Solution to Low Currency Volatility? Multiple Lot Trading

The low volatility environment in the Currency Market has made it very difficult for traders to earn at the same rate as under normal conditions. Low interest rate policies by the major central banks and investigations into market rigging have contributed significantly to the downturn in market activity. As a result, trends have been short-lived, forcing traders to either be extremely patient or find new strategies to adjust to the market. With this in mind, there is an aggressive trading option available for the traders whose main strategy is Swing Trading. This option is popularly known as Multi-Lot Trading and involves adding positions to an existing trade to maximize on the trend on its way to the final target. 


SINGLE & MULTIPLE LOT TRADING

The more conservative way to trade the larger trends is to open a single position on a currency pair and hold it until the target is hit a few days later. However, with the limited number of trends being provided by the market, single lot trading might have to take a back seat to allow room for greater returns in the same amount of time.


Lets take  a recent example of a downtrend on the 4 hour Chart to on the AUD NZD that offered 3 clear entry points during the trend. This was a  232 -Pip decline from 1,0880 on April 28, 2014 to 1,0648 on May 6, 2014.


FIGURE 1 - AUD NZD


Source: Dukascopy Swiss Forex Marketplace
























In a typical trading scenario, the trader would enter short at the break of the Pennant, with the Stop Loss placed at the high of the formation. With the entry at 1,0786, this would be targeted to capture 142 Pips.


FIGURE 2 - 1ST ENTRY POSITION


Source: Dukascopy Swiss Forex Marketplace























A second lot could then be entered into upon seeing the break of a Counter Trend Line (CTL). Entry would be at 1,0756, the Stop Loss placed above the high of the formation and the pip target set at 108 Pips. The first Stop Loss would then be moved to the 2nd Stop Loss, effectively creating a single position capturing 250 Pips.


FIGURE 3 - 2ND POSITION



Source: Dukascopy Swiss Forex Marketplace

This process is then repeated when a third entry setup in the form of another CTL break appeared. Entry would be at the close of the bear candle at 1,0706 with the Stop Loss placed at the high of the setup. This 3rd position would be set to capture 48 Pips and the Stop Losses of the previous two entries placed at this 3rd Stop Loss.


FIGURE 4 - 3RD POSITION


Source: Dukascopy Swiss Forex Marketplace























After waiting patiently for 8 days, all three positions would hit their target to capture 298 Pips - double the value of a single lot entry at the start of the trend.


FIGURE 5 - CLOSED POSITIONS


Source: Dukascopy - Swiss Forex Marketplace























This is a very effective way of maximizing on the limited number of profitable trends that are available in the market at this time. The number of pips and hence the total revenue can be almost doubled, allowing monetary targets established for the Retail or Institutional Traders to be reached in a much shorter time.


CHALLENGES INHERENT IN THE STRATEGY

As simple as this strategy appears to be, there are a few important considerations that go into this trading style. Apart from requiring an aggressive but patient personality, the trader must use a strategy that correctly identifies the common exit point for each lot. This ensures that the targets aren't emotionally determined and that they avoid sharp reversals in the trend as illustrated in this chart.


FIGURE 6 - SHARP BULLISH REVERSAL


Source: Dukascopy- Swiss Forex Marketplace






















If a trade is held onto longer than it should by even a few pips, a sharp reversal in a short time can erode or wipe out all positions simultaneously. In this example, the reversal would take 8 hours, but on a smaller time frame where there is very little time to react, the damage can be even more emotionally and financially painful.


FIGURE 7- 30 MINUTE CHART REVERSAL

Source: Dukascopy- Swiss Forex Marketplace























Within only 90 minutes, a trade on the 30 Minute chart with an incorrectly chosen Limit can be erased if the trader took his eye off of it under the assumption that the target was farther down.



ENTRY & EXIT STRATEGY

Given this danger, trades such as these must have the right target chosen based on correct interpretation of the candles and market signals. These targets should be determined by;


  1. The Weekly Range of the Currency Pair;
  2. The Breakout Equivalent;

If a Currency Pair has a range of 300 Pips in a normal trend from start to finish, aiming for price points beyond this out of greed or negligence will lead to unnecessary losses. If we are talking about a breakout from a Consolidation boundary, then the distance to aim for is usually the Breakout Equivalent. Years of examples on the most liquid currency pairs revealed that these were the main tools to use to identify exit points for trades lasting several days.

There is an argument for monitoring the trades to ensure that these sudden reversals are avoided. However, this presents another set of dangers in the forms of;

  • Panicking at the sight of a reversal, that proves to be only temporary;
  • Looking at the floating profit and being tempted to exit early;
  • Being tempted to hold on beyond the target because of the sight of the large, combined value of the trade;

The discipline to establish the target and avoid looking at the trade unnecessarily is crucial to this trading strategy. You will need to look at the trade when identifying additional entry points, but there is a detailed method of doing so that minimizes the risks involved. 



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Duane Shepherd 
(M.Sc. Economics, B.Sc. Management and Economics)
Currency Analyst/Trader
Contact: shepherdduane@gmail.com
Twitter: @WorldWide876
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