A couple of months ago, we talked about the fact that we would update our subscribers regularly about how we view the three asset classes that we trade (Stocks, Futures, Forex) currently so that they can adjust their trading size. In the last two weeks, I’ve received several emails from subscribers asking if it is time to lower our size on Forex, which often dries up a bit in the late summer as people in Europe goes on vacation. So, I decided that now was a good time for an update.
Let’s start with Forex. It is true that most years, I suggest reducing size on Forex when it slows down, which is typically centered around August. Last year in particular, we were “half size” for several months at the back end of the year in what was one of the worst Forex trading environments I can recall (there was another slow period in 2006, but this was much worse, driven by the uncertainty of the Fiscal Cliff scenario). There were tons of days in that window where the “range” (number of pips from high to low in a session) were 50 pips on the EURUSD and even the GBPUSD. Keep in mind that the 10 year average daily range on the EURUSD is around 130 pips per day, and for the GBPUSD, it’s more like 145. So 50 pips is not something you can make money in easily. That’s just not a good environment for trading at all, frankly.
So it wasn’t just about summer last year. And once January rolled around and the Fiscal Cliff situation was resolved, things did improve. We’ve had some decent moves, and ranges have definitely been better, and our results by month this year have been just fine again, but I still wouldn’t say that it is quite back to normal in terms of both intraday ranges and general broader moves that we have seen in the past. No complaints, but we know that there will be even better times again someday. The way that I typically make the determination to reduce size (we call it “half size” but your trading should reflect how poor the ranges are consistently) is not just based on a date or time of year. In fact, it isn’t even just based on ranges. Let’s take a look at the EURUSD and GBPUSD this past week, for example. The EURUSD traded 73, 143, 119, 249, and 100 pips of ranges for each of the five days. For the GBPUSD, it was 221, 108, 168, 172, and 118. That’s an average for the week on the EURUSD of 136 and an average on the GBPUSD of 157. These are well above the six month averages of 108 and 117, respectively, and frankly, just a nudge above the 10 year averages. In other words, compared to this last year, this was a good week for movement, even if a lot of it was in one session. We won 4 out of 7 trades, and one was a nice winner to the final exit. So we don’t just lower size because “August is coming.” Frankly, there have been years where August didn’t slow down. We are on guard around this time of year, but the first thing we need to see is those ranges dropping. And frankly, you could have slightly worse ranges, but potentially still be hitting about 50% winners and losers and not losing ground. The second component for me is that I finally see the lower ranges AND start to lose more. Then I lower size until that changes back the other direction. Usually, with consistently lower ranges comes more losses, but it doesn’t have to be the case. We’ve had plenty of 100 pip-ranged days on the EURUSD and made money.
So in terms of Forex, I’m still comfortable with full size, and I will note in the reports the minute that I’m not, but it will not just be because of one or two light days. It will be because of a week or two of deteriorating activity, and we have no sign of that yet.
Unfortunately, even though we’ve had a couple of months now of decent returns in the Futures market (and I was getting close to bumping my size back up at one point), I just don’t see it there yet. This last week, while not really hurting us, just was awful from the perspective of movement in the indices during the day (half of the gains in the market were gaps). The problem remains volume in the markets. It’s horrible. And don’t fool yourself about why. The sequester continues, pulling a lot of money and certainty out of the economy, while the Fed continues to “stand ready” at all times to prop things up. In other words, no one wants to throw big money into the market, but there isn’t a lot of reason to take it out. Even breaking the S&P trendline has played out in slow motion at best, and if we don’t start to roll soon, this might end up being a 3-month base instead (and then rally at the end of the year). Just go look at the ES chart from Friday and you can see why the futures aren’t a good place to be concentrating right now. Frankly, not only is my size way down, but I’m just not looking for or making as many calls as I usually would. Being extra picky seems to have resulted in net gains for the last few months, but typically, there should just be a lot more to do in the Futures market. Also, a lot of the trades that end up working are sweeping and stopping once first, so the results come down.
So in terms of Futures, we’re in “half size” mode, and you should really just be extra cautious. I feel bad for people that only trade futures (or even worse, as so many do, just the ES) and are trying to make a living there.
That brings us to stocks, which you might think would be equally dull with the market volume being so poor. But, the stock market has a lot more options, and frankly, we’re doing just fine. Our win rate is great, and yeah, there might be more trades that only get a partial and then drift than we would like, but that just means the gains are less, not that we aren’t making money. Key daily chart patterns continue to work (see CHKP this week, top pick off the report) when they don’t gap over (we have had too many gaps). The reality is that you need to be hyper-sensitive to market direction and what the futures and volume ARE doing for the session, and a day like this Friday is just not going to do much for your PnL, but we’re still finding tons to do. For people that say that they want more trade ideas, however, I have to stress that even more than usual, more trades does not lead to more money made. I can assure you based on 20 years of doing this now that in this environment, more trading leads to losses. For me, if I can hit 2-3 stocks in the first 60-90 minutes, that usually gets it done. We’ve even had a few afternoons with some ideas and movement. But if I can’t find things worth entering in the first hour, there probably won’t be much for the session.
So in terms of Stocks, it’s full-speed ahead with a note of caution about checking your daily environment.
That’s what I see for now. Full size in Forex and Stocks, something half-size or less in Futures, depending on whether you trade more than just Futures. This is why we always recommend that people trade more than one asset class. Two months from now, this picture could look completely different. Have a good weekend.