I entered a short position on GBP/JPY last night after the pair broke out of a bearish pennant. Today, the pair continued in my favor, all the while exhibiting some nice action on the intraday chart.

First of all, about the position - after entering last night at 143.073 (down red arrow), I woke up this morning to find that the pair had moved in my favor overnight by more than 1R. So, according to my rules, I moved one of my two initial stops to breakeven and the other to 1R above the low. Half of my position was stopped out for a profit of 48.8 pips while I was at work this morning (red "X"). The other half is still open with a stop at breakeven, currently up approximately 430 pips. :-)

Now take a look at the 30 minute chart below (please note, I never trade off of time frame this short - but I do like to look at the 30 minute chart every now and then to see what's going on!).  Last night I noted the area around 139.00 (dotted horizontal line) as an area of support that I'd be watching.  See how the price tested and bounced off of this area in this morning's session in the first red circle?  If I hadn't been at work at the time, I'd have moved my fixed-pip trailing stop to 1R off of the low and would have captured more pips on this half of the position when the pair retraced shortly thereafter.  However, I wasn't able to do this, and that's how it goes sometimes for the trader who works a full-time job as well.  You've just got to accept it and take what you can get.

 

After the pair tests support and retraces, it resumes the downtrend and again tests support. This time, though, it breaks through it. Notice, though, after it breaks through the area of support, it retraces and tests the 139.00 again from below in the second red circle.  We see that now this area of support has become an area of resistance, and GBP/JPY appears to be reacting off of it as such; the pair will likely continue lower.  Oftentimes, areas of support, once broken, will become areas of resistance and vice versa.  This is a great example, and if I saw this happening on a 4 hour or daily chart, I'd probably add to my position here now that the pair has shown that it will respect 139.00 as an area of resistance.

This has been a fun trade to watch unfold.  We'll see how much farther it can go.  Now that support has been broken, it's anybody's guess!

This afternoon we saw a breakout to the downside of a bearish pennant that had been forming on the GBP/JPY 4 hour chart for the past few days.  Since the prevailing trend on the daily chart is still strongly down, I'm going to take this short and see how things go.

The horizontal dotted line in the chart below around 139.00 represents a level of support that I'll be watching carefully.  Price bounced off of this level pretty hard on 10/24/08, and tested it again on 11/13/08.  I feel comfortable shorting the downside breakout of the bearish pennant, though, because the distance to the area of support around 139.00 is more than the amount that I'll be risking initially, so by the time it gets close to support, I'll have moved my stops to breakeven.

So, without further ado...

• Short Entry:  143.073
• Initial Stoploss:  144.569

Quick update on my EUR/USD short held over the weekend.  I was stopped out of both halves of my position yesterday - at 1.27167 and 1.26565 - for 61.5 pips and 1.3 pips profit respectively.  So a small win, but a win nonetheless!

I'm now flat and waiting for the next opportunity to reveal itself.

Another new week is upon us, and I'm currently short EUR/USD from 1.2718.  My short orders were hit late Thursday night, and I was able to move both of my initial stops to breakeven late Friday after a late surge down by more than 1R.  After opening down further tonight, I've moved one of my trailing stops into positive territory, per my rules.

Though the prevailing trend on the daily chart is still down, we're in a period of consolidation on the 4 hour.  It will be interesting to see what happens around the 1.2425 area, if it makes it there.  I have a feeling it will find support and bounce a bit in that area, but I could be wrong.

Other pairs I watch (AUD/USD and GBP/JPY) also may be testing areas of support this coming week, so I'll be keeping an eye on them.

Good trading to all this coming week!

I Frequent several forex trading message boards and often see questions like the following from individuals who are just getting into Forex:

My broker only allows me to trade with leverage as low as 10:1.  I don't want to risk that much - can I somehow set it to 1:1?

This type of question reveals a misunderstanding of leverage that many new traders have.  Leverage does not equate to risk.  It simply dictates the largest size of a position or positions a trader can take.

I came across a clear and simple explanation about the difference between these two concepts tonight in an article entitled What leverage is really all about, written by John Forman at The Essentials of Trading.  Since I couldn't improve on the author's explanation if I tried, I've copied an excerpt below (emphasis mine):

Allowable leverage tells you one thing - how big you can trade, either in terms of position size or number of positions. That’s it. No more. No less.

Risk comes down to one thing, and one thing only - the size of your position. The larger the position, the greater the risk. It’s that simple, really. High degrees of available leverage certainly allow for larger positions, but they do no require them.

The thing that I think causes the most confusion is thinking in terms of margin and not account size. If you trade at 100:1 leverage you would have to put up 1% margin. That means a 1% move in the market against you would wipe out your margin deposit. If you were trading on 50:1 leverage the same 1% move against your trade would only take out half your margin. That seems like less risk.

Here’s why it isn’t.

Assume a $10,000 account and a $100,000 trade size. For a 100:1 leverage account the margin requirement would be $1000, while at 50:1 it would be $2000. If the market moves against the position by 1%, that would mean a $1000 loss to the account, or a 10% decline in account value. It doesn’t matter whethere the trade was done in a 100:1 or 50:1 leverage account. A 1% move on a $100,000 position will always represent a 10% change in account value for a $10,000 account.

The only time differences in leverage mean differences in risk is when you are talking about different position sizes, basically meaning using all available funds for margin. The 100:1 leverage $10,000 account could trake $1 million, while the 50:1 could only go as high as $500,000. Clearly, when the accounts are maxed out like that a 1% move in position value is different. The 100:1 account would be wiped out, while the 50:1 account would only lose have its value.

So, assuming a constant position size, a trader does not necessarily risk more by using higher leverage.  Higher leverage just means that the trader can take a larger position or more positions if he/she so chooses.  Hopefully this will help clear up this mystery for some.