I’ll do this “once” as to provide a touch more insight into how I trade.
Let’s look at AUD/JPY for example.
You can see in the chart below, that the pair has been trading sideways for near an entire month within a very tight “100 pip” range. To put that in perspective in “real terms” the difference in value of the Australian Dollar and the Japanese Yen has fluctuated “a single penny” over the past 30 days. Actually no wait….over the past 2 months! A single penny in exchange rate.
AUD_JPY_RANGE_2013-12-06_Forex_Kong
Let’s stop right there.
Can you imagine that with “all the news” and “all the hype” and “all the bullshit” you are inundated with every single days as to “The Taper!”, ” China Slowing!”, “Death Of The Dollar!” , “Stocks At All Time Highs!” “Market Crash Coming!” Blah blah blah….that the fluctuation between one of the highest yielding currencies, and that of the lowest yielding currency has moved…………a single penny?
And you’re completely underwater, can’t believe you’ve taken trade advice from a total stranger on the Internet, and sitting under your desk praying to god that “things will turn in your favor”.
A “single penny” in real world terms – and you’re already about to pull your hair out.
So…………..
This is where you just step back a moment. You recognize you’ve got absolutely no business trading as large as your trading – and that frankly, you’ve got “no friggin idea at all” how currency markets / trading works.
Good. This is an important step as……hopefully now…..you’ll go back – start reading from the beginning, and get yourself caught up. It’s all here, and I’m always available to answer your questions.
I can’t tell you “how to trade”, but I can tell if “a single penny” on “a single day of trading” has you slamming your head into your desk – I’d best keep my positions small.
Very small.
The Reality Check Every Forex Trader Needs
Why Range-Bound Markets Destroy Amateur Traders
Here’s what kills me about novice traders watching AUD/JPY bounce around in that pathetic 100-pip range. They see every single bounce off support or resistance as some kind of “breakthrough moment” that’s going to make them rich. Wrong. Dead wrong. When a major currency pair like AUD/JPY gets stuck in a tight range for months, it’s telling you something critical about global macro conditions. The Reserve Bank of Australia isn’t dramatically shifting policy. The Bank of Japan isn’t suddenly abandoning their ultra-loose monetary stance. Nothing fundamental has changed, yet amateur traders are in there scalping 10-pip moves like they’re trading the breakout of the century.
You want to know what that sideways chop really represents? It’s institutional money sitting on the sidelines. Big banks, hedge funds, sovereign wealth funds – they’re not interested in fighting over scraps in a 100-pip range. They’re waiting for actual catalysts, real policy shifts, genuine economic data that moves the needle. But retail traders? They can’t help themselves. They see price touch the top of the range and immediately think “short.” Price hits the bottom and they’re screaming “buy.” Meanwhile, they’re getting chopped up by spreads, commissions, and whipsaws that eat their accounts alive.
The Macro Picture You’re Completely Ignoring
Let’s talk about what should actually matter when you’re looking at AUD/JPY. Australia’s economy is fundamentally tied to commodity exports, particularly to China. Japan runs one of the most accommodative monetary policies on the planet, keeping the yen artificially weak to boost exports. When these two currencies trade sideways for months, it’s because the underlying economic relationship between Australia and Japan – and by extension, China’s demand for Australian resources – is in equilibrium.
But here’s where most traders go completely off the rails. Instead of recognizing this equilibrium and either staying out or positioning for an eventual breakout with proper risk management, they’re trying to day-trade every 20-pip wiggle. They’re completely ignoring iron ore prices, Chinese GDP data, Japanese export numbers, and yield differentials between Australian and Japanese government bonds. These are the factors that actually drive AUD/JPY over meaningful timeframes, not some random news headline about tapering fears or stock market volatility.
Position Sizing: The Only Thing Standing Between You and Bankruptcy
When I say keep your positions small, I’m not talking about risking 1% instead of 2% per trade. I’m talking about risking so little that a 50-pip move against you feels like pocket change. If you’re sweating bullets over a single day’s price action in a range-bound market, you’re trading way too big. Period. Professional traders size their positions based on volatility expectations and time horizon. In a 100-pip range environment, they might risk 0.25% of their account per trade, knowing that getting stopped out three or four times is just the cost of waiting for the real move.
Amateur traders do the exact opposite. They see low volatility and think it’s “safe” to size up. They figure since the range is tight, their stop losses can be smaller, so they can afford to trade bigger. This is backwards thinking that will destroy your account. Low volatility environments are where patient capital gets rewarded and impatient capital gets obliterated. The professional approach is to size down during consolidation phases and size up during trending phases, not the other way around.
What This Means for Your Trading Going Forward
If you’ve been getting crushed trying to trade every minor fluctuation in pairs like AUD/JPY, here’s your wake-up call. Start thinking in terms of weeks and months, not minutes and hours. Begin following the actual economic data that drives these currency relationships – Australian employment numbers, Chinese PMI data, Japanese trade balances. Understand that when major currency pairs trade sideways for extended periods, the market is telling you to be patient.
Most importantly, recalibrate your position sizing to match market conditions. In ranging markets, trade smaller and focus on capital preservation. Save your larger position sizes for when these ranges finally break and trending conditions emerge. Because when AUD/JPY eventually breaks out of that 100-pip range – and it will – that’s when the real money gets made. But only by traders who survived the chop with their capital intact.
Kong,
Keep giving us stock guys something when you have the tiime!! Thanks!
I’ve got this thing knocked out on a much larger scale requiring additional computers and obviously “higher costs”.
Ultimately – stocks , futures , metals , forex will all be available.
If only there where more hours in the day.
This weeks lesson learnt (the hard way) – take the half a percents regularly and be happy. Nuff said.
