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What about the Forex Market?

Frequent emailer Rod is back with another worthwhile question.

Hi John,

I know you are a position trader in the stock market, using a variation of CANSLIM. You are a day trader in ES, using Market Profile. I think these are great ways to approach these markets. That’s why I would like to know how do you approach the Forex market:

– Are you a position trader? If so, do you scale-in or pyramid to build large size or do you difersify as much as possible?

– I know you use weekly Bollinger Bands and forex seasonals, but is that enough to time your entries or do you use other tools or analyses?

Thank you.

Rod

Before I talk about my forex trading, let me back fill a bit for those who haven’t followed my work. The strategy for the individual stock trading I do – which Rod correctly notes has CANSLIM as it’s foundation – can be found in an appendix to by book The Essentials of Trading. It is a strategy which combines technicals and fundamentals, and I figure on holding positions for 8 weeks when I put on a trade. The ES (mini S&P 500 futures) trading I do definitely utilizes a Market Profile approach, though I wouldn’t strictly call it day trading because I do sometimes carry positions overnight.

Now, as for forex, I do like being more of a position trader, holding trades for weeks or even months to catch good-sized trends. Sometimes I also play more swing time frame trades. Regardless of the time frame, though, my approach is basically the same. I use the Bollingers to find situations where a new trend looks likely to develop, pretty straightforward chart analysis to identify entry and exit points, and the attractor ideas from Market Profile to identify likely target points.

As for the forex seasonals, I use those to bias or filter my trading, especially the more swing oriented positions. For example, if a pair I like to trade is biased higher in September I’ll look for good long entry opportunities. I’m also planning some research into more mechanical strategies there.

In terms of scaling in and things of that nature, my history has been mixed. I’ve definitely had some times where I’ve added to positions as a trend unfolded in my direction. Other times I’ve just gone the all-in route from the start. I’m not a diversifier specifically. I do look to avoid getting overweight in any specific risk area (like being too long or short a particular currency), but because I tend to focus on one position, or at most a small number of them, at a time it really isn’t an issue very often.

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