My own definition of a risk event (go figure) – An event that puts you at risk.
We’ve all got our own tolerance for risk, as a particular event (such as the FOMC announcements tomorrow) that may be considered a “risk event” by one individual, may have absolutely no significance to another. There are many factors to consider – and it really comes down to the individuals circumstances and/or evaluation at the time.
I for one – have an extremely high tolerance for risk.
Almost to a point of fault, I have been known to walk down the odd dark street at night just to “see what’s down there”, or perhaps hail a cab with no real “company name” visible on the door – however…..
I do not take undo risk with my investment or trading decisions.
The best suggestion I can make centers on the simple question of “whether or not its worth it” as a risk event approaches – and more often than not the answer comes back the same….absolutely not.
- Could something occur tomorrow that could potentially jeopardize the profits I am currently seeing on the table?
- Could I find myself deep underwater tomorrow in the case that something completely unexpected occurs?
- Am I going to miss “something massive” if I am not fully invested and exposed to the market?
Questions like these are healthy, and can go a long way in preserving capital in these volatile times – let alone reduce risk considerably.
Consider your risk tolerance. Ask yourself – Is it really worth it….. for a couple of points or two?
An aside – I have little doubt that tomorrow’s FOMC announcements/outcomes will result in markets moving higher, and the dollar getting sacked. However – it may not play out as “matter of fact”. I have 100% confidence that any trade opportunity that is currently available to me – will equally be available to me tomorrow (and likely the next day for that matter). Do I care?….nope…not really.
Kong banks an additional 2% on the day – and back to the ol favorite – 100% hard cold cash.
The Reality Check: Why Most Traders Get Risk Assessment Dead Wrong
The FOMC Gamble That Separates Amateurs from Professionals
Here’s what drives me absolutely nuts about the retail trading crowd – they treat every FOMC announcement like it’s their personal lottery ticket to financial freedom. News flash: it’s not. The Federal Reserve doesn’t care about your EUR/USD position or your dreams of hitting it big on a dovish pivot. They’re making policy decisions based on employment data, inflation metrics, and economic projections that span quarters, not the fifteen minutes after Jerome Powell opens his mouth.
Professional traders understand something that escapes most retail participants: the real money isn’t made in the chaos immediately following these announcements. It’s made in the days and weeks that follow, when the dust settles and the actual implications of policy changes begin to materialize in currency flows. The USD/JPY doesn’t care about your stop-loss at 149.50 when the Fed drops an unexpected hawkish tone and sends the pair rocketing 200 pips in thirty minutes.
The smart money? They’re positioning themselves based on longer-term interest rate differentials, carry trade opportunities, and central bank divergence themes. They’re not gambling on whether Powell stumbles over a word or looks slightly more dovish than expected in his press conference body language.
Cash Position Psychology: The Ultimate Edge
Let me be crystal clear about something – sitting in cash isn’t being lazy or missing out. It’s being strategic. When I’m holding 100% cash ahead of a major risk event, I’m not paralyzed by fear. I’m exercising the most powerful tool in trading: optionality. Every minute the market is open, opportunities are presenting themselves. The difference between profitable traders and those who blow accounts is recognizing that not every opportunity needs to be seized.
The psychological advantage of cash cannot be overstated. When you’re not emotionally invested in a position during volatile announcements, you can observe market reactions objectively. You can watch how the GBP/USD initially spikes on dovish Fed commentary, then reverses when traders realize the Bank of England is still dealing with persistent inflation pressures. You can see these moves developing without the clouded judgment that comes from having your capital at risk.
This positioning allows for what I call “post-event clarity trades” – entering positions after the initial volatility subsides and clearer trends emerge based on the actual policy implications rather than the knee-jerk reactions.
Interest Rate Differentials: Where the Real Action Lives
While everyone’s focused on the immediate drama of Fed announcements, the underlying drivers of currency movements remain fundamentally unchanged: interest rate differentials and relative economic strength. The Australian dollar doesn’t suddenly become attractive just because the Fed pauses rate hikes if the Reserve Bank of Australia is simultaneously dealing with a housing market collapse and commodity price weakness.
The carry trade opportunities that develop from central bank divergence are where consistent profits are generated. When the Fed maintains restrictive policy while the European Central Bank signals dovish intentions due to economic weakness, that USD/EUR interest rate differential creates sustainable trends that last months, not minutes. These are the movements that build real wealth in forex trading.
