your transaction - it shows you exactly where, if the CAD trades there, will you be taking your loss. As you can see, the odds of you making or losing money on this transaction was 50-50. You did not relly get into profit here - because of the false breakout that the "big guys" engineered, you took a -$300 loss on the transaction by the third day, if you were trading without a stop-loss you could easily have taken a loss in excess of -$500. In the end however you were right about the trend continuation, it did break out and it did go up and it would have given you a really nice profit, if it wasn't for the dip and kicking you out of the transaction with a loss before it did that.
We now look at the Matrix Plus
The Matrix Plus includes a number of strategies to trade every type of market that you encounter - an upwards trending market (Bull
Market), downwards trending, neutral, non-neutral, etc. They are split up as beginner, master and advanced strategies and they are
classified according the volatility of the market and according the appetite you have for taking risk. One of those suggested
strategies is that in an upwards trending market you could consider selling PUT options. Without getting into the details of what
all of this means, let us setup such a strategy.
Shown on the right will be the result if we decide to SHORT a PUT option at a strike price of 0.8150.
- We choose a strike price of 0.8150 because it is below (well below) the lowest point of the last correction of the CAD. In order for this price to be threatened, the CAD will have to totally reverse its recent uptrend
- Through the option we are guaranteeing someone that, should the price of the CAD turn around and drop below 0.8150, then we will buy the CAD from them at 0.8150, allowing them to sell the CAD at this price. In other words we are giving someone an insurance policy against the CAD dropping.
- Insurance policies involve risk - we are taking the risk in this case, whoever purchases this insurance policy from us will pay us for taking this risk
- Note, as before with buying the CAD, we only enter this transaction when the price of the CAD trades ar 0.8290, that is why our break-even line starts at that point.
- With the CAD trading at 0.8290, the 0.8150 PUT Option will sell for a price of $460. Thus, someone PAYS US $460! We receive this money into our trading accounts. Premiums are non-refundable, thus we keep this money!
- The two feint yellow lines show us where we will be taking a -$300 loss and a -$500 loss respectively (the cost at that point in time for us to buy back the option)
The result of this trade speaks for itself.
What did we do?
- Through trading this same market with options, we changed the probability of success to drastically favour ourselves
- Look at the risk in the position for going long the CAD (buying the CAD) and for selling an option. With trading with the option we have changed the risk in the transaction entirely. Where a -$300 loss would have been at 0.8260, we have shifted that down to 0.82. That is not all, the point at which we take the loss also drops as time goes buy (down-sloping line versus a horizontal line for the original transaction)
- What did we have to give up? We limited our profit for the transaction to $460 - the premium we received for selling the option. In other words, by not being greedy, by being willing to take less profit, we were able to reduce the risk in the transaction and drasticlly shift the odds for success into our favour
- We were down, but our total loss was small - at the point where on the currency trade you would have taken a -$500 loss, we were sitting with a less than -$150 loss!
- We bought ourselves room! We can relax, monitor the position over the next couple days - the false breakout that the "big guys" tried to engineer does not affect us, we just ride through it and wait for the CAD to do its thing!
- And finally, no need to sit in front of a computer screen closely monitoring our trade, these are DAILY MOVES! We could enter this transaction and once a day in the evening just monitor out position, let it ride - in other words our trading business does not influence our day job!
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