Closed EUR/CHF and GBP/CHF Shorts: Best. Trade. Ever.

As I was saying earlier this week, I have been stockpiling in EUR/CHF short in my demo account (Fig. 1). Aside from that, I’ve also stocked up some GBP/CHF shorts this week (Fig. 2). Both positions are