The Anatomy of a Trade

  • AUDNZD still in retreat mode
  • Trading in and out to optimize position
  • Longer-term bottoming pattern
  • Position size is absolutely critical

BULL RIDE - I have been trading in and out of AUDNZD over the past several days, trying to build into a meaningful long position. It has been a rocky road to say the least, with the market unwilling to cooperate just yet. I kind of feel like I have been riding a wild bull. The market has seen some intense declines since topping out just shy of 1.1500 back in August, and the latest wave of weakness finally drew me back in, with the market retracing 50% of the yearly move. Remember, earlier this year the market put in a record low and I had talked about this being the trade of the year back then. I had established a long position at the end of 2014 and then traded around it, in and out, just like I am doing now, before finally averaging in at a good level and catching a sharp move higher towards 1.1000.

IN AND OUT - It was a great trade and I think we are getting another great opportunity now. Again, just like back then, it is requiring a little bit of bull riding experience. And so, after initially establishing a long position the other week, I scaled out of some as the market continued to decline, while exiting the remainder into the rally on Wednesday with the hope of re-entering lower down into today. That opportunity presented with the market dropping from 1.0800 back to the 1.0650 area, and I am back into the position around 1.0650. Overall, since the start of the trade, I have taken a net loss of about 1% of total equity. But given the compelling risk/reward here, the upside should more than pay off. When you look at the longer-term chart, you will see the formation of what should be an major inverse head and shoulders pattern. I expect this decline we have seen since August to be the the right shoulder, with additional setbacks limited in favor of an eventual push beyond the 1.15000 area and towards 1.3000 in the months ahead.

If you can't sleep at night, reduce your position size until you can. Via @joelkruger

PILLOW TEST - But all of this talk brings up another critical point that must be reviewed. It is times like these, when you take a position like this that needs space, that you make sure you are trading with the appropriate position size. I have never taken a size that has exceeded 2X leverage with this trade and have mostly been trading with no leverage at all. And so, when you get swings like the ones we have seen, these swings don't turn my stomach or have me staying up at all hours checking the rate. Instead, I understand we could see some volatility and downside before the market turns higher again, and I am fully prepared to sit back and wait, without it compromising my portfolio. Make sure you take my 'Pillow Test' if you are finding yourself stressed out with this position or any other for that matter. If you find you can't put your head down on the pillow and sleep at night, reduce your position size until you can. Simple as that.

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