Teeka Tiwari

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A Little Leverage Goes a Long Way

If I'm day trading, using very narrow stops, then I'm going to want as much leverage as possible. And this makes forex much more attractive for me for those types of trades.

If I'm position trading, or following trends, then I'm going to want to be on a recognized exchange for a number of reasons -- the most important being that, when I position trade, I can maintain my position for many months at a time. By being on an exchange, I virtually eliminate counterparty risk.

When you follow trends, you will also typically use a wider stop than when you day trade. When trend-trading, I'll typically risk between 1% and 2% of my total equity per trade. I would never risk that much when I'm day trading with 100-to-1 leverage. Even a minor price shock could wipe me out.

When day trading with massive leverage, you want to be in and out of most of your position within seconds. You want to have a very firm idea of where the key intraday retracement levels are. (A retracement is a price reversal that goes against the current trend.)

This isn't easy to figure out, but its also not rocket science either. All it takes is some solid research.

Track the 'True Range' of the Trend

I'll share a quick strategy with you that I use.

I keep track of the 20-day Average True Range (ATR), an indicator that measures volatility, of each of the currencies (and other futures) I trade. The 20-day ATR tells me what the average overall movement of the underling security has been over the last 20 days.

Key intraday retracements typically occur as a percentage of a two-ATR reading.

Let's say a currency has an ATR of 40 pips. ("Pips" are the smallest units of measurement that currencies are traded by. For example, if the euro's bid/ask spread is quoted at 1.4755 by 1.4757, then it would have a two-pip spread.)

This tells me that, on an average day, the currency will have a 40-pip range between yesterday's and today's high and low.

Trading With a Currency's Trend

When a currency is trending, either up or down, you will get contra-trend moves. These are moves that happen in the opposite (contra) direction of the primary trend, and they serve to shake out the weak hands.

These moves are typically (but not always) a fraction of a two-ATR movement.

Usually a currency (or any other future) that is trending in a single direction won't experience an entire two-ATR move in an opposite direction to its underlying trend, unless the primary trend is changing direction.

It'll get very close on occasion, but typically it won't experience a two-ATR reversal.

When I find a currency that is trending and I'm looking to day trade it, the first thing I do is look at the last few months' worth of price data and see what the maximum contra-ATR movement has been. Again, I'm looking for the max ATR movement that goes against the primary trend.

Usually, the typical retracement is around 75% of the two-ATR figure before the primary trend reasserts itself.

It's going to be different for every financial instrument. For some futures, a percentage of three-ATR works better than two-ATR. It just depends upon the trading history of the underlying.