A good trade that could have been great: a lesson to take profit at target

A profitable trade is definitely a good thing. But when you sit idly to see good profits turn into great profits, and then doing nothing to lock in some of that windfall, it is time to review your trading strategy. That is exactly what I have done last night when I saw my AUD/JPY shorts took a 150 pips dive at the Sydney open to pass a strong support. And it wasn’t AUD/JPY only, all my 4 other pairs also pushed about 100 pips deeper into the green to test their respective supports. But as quickly as those unrealized profits appeared, it was quicker that they evaporated.

While I had 5 positions last night and they all fit this scenario, I will use my AUD/JPY short for this particular case study as it was the most dramatic and easy to read.  Here is a brief summary of my AUD/JPY shorts.

Figure 1 is a 3-hour chart of AUD/JPY showing my entries and exits.  I entered twice on Oct 29 (83.76 and 82.47, marked by yellow triangles) and was stopped out with profits on Oct 31 and Nov 2 (81.7 and 81, marked by red dots).  The trades ended up +147 and +206 pips with 1/2 the position size each.  As shown in Figure 1, I did manage to capture most of the down move nonetheless.  So these weren’t badly executed at all.

(I used my FTCS 0.1 as the trading setup, so I won’t go into the logic behind my entries and exits here.)

What I’d like to point out though is the long tail candlestick poking through the support at 80.0.

From Figure 2 daily chart, it is apparent that 80.0 for AUD/JPY is a strong support from prior congestions.  Not to mention that it’s a nice whole number.  As such, it was naive of me to think that AUD/JPY could break and maintain this depressed level on thin volume on a Sunday (EST) Sydney open.

Secondly, also note that in Figure 2, the fall in price of AUD/JPY is quite extended as shown by the RSI’s dive from 90+ to about 40.  Even if the pair is poised for further weakness, there’s bound to be some catch of breath before it can take on a strong support.

From the above  2 observations, which I did see at the time, it’s evident that I should have taken some profits (i.e. half of my positions) when I had the chance.  I knew in my mind that 80.0 was hard to break, but instead of exiting on target, I merely tightened my stops in hoping for more gains.

Don’t get me wrong.  Using stops for entries and exits have served me well and it will still remain my primary trade order method.  But if I’m to improve, to go from +200 pips to +300 pips in a trade, I need to be able to spot and exploit other tools at my disposal when extraordinary occasions such as last night’s appear.

So what can I do in the future to prevent this from happening again?  With 2 simple additions to my trading strategy:

• Set a profit target and take some chips off when the market reaches target at extreme conditions.
• Keep these profit targets up-to-date according to the trading setup.

Notice that this is analogous to what I have already been doing with my stops by moving them closer as the price action dictates.  However, one important caveat to this technique is that this should never override the fundamental trading rule of letting profits run.  I will only take profits at a target if the price is severely over-extended according to my trading setup.

In any case, as Ancient_Warrior wrote to me on Twitter, “Well don’t ‘kick yourself’ too much for 200 pip gains please! lol”

AUD/JPY, 3-hour

AUD/JPY

Related posts:

1. AUDJPY Short 81.37/77.17: Anatomy of my first 400+ pips trade
2. Paper trade: Stopped out AUD/JPY longs @ 81.3 (+7 pips) and 81.29 (-28 pips)
3. Paper trade: Short GBPJPY @ 146.32, Target 143
4. Paper trade: Short USD/CAD @ 1.0573, Stop 1.0640, Target 1.0415
5. Paper Trade: Long GBPJPY @ 144.24, Stop 143.60, Target 148