Wednesday, January 5, 2011

Trade 526: Anatomy of an AUD trade

My Strategic thesis on the AUD for the short term.

- China raised rates in the final week of the year - a kind've peculiar timing when most people are on holidays and hoping the rate hike will fly under the rader.
- immediate implications would be a selloff in commodities, and a flow on negative sentiment on the AUD being sold off.

Offsetting risks
- My portfolio has a fully leveraged long position, with no shorts, and this seems to be a good risk off balance.

Price actions
- The 30,000 short trade was initiated at trade 524 on the 30 DEC, with the expectation that the markets would hold near resistance highs.

Key tactical application 1:
- I had kept a soft stop - I was prepared to hold the position without a hard stop - given the low liquidity in the holiday trading, and also having a strong long position in my portfolio. The position was thus partly a hedge against my long portfolio - I only held 30,000 short, so this equited to about 80% of my total long positions.

- The position then did a fake breakout to the upside - with headlines in the papers stating 28 year highs for the AUD - this did get me a little nervous, but I stuck to my instincts on this play.

- First week Jan the position had worked back to my entry level price and had started to break below the 100MA.
- The price action in the 15 min made me convinced there could be an intraday bounce so I closed trade 524 and initiated a long in 526 but only for a tiny 20,000. I got quickly stopped out on this long, the discipline pays off here.

Key tactical application 2:
- As the short term price movements clears way for the break below the trading range - I re-opened my short position, for a 40,000. I initiated hard stops in this case, as the market players are probably going to make this a much more clearly defined price action.
- The stops were v. tight, and the risk/reward here is close to 10-1 if I get the fortitude to ride the price below 99c.