OK ok……..hey – seriously…..Nikkei took back 3 straight days in a matter of hours so….
It’s not like any of us “plan for that”.
Have a good weekend…and look at things again next week.
No disrespect intended Kong. Let me say it right here and now. Which ever way any of your future trading suggestions go (good, bad or ugly) I’m in and fully behind your site. It’s our choice to trade them and our responsibility to manage them. Don’t change.
Ps. I was already in Yen shorts before you posted and had already re-shorted before you posted that too. Happy that it’s sinking in.
Pps. Do you think you’re early quite a lot because your crayons are too big? Just a joke matey.
He he he …….
Andy – I imagine once I put together the memebers area / paid service / Kongdicator / Money management etc…that I’ll play a larger role in “managing” risk for others, but as it stands – ya…… no holy grail / get rich sitting on your ass type thing to offer yet.
I imagine some still don’t really understand the “staggered order entry approach” either…envisioning that my “signal” means – this is the exact level that a given pair will reverse etc…
I hope the post shed’s a bit of light on that.
Interestingly…..I thru the Kongdicator on the /NKD futures contract here this afternoon…and the signal was hit this afternoon around 3 oclock so…..man – 24 hours give er take. I’ll take those odds any day.
Cheers…and have a good weekend.
Future “tweaks” will be with respect to “time” and not “price”.
Back to the old good news is good news bad news is better news…
The day to day stuff will drive you mad Robert.
Without a larger term view you’ve got a real good chance of getting shredded out there as….the short term moves are “by design” – there to trip you up.
Trader smaller and “look further” is about all I can suggest as…the post suggests – a single penny?
Ya that was a funny post. Running to stand still. Ya I don’t doubt there is a teeny bit of yen downside left as the ‘joy’ spills into next week. By Monday night or something it should be reload time and the downside after the retest should be a ripper. ..
Sound advice Kong. Forex trading is a marathon not a sprint. Look to the higher time frames even the monthly for direction. I don’t trade anything below the 4hr chart. Also trade small with a small account. Preservation is key. There will always be a trade but if you blow your account you’re out the game
Excellent commment Kalahari.Excellent.
1. Again, only the most brain-dead of idiots would enter into and then hold a short AUD/JPY position. Being long the yen is a suicide trade at this point in time.
2. You are completely right, asset allocation is the core of trading and short term bets kind of… well, they are not what trading is about. If you are getting into a pair that recently fluctuated by 1,000 pips but panic when it moves 100 pips against you, your trades need to shrink to 1% what they are now. I realize that means your profit potential is severely reduced but maybe that simply means you don’t have enough capital to be in this business. Forex is not a magic money machine. Even professional poker players need a substantial bankroll to be able to actually make a living from poker.
Spoken like a true gentleman.
If there is one thing within the forex industry that is the “least understood” its the money management / asset allocation element.
Not disclosing my account balance but…… I often have 12 – 15 “open trades” at any given time “fully aware” that things could equally move against me (as rare as that is these days).
All the same…..if you’re out on the field and looking to play – your 2k starter account with an online broker doesn’t even get you near the bench. This is a “big boy’s game” and your account balance / ability to manage risk plays an integral part in your survival.
When people finally understand that you need to approach it “like a business” – you “might” have a chance of making a buck.
Great post Andre. Have a great weekend.
Asset allocation is not an element of the forex industry, it IS the forex industry.
Asset allocation?
Like……position size.
Asset: “In financial accounting, an asset is an economic resource.” Allocation: “the action or process of allocating or distributing something.”
Okay, another word for “trading” is “arbitrage”. A trader is someone that takes an item trading in one market and “transports” it to another market with the intention of turning a profit because of the differences between these two markets. While most trading involves three main elements (space, volume and time), what we call “forex trading” today involves only one (time). One of the key elements in proper arbitrage is survival. If you buy spices in India, it doesn’t really matter how much they are worth in Lisbon if your ship sinks before it reaches its destination. If you fill your ship with more spice than it can safely carry, you might end up sinking and losing all of it just because you were too greedy to allow a big enough part of your ship to be filled with air. Now these days we have the internet and can “check” the price of items in different ports across space, but imagine you are a trader a few hundred years ago. You don’t really know what the price of spices is in Amsterdam when you are docked in Bombay you just have a general idea of the “fundamentals”. Just like today you don’t really know where the USD/JPY is going to be in March. So instead of simply loading up on one item on one trip, you fill your ship with a variety of goods and make multiple voyages back and forth, so that even if you can’t turn a profit on some trades, you average them out. Did that make any sense?
Got cha. I’m already doing it just didn’t know it was called that. Newbie apologies.
Kong have you ever gone “all in” on a trade? There’s a couple of times I’ve been certain of a trade have been tempted – and regretted not doing it. When you’ve got the best hand possible doesn’t it make sense? I’m not asking you to endorse recklessness far from it, but one of George Soros’ principals is “Why so little” and he’s made a few quid. Just interested in your opinion on the occasional flutter.
You bet…..timing the massive move in Yen last year, had me make some very serious coin – in a very short period of time.
However, still not “all in” type mentality no. I’ll step on the gas with much larger positions sizes sure – but still stick with the strategy of pulling those profits “out” and doing what I can to “get back in there” as soon as possible.
With the big Yen move last year, I saw so much movement in a given 24 hour period that I’d just scoop profits then place orders “above or below” the current price action in any number of pairs…and just let the momentum keep hitting them as it went along.
I’d wake up morning after morning with much more gas in the tank – and continue to just see “green candles and profit” as price continued to rocket in one direction.
Anyone can see, by even a chart of USD/JPY for that period from Oct to March – a relentless climb, and some very easy trading.
We will see something like this again – but as you can also see “since” – things haven’t been nearly as easy.