Hedging should go further then hedging

To my mind one should approach every hedging strategy like it is your own money. What is the entry point, stop loss, take profit, time frame of the trade and the most importantly risk/reward ratio. What is a risk reward ratio? The answer lies in the question: how much you are willing to risk for a certain profit. Again, forget about physical side of the market and this absurd idea that if you loose on your hedge then you win on your physical exposure. This is a loss in the end...

Traders normally prefer to risk $1 in order to have $3 of potential gains. Mathematics is simple here, if you have equal chances to of winning and loosing, over the long term you will be earning money. But my experience shows, that 1 to 3 risk reward ratio is not enough, you need at least 1 to 5+ to be profitable by the end of the year, but this depends on the trading style.

Does fundamental research provides you with the plan for a trade? Clearly no. More work is required. So hedging strategy becomes a trading strategy. (and for the people that are aware of this... SCREW HEDGE ACCOUNTING!)

Everyone knows that trend is your friend until it ends. So the question is how you define a trend. I personally like to identify trends visually with the help of moving averages. Despite the latter are a lagging indicators, they serve as good support and resistance levels. Let's have a look at the world through moving averages:



Technically I am not buying this market until at least half of it goes green (price goes above moving averages). Before that I will ignore call on fundamentals getting better.. Trending and not necessarily fundamentally strong/weak markets are the ones we make money in. more tech analysis to follow soon.

2010 05 18 - Going technical

Preparing all the technical charts for this blog appears to be a little bit more difficult then I thought. But here we go...

I discussed previously relationship between dollar and other asset classes. once dollar goes up then everything falls. And the following bothers me a lot... I think we're at the inflection point. Below is the monthly chart of dollar index (trade weighted basket):



I don’t have much historical data, but on two occasions when index broke 200 month moving average it resulted in significant dollar rallies. Rally of 2008 is insignificant to rallies that started in April 1981 and January 1997 and lasted for several years. In the past strong dollar meant higher equity markets. But relationship reversed in the end of 2002 and beginning of 2003.

Put everything aside 200 month average is a good long term support / resistance for dollar index. If we break it upwards, there is a chance we might enter multi year dollar bull market. I am not sure what are the consequences for commodities and equities. Any opinions?

There is more technical analysis to come this week.

Blogger Sentiment

Previously I said I liked the idea to measure news sentiment on CNBC. Unfortunately there is already a similar tool, so this idea will not get my name. Anyway, check Blogger Sentiment poll.