Risk management is key to trading so you need to do the maths on margins and risk with each pair

Yesterday I went through my ½ year trading review. What I unearthed out of it was surprising. 2 pairs stood out GBP/USD and USD/MXN. USD/MXN was the most profitable pair.

USD/MXN has been in vogue in the trading room over the last month or so. Even Ryan has traded it! Being a sheep, I followed….

As a retail trader with a small account, and by that, I mean under £10k, should I have even been trading this pair? It’s a question every trader should ask themselves when risk is high. USD/MXN is an emerging market currency also known as an EM ccy. It’s volatile. Not only that each tick is done in the 1000’s not hundreds like most major pairs. So, it’s volatile, a 1000 tick move is possible within minutes and most brokers restrict the margin needed to trade this pair. Rightfully so in my view. They have to control their risk as well. The plus points are if you short this pair the carry, due to the high interest rates in Mexico, is superb. Inversely if you long this pair it will seriously cost you to hold the position. Under my current broker rules (pre-ESMA) I can trade this pair with 1:100 leverage. This is a good thing for me as 10 pence per point requires £200 margin requirement. You may be thinking that 10p per point? Well that’s nothing. On this pair it still very quickly adds up. Remember this pair is in 1000’s. So, if I sell at 10p per point at 20.00 and the price moves up to 20.10 I’m £100 down and vice versa. So, you can to the simple maths. So, a £10k account and a price move from 20.00 to 21.00 has gone against you you’ve lost 10% of your account. Not good trading. Post ESMA we are in different territory and you and I will need much deeper pockets to trade this pair. Leverage will be restricted to 1:20 so to trade this at 10p per point I will need £1000 in margin. Yes, you read that right.

Now would your stops have been so wide? Probably not unless you’re playing very long term or you have very deep pockets. However, due to the ccy being so volatile you need to give it room to roam. You also have to pick your levels very well. That’s what’s great about the premium trading room. Ideas and techs are floated about and if you’ve missed something someone else has picked it up. After all we all look at the same charts and price action. I generally keep my technicals very simple. By that I mean my charts don’t look like psychedelic spaghetti on a cloudy day! I use Fibonacci on a longer time scale like the daily, simple areas where the price action has found support and resistance on 1hr, 4hr and daily (for this pair) and finally trend lines. The latter is not a concrete tell but sometimes on long time frames it’s very strong.

USDMXN Daily

As you can see from the daily chart there are some great levels in play. Many have been watching for decent bounces to jump in short. They haven’t really materialised. The levels I’ve jumped in short are 20.50 (wish I had kept that one running!) 20.04 and 19.98. I’m flat now but all those brought decent bottom line numbers. My timing was good on 2 of those trades and not so good on one where I wore a lot of pain at the market highs. That could have gone badly against me but it didn’t. Lucky? Maybe, but we all need a touch of luck when trading.

So where do we go from here? Today is July 4th so it’s a massively illiquid day everywhere and even more so on this pair. There are positive tones from the new leftist leader towards Trump and NAFTA. If this continues then I think 18.00 is very realistic target. Other things to watch out for is Obrador’s attitude towards oil. If he pulls back from the private companies buying into all the new acreage then investors will get very twitchy that he will follow the road trodden by other socialist government throughout Latin America. We all know how that has turned out. As others have said NAFTA is the market mover before our eyes and any tweets from Trump or headlines which associate Mexico then we’re off to the races in either direction.

So, to sum up trading this pair. Should I or anyone trade it? Yes, but only, and only if you are comfortable and fully understand the full risks involved. It’s a monster and certainly not for the faint of heart. Should have traded it using the rules I have applied. No in all honesty. It was a gamble on the first trade. The subsequent ones were within the risk threshold. So, bear that in mind when you approach volatile markets.

David Terrell

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