Why Forex Trading is Frustrating

Or rather, why Forex trading is frustrating at a bucket shop like Oanda. I really don’t know which is the right statement to make because I can’t be arsed to do the research. I don’t have the time. What I can tell you is that my initial reaction when trading Forex is to take the profit when I’m in the money but my stock risk/reward ratio training always thwarts me. Or is thwart the right thing to write?

Forex at Oanda

Last year in November I made a simple trade shorting the EURUSD pair. I thought that the Euro was going to weaken because of all the problems it has with Brexit and Italian Bonds. I also thought the USD was going to strengthen because of consumer confidence and the Fed continuing to gradually raise rates.

In Forex trading, stop hunting is a favorite past time…

I had $125 dollars in my Oanda account and on a whim I just shorted the pair. Oanda is a market maker (aka bucket shop) which allows new Forex traders to open an account with as little money as $10 USD. They make their money by charging you a spread for the currency pair you want to trade. For the EURUSD it’s about 1.3 pips and for something like the USDZAR it’s like 80 pips. These spreads vary based on market volatility too.

So far, my initial thought on the EURUSD being in a downtrend has been underwhelming.

EURUSD Position

One of the things I’ve learned when trading with a bucket shop is that they know where your stops are. Stops are a great way to protect your position in case you are wrong. In Forex trading, stop hunting is a favorite past time, so you’ll immediately get stopped out and watch the market reverse and go back to being profitable if you weren’t stopped out!

I was hamstrung by my risk to reward thoughts.

So I trade without stops and it causes me to take on a lot of risk, too much for my liking these days. I’ve watched my position go from a small gain of 20+ pips to an easy loss of 200 pips.

EURUSD 2019-01-27

Above is snapshot my current Oanda trading screen. The little triangle in November is where I went short. You can see that in a few days I was profitable, my gut instinct said, “Take the profit and run!!!” However, my risk to reward training said, “No, you need to make 2X what you risked!,” so I stayed put and watched my position go from winning to losing. Then in late December I was profitable again, did I take profit? Nope. I was hamstrung by my risk to reward thoughts.

Fast forward to last week, I almost closed out my position with a 30 pip gain, after surviving a 200+ pip loss on paper. I almost did, but didn’t because my risk/reward training thwarted me again! Ugh!

How stupid is all this? On paper I risked 200 pips to make in theory 30 pips. This is why Forex trading is frustrating. You have to take on more risk than what your possible reward could be.

Risk/Reward Thwarting

I really shouldn’t say that my training in risk vs reward is thwarting me, it’s not. It’s warning me. I should listen to it because it’s the one thing you should really learn, internalize, and listen too when trading in ANY market. If you risk $1.00 to make $0.50, then you’ll go broke eventually. You will be wrong about the market no matter if you use technical analysis, AI, algo-trading, etc. You WILL be wrong and all it takes is being wrong once with bad risk vs reward ratio to blow up your account.

Carry Trade

There’s one thing that I completely overlooked with this trade, it’s the carry trade. The USD is a higher interest rate than the Euro, so I’m making some money from the interest of holding long USD and shorting EUR. So that’s been a plus, but it doesn’t negate the potential disaster I could face if the trend suddenly reverses and the EUR goes higher.

The fact that the EURUSD has been bouncing around at this level for the past few months is telling me that the downward trend is possibly over. It’s quite conceivable that some bizarre Trump Trade news can wreck havoc for my current position.

What Works; What Doesn’t Work

In my “What Works; What Doesn’t Work” post, I remember what I wrote for list number 3.

Day trading doesn’t work for me. I blow up all the time. What works for me is swing and trend trading. Do more of that and no day trading.

I’ve always found that the route to success is truly knowing yourself (what your weaknesses and strengths are) and doing more of what works and less of what doesn’t. Maybe I should amend #3 to include Forex or just stick with Passive Investing.

Market Recap

Last week I posted my Death Cross & a Test article and a few weeks before that my article on How Passive Investing Saved my Life. It turns out some of my readers found it useful so I decided to post a market recap from last week. I’m not sure how long I’ll keep these up but it’s fun to write about for the time being.

I don’t keep up on ALL the market gyrations but I’m aware that earnings season is coming and several companies are already ‘warning’ of possible misses. While some of that’s due to the Trump administration not know what they’re doing (tariffs, threatening to fire Chairman Powell, etc), some of it could be due to Bull Market exhaustion. Whatever the case is, I expect plenty of volatility going forward for the rest of January and even into February.

