Method
The method below is for trading spot positions on currency majors and also options on currencies when the opportunities present themselves. Instead of using complex numerical, economical, or chart pattern-based models, the methodology is simple: recognize when inefficiencies in the market surface due to human behavior and filter random from non-random price-movement and information, and then profit from these imbalances. Such a contrarian strategy is one of the safest and close to guaranteed strategies for profit because the crowd is eventually wrong. Furthermore, this applies to all time frames because the market is fractal.
The method assumes the following logic:
1. Take the worst case scenario and admit that we’re ignorant and that the market is unpredictable.
2. Since the currency market, like all other commodities markets, is a zero-sum game (wealth is neither created nor destroyed), the crowd must be wrong at some points.
3. Thus we act as contrarians and look for imbalances to build up based on human behavioral tendencies as well as macroeconomic shifts.
4. Start building positions when sentiment and speculation reach extremes and allow plenty of room and time for randomness to take its toll on the market. We look for when the rules of the game have shifted as we place all new incoming information in context.
5. Trade multiple exits in addition to multiple entries as opposed to going all in and out with one shot.
Now that may seem like theory or philosophy to some traders, so let me break it down into more specific, actionable steps then.
- Focus on one currency. What has it done against the dollar in the last year, quarter, and 24 hours? Has it ranged or trended? What is the fundamental reason for it going from A to B? In other words, determine what the market is focused on.
- Put the focus into context. Does what happened in the last 1-4 days fit with the bigger picture? If the currency rallied because of what the market is focused on right now, is there something that the market is ignoring that’s equally important and could reverse the latest move? If so, what could possibly be the catalyst and how far could it move?
- Analyze the other players. What is the current positioning in the currency pair and other macro instruments (e.g. interest rate futures)? What is the current sentiment (measured by market reactions to information stimuli)?
- Use randomness to your advantage while entering. If an imbalance develops, start building positions by entering at multiple different points. Take profits quickly on some positions and allow stronger movements on others before taking profits. Add more when a catalyst develops that “releases” the imbalance. Remember we don’t sit in front of the screen all day so we don’t need to enter and exit at exact prices.
- Scale. As your level of conviction rises, take bigger positions, especially while nobody else dares to.
- Control. Keep leverage and losses below predetermined maximum levels and allow price plenty of room to move.
This is the essence of my strategy and as you can see, a lot of discretion is involved. However, my approach is very systematic. I am currently releasing a free special report consisting of three articles with actionable steps based on this method. If you would like to download them, just enter your name and email on to the form at the top right and they will be sent to you.
