Page 124 - Ultimate Guide to Currency Trading

world's stock markets have been run up for a while, even if for three or four days, you could buy and
go long USD, Japanese yen, and Swiss francs.

More on Concentrated Positions

Even though these are three currencies from three major parts of the world, they will all react in the
same way when the stock markets correct them-selves. Stock markets correct themselves after a
three or four day run-up because the professional traders of the world like to take money off of the
table and sell out of some of their positions to lock in their gains from the markets. Once the stock
markets go down, risk assets all over the world will also fall, and the safe havens will gain. This means
your long USD, JPY, and CHF will gain also.

One of the main reasons that the stock markets of the world rise and fall every two or
three days is that the professional traders all see the same buy and sell indicators on the
technical charts. This reading of the market makes most traders add money and then
take money out of the market at the same time.

Since your three positions will gain in this situation, what you essentially have is a directional
trade. Even though you have three currencies, they are all risk averse, and therefore act as a
concentrated position. The three FX pairs on your books actually act as one FX pair. Granted they are
diversified in geography and in counter currency, but they are concentrated in direction. If these are
the trades on your books, you will win big when the world's traders decide that they would like to take
some money out of the market and reverse their positions. Stock markets go up and down all the time.
One, two, or three pairs in the same direction will make you capture very good profits when the time
comes.

Since the three trades on your books are actually a concentrated position, it is best to diversify
these three positions in proportion to each one's potential movement. In order to do this you should
first have an idea as to what currency pairs to buy into for this type of setup.

In this example, you are looking to get into three unidirectional trades that are diversified as
much as possible. Since the stock market has run up in the past several days, it is safe to assume that
the U.S. and world stock markets will fall due to profit taking by traders. While planning for this to
happen, you decide that you are going to use a total of 12 percent of your margin for the entire risk-
averse position.

You then decide that in order to have risk-averse trades, you will short a commodities
currency, a growth currency, and go long a safe-haven currency. With this in mind you consult your
broker's reports and your trading journal. You can choose to short the New Zealand dollar and the
Swedish krona, and go long the safe-haven currency, the Swiss franc. All of these currencies are
sensitive to the risk sentiment of the markets, but they are diversified somewhat.