Market Rebound?

It looks like the S&P 500 (my main go to chart) is firming up. I look at the booth the weekly and daily charts and noticed that the daily chart is rebounding nicely from the lows in December. There appears to be some weakening happening in volume as it’s nearing the 50 DMA. Strong volume and crossing the 50DMA line is really important here. This is a wait and see.

S&P500 Daily Chart through 2019-01-11, market recap
S&P500 Daily Chart through 2019-01-11

I’m not overly concerned right now as the weekly chart in the S&P500 is still very positive but the price action is below the 50WMA line. Not a good omen if the price action stalls below it and we might see some stalling in the daily chart (above). Still, those white hollow candles and decent volume on the weekly chart makes me want to take a wait and see position.

S&P500 Weekly Chart through 2019-01-11, market recap
S&P500 Weekly Chart through 2019-01-11

I haven’t market timed or moved any money out of my retirement accounts. My mad money — aka small stock investments in my Brokerage account — is not doing so well. Meh. That’ll be a topic of another post soon.

Despite all this, I’m still long but I expect weakness going forward this year. That’s not bad, it lets me dollar cost average better in 401k.

ETF Pick of the Week

This pick of the week is mostly me remembering something from my past trading days. I really like ETF’s and I plan on rotating out many of my individual stock holdings into ETF’s over the next few years. I find that they’re easy for me to think about and keep track of.

This weeks ‘pick’ is EEM, the iShares MSCI Emerging Markets Index. Let’s look at the daily and weekly charts.

EEM Daily Chart through 2019-01-11, market recap
EEM Daily Chart through 2019-01-11

EEM just plain sucks on the daily chart. It had a death cross many months ago and has been riding the 50DMA average down ever since. While the recent price action since early 2019 is nice, it hasn’t broken above the last high beginning last December. If it does, then yeah I’d be watching it more closely. If it takes that high out and the high last October, while breaking above the 200DMA, then I’d consider buying.

Still, there’s so much craziness going on right now with the Trump Tariffs, Brexit, and whatever else you want to blame.

EEM Weekly Chart through 2019-01-11, market recap
EEM Weekly Chart through 2019-01-11

The weekly chart looks a bit better. The 50WMA is still above the 200WMA, a test of the 200WMA in late October 2018 and again in December 2018 held, so that’s positive, BUT the 50WMA racing toward the 200WMA is cause for concern. Weekly moving averages that make a ‘Death Cross’ are big deal for me.

Famous Last Words

Still long and Bullish overall, but very cautious. I’m keeping an eye on the S&P 500 and might buy EEM for my long term portfolio if it perks up more and the charts keep going from the lower left to the upper right.

Now, go out and do something fun.

Death Cross & a Test

Although I do passive investing 95% of the time, I do keep an eye on the general market gyrations if there’s something notable happening. For example, the recent market sell offs. Of course my 401k looks like 351K now, but this is to be expected considered the lunacy we’re seeing in Federal Government right now.

The markets have been selling off like crazy lately and everyone is trying to come up with a reason. Is it the Trump tariffs? Bond yields inverting? Apple earnings? Usually it’s a combination of all of the above. The market is trying to desperately price in all known things and even account for unknown knowns.

Death Cross

If you look at the daily chart below, the S&P500 had a very bad December. It had a death cross (50DMA drops below the 200DMA). That’s a very ill omen considering the index started showing weakness around the beginning of October.

S&P500 Daily Chart with a Death Cross at the beginning of December 2018

Sure we had some rebound since the end of 2018 but I expect lots of volatility in January and possibly beyond. I’m not worried yet because of the weekly S&P500 chart. There are no death crosses there, just a nice test of the 200 WMA.

S&P500 Weekly Chart with a test of the 200 WMA at the end of December 2018

That weekly candle in the last week of December 2018 is like classic textbook test of the 200 WMA. It tried to pierce but failed. My guess is that the institutions were watching those levels like a hawk and initiated the buy programs like crazy to try to save this bull market.

Let’s wait and see

I’m definitely taking a wait and see attitude now. If the markets start to firm up and close out January on a solid footing that I’d say the most of the market lunacy is passing. Not passed, just passing. There’s a lot of unknown unknowns happening in Washington DC right now that the markets are definitely on edge. As long as we don’t have a death cross on the weekly charts, I’m not too worried but look at this volatility as a perfect time to rebalance and up my dollar cost averaging.