Wednesday, January 24, 2007
Trade of a decade
Trade of a decade
I trade the shorter term charts most often but I try to investigate the longer term charts often. This way I can track long term, wealth building investments, rather than just the typical dollar here dollar there to just make the monthly payments. Long term pip movements can earn an investor 10000% easily with moderate compounding.
This is the beauty of forex investing, the leverage and its application to long term investing. Leverage can be further leveraged with the use of stops. I can assign more money to my investment if I reduce my stop loss. This leads to greater return over the long term investment period but also this increases risk, not so much though, as the stop loss is further limiting.
Applying stop losses early allows to use your leverage as much as possible. With a tight stop, it wouldn’t be detrimental if I used 100:1 leverage. Even at leverage that high I can be set so I won’t lose more than a few percentage points. This does mean, though, that the price must move almost immediately in my direction.
The trade I am talking about here is on the GBP/USD chart. As we know, trends that develop on longer term charts tend to last longer and are stronger. The durability of a trendline is much like that of a name of a company. The longer its in business, the more trusted it becomes.
Not only have these trends existed for such long periods of time, the trends are developing on a chart with monthly bars. This means the trend is most reliable. It truly is a full-fledged TREND if it exists on timeframes spanning YEARS! Trends are simply patterns that develop, but trends aren’t really trends if they only exist on the tick charts. Those trends are so small and miniscule the spread would eat up all of the potential profit.
I present to you this beautiful chart of the GBPUSD since it first started trading in one month bars.
First and foremost there is some horizontal resistance. Horizontal lines are extremely important because they are often points that are RARELY penetrated by price. Horizontal lines are often marked at the top of movements when a price hits that infamous no mans land. Horizontal lines in forex are usually backed by huge financial establishments, governments, or banks. This is another point to hit on!
Forex is not like anything you’ve ever experienced in stock markets. The prices of currencies have effects beyond national borders and affect whole economies, unlike stock prices which generally only affect a few investors rather than populations of people in capitalistic countries.
Banks, Governments, even investment firms all take part to make sure that there is a global balance in the foreign exchange markets. See, if GBPUSD were to go to $3 overnight, things would be awfully bad in the United States. Our currency would have, in effect, lost 50% of its value against the British pound. Instantly goods from Great Britain would cost 50% more because of this unfavorable rate. Anything that the United States had once imported from its former ruler probably would have ceased the second that trade happened.
The United States as a consumer would have to buy from a country which has more favorable prices and better exchange rates. It is worth it to government and big banks to make sure that the balances are in place so that this doesn’t happen, so that one country isn’t put into financial peril.
One way to make sure that a currency does not get out of hand is to raise or lower interest rates. When interest rates are lowered, this is thinking internationally of course, the prospect of investing in that nation is lower. Who wants a lower interest rate? In forex, the people who feed on the interest alone might start borrowing from that country (selling its currency) to invest it in a country with a higher rate (buy that currency).
Its called hedging and people do it all the time. Up until recently Japan had a 0% interest rate. I could borrow on the exchanges and it would cost me nothing! Why? Well first of all the Japanese are notorious for their saving, the average Japanese family saves 18% of its take home income while the average American saves a NEGATIVE 2.2%. Yay debt! Also, the Japanese banks need their money out working in the economy rather than just sitting around collecting dust.
The Japanese wanted their money to be invested overseas and bring money BACK INTO Japan, boosting the snail paced economy.
What I wanted you to understand here is that the foreign exchanged markets aren’t nearly as local as we would expect. The price of your hamburger depends on the exchange rates at various points in time.
Next focal point of this chart would be the magical RSI divergence that I love so much. The RSI tells us the strength in the pair is dying while the chart itself is disagreeing. This disagreement shows a “divergence” in the strength and the price, meaning the price will fall rapidly to make good with the RSI.
When strength falls, so does the ability for a security to gain value. When it gains value and loses strength this doubly means its lost ability to further gain value. At this point we can only wait until one of three things happen:
1 The security goes in favor of the RSI as expected.
2 The security goes against the RSI
3 The security forms another step in an RSI divergence and goes back to the beginning of following either the first possibility or the second.
I think this will be one amazing trade. I’m willing to ride this particular trade for at least a year, and in that time I believe the pair could go as low as $1.83-85 per Pound. That’s about 1000-1300 pips. Enough for a gain of 5-650% on just a one time investment. I’m shooting for a bit more risk here. I was lucky and invested at the top and so far my first position is up 230 pips already. Every 100 pips I will be furthering my investment a whopping 33%. So for each 50% gain, I’m reinvesting 33%.
I’ve got 3 positions, one up 230, one up 130 and one up just 30 pips. In this short time my total return is 94.3% ROI on my entire investment with this specific investment plan. Unfortunately these positions pay a negative interest rate, which accounts for some change, maybe a couple dollars, each day. The key is that I expect to earn at least 500% with this trade so negative interest will not hurt my portfolio on the least bit.
Remember that although I’m up considerably so far, it would be ridiculous to think that these gains cannot be erased. I’m perfectly expecting to see my positions move closer to the red because the pair moved so violently lower. This is one of the few investments in which I would recommend taking investment even as the pair goes against you. The more it loses, the more chances I have to invest and slowly raise my average investment price higher.
I would call for this pair to make its way back down to 1.41 but we have to remember that these charts do have some extreme impact on world economies. A fall to 1.83 is neither going to hurt or help the economies of the US and GBP like a fall to 1.41 would.
The US just doesn’t have the credientals to warrant an exchange rate of 1.41:1 on the GBP. If this were a trend happening in say nature, I would be all for fallowing it down to 1.41 at an extreme profit, enough to probably put everyday people like you and I on the short list of billionaires. Being in a group of just 400 people would be pretty cool huh? 