Smart traders focus on these macro themes rather than trying to scalp volatility around announcement times. The Japanese yen’s chronic weakness isn’t a function of any single Fed meeting – it’s the result of the Bank of Japan maintaining ultra-loose monetary policy while other major central banks have tightened aggressively.
The 2% Daily Win Philosophy
Banking 2% gains consistently trumps hitting home runs and striking out repeatedly. This isn’t conservative trading – it’s mathematical superiority. Compounding 2% gains over time destroys the returns of traders who swing for the fences on high-risk events. The math is unforgiving: lose 20% of your account on a bad FOMC gamble, and you need a 25% return just to break even.
The beauty of this approach lies in its sustainability. Markets will always provide opportunities. The EUR/GBP will continue presenting technical setups. Commodity currencies will keep reacting to global growth expectations. The Swiss franc will maintain its safe-haven characteristics during geopolitical tensions. None of these fundamental market dynamics disappear because you chose to sit out one Fed announcement.
Risk management isn’t about being conservative – it’s about being smart enough to fight another day when the odds are genuinely in your favor.
Hey Kong,
I’m curious about your position sizing and managing losses/drawdowns. If you’ve banked 2% on a mild up day like today, and I think I recall you saying you don’t use stops, then you must at times be weathering some pretty significant drawdowns. Am I right in presuming that you have a high win % but when you do lose, those losses can be big?
Great questions Kreks….great questions.
If you’ve read through – a key element of how I approach entry is a “staggered/dip my toe in” type thing….until my direction has been proven/established.
So……on a given day (such as today) stretched across some 12 odd pairs….each with a relatively small position (and no stop) – its not unusal at all for a “small movement” to accumulate reasonable profits – If indeed things have moved in my direction!
So……this lends considerable credence to my ENTRY SYSTEM – WHICH IS HIGHLY – HIGHLY ACCURATE.
You may recall that I sat in cash for a full 8 days the week before last with no real concerns, and on pulling the trigger – I literally went into profit some 15 minutes later.
Another element – if indeed something does “suddenly” move against me – and it does obviously, I generally have an additional 33% account capital…and then an ADDITIONAL 33% capital to add/stagger – and most often look at these events as opportunities not concerns.
I have endured drawdowns (when I started out) and it was terrible / grueling.
These days, the ability to remain patient coupled with the honed technology/entry system I’ve devised has essentially eliminated this.
Although (again looking at my risk tolerance) it could most certainly happen that some “event” could blast some several hundred pips against me (flash crash style) but……it would more than likely be exactly that “an event” – not a fundamental change in policy/direction. And I can just trade though that – by keeping entries small….and reserve capital LARGE!
Thanks for that. I’m still getting my head around this so please bear with me! I’m not sure how you interpret the term “reserve capital”. ..Let’s hypothetically say someone trading like you has a $300,000 account. You make 2% profit = $6,000. This comes off a currency market movement of let’s say roughly 0.5% – so, your “position size” is $1.2million. So if you’ve deployed 1/3 of your account – $100,000 – this is then at 12x “leverage” – but really you could equally say you’ve deployed your full account of $300,000 but with 4x leverage. When you talk about reserve capital, it sounds like it’s more a question of margin?
Off the top of my head….and forgive me as well in that….I wouldn’t trade “like” I have 300,000 in my account. (In that the entire math equation would be “based” on crazy forex leverage – and defeat the point at hand).
I would trade “with” 300,000 in my account.
Kreks….Ive read it back and am now sure that I’ve misunderstood.
Try again with a simple round number like 100k – and we can try again.
It’s ok, I get it. I was confused by your reference to reserve capital and taking a 1/3 position. It’s the kind of lingo people use in the equities market (ie. if you had a $100,000 account and you used 1/3 of your capital, you’d buy $33,333 of whatever stock we’re talking about.) It’s obviously different in the currency context because if you only bought $33,000 AUD/USD you wouldn’t make any money. We’re really talking about leveraged positions here, and how much margin you have to add to a losing position.
On a day like today, if you had a $100,000 and you made 2% = $2000. Let’s say you traded AUD/USD…. If the market moved 0.5%, then your position size was $200,000. If AUD/USD had gone down 0.5%, you would be sitting on a $2000 drawdown – so what would you do – add another $200,000 AUD/USD?
Sorry, lol it’s still the morning here. That should be: “On a day like today, if you had a $100,000 and you made 2% = $2000. Let’s say you traded AUD/USD…. If the market moved 0.5%, then your position size was $400,000. If AUD/USD had gone down 0.5%, you would be sitting on a $2000 drawdown – so what would you do – add another $400,000 AUD/USD?”
This looks about right – but still missing something.
I don’t know where you get the 400k part? – if the trade moved 200 pips in my favor and I was trading 1 standard lot then yes…the unrealized profit would be 2k. Inversely if the trade went a full 200 pips against me (which again – considering entry system/trade patience/tech etc..would be extremely rare) yes….the account would reflect a -2k unrealized profit/loss.
If your account total vlaue was 100k then the “drawdown” is only 2% and you’ve got like a zillion dollars more to add (if you choose) and/or exit the position for the tiny loss of 2%! I don’t get the 400k part.
If I decided to add to the position…..then (for exammple) sure – buy another 1 standard lot (now 200 pips cheaper) and have an averaged postion that is only 100 pips underwater – get it right, and the following morning you are just as likely back to break even. OR -You’ve got no concept of levels of support or resistance….no idea where the market is going…and continue to add to losing position until you blow up your account sure.
Not me.
Kreks,
Im just debating writing a full post / explination on “some” of this as opposed to just a quick answer here in the comments section – please bare with me as I wrestle with a “simplified way” to explain this – and not open myself to 8 million questions, that frankly I am unlikely to answer until a paid section of the website is established.
I appreciate how “unknown” this area of forex trading is – and how rarely discussed/uncovered.
I can make sense of it in a broad sense but already find it challenging to “roll out” short of writing a small book!
Sit tight.
All good, Kong. I think I “get” you now lol … look forward to the post if/when it appears.
K
That’s what I thought you meant. The key with that kind of trading is knowing how to average down “safely” and not compound your losses. It’s a difficult skill to master… I’m impressed that you have! You really are an aggressive gorilla lol
The emotional scars of big losses caused in the early years of trading have stopped me from ever, ever adding to a losing position. I’m so cautious that I will move my stop to break even pretty quickly now also. It can get frustrating when you have a string of trades stop out at BE. But I do take big positions and my wins, when they come, are also big (10-15% of my account). It’s just the way my trading style has evolved I suppose…. there’s no way I could weather a 100 pip move with my position sizing. But it works for me … I’m up 131% for the year, and only one losing month (tiny).
The more experienced traders I speak with – the more interesting the trading styles. What works for one represents “certain death” for another… and so it goes. Obviously if you’ve found something that works – that’s all that really counts. It sounds to me like you are doing great!
Feel free to drop a couple of “tips and tricks” here of your own – as the learning never stops.
I am looking to close a position AUD/JPY which has been running since the 14th 16th Nov & my last Dec 6th, I think this run as been maxed out for me, at the very least running the beat March highs just seems to much too as for at this point.
I think I got this from your post Kong….. nice 🙂
YUP…….. you posted this monster trade….. nice call KONG…. where is the dotted line…. cheers
Schmed.
You are 100% bang on the money at current levels – I would be thrilled to take profits / call it a trade!
The pair is “in the zone” of resistance that has rejected it time and time again so……sure there could be a “pop” but my crayon’s have it running outta steam.
Nice one man!
schmederling your fearless leader at SMT just canceled my subscription for nothing more than asking you what I should be thanking him for. bad timing He clearly makes more money from subscribers than he does investing. He has lost his edge.
I saw the writing oh the wall some weeks ago – as my general “concerns” surfaced. It’s likely on its last legs.
After the “4th rephasing” of the cycle count etc….I still tried to contribute – but finally gave up. It’s obvious (as he’s stated himself several times) that he has no idea whats going on – short of suggesting to “buy gold and the bull will save you” – wow…that’s what I call “cutting edge” investment advice.
Admitedly I’m disapointed in that – I was originally advised that he was one of the better cycle guys, but clearly that’s not the case…let alone the decisions/trade suggestions buying the options at the top etc…
Again – I wish him the best of luck.
exited my GDX calls at a loss today
happy trading all…
Damn Hf – that’s too bad.
I’ve done the math on mine….as well a couple NUGT calls, and considering it’s part of an options “gambling account” anyway – will look to hold through til end of January. Gold is a slow bull to say the least – and frankly “dead money” and/or “hope” are no part of my plans.
I do expect to do O.K – but have more or less rinsed my hands of it in the short term, in that currency wise – things are chugging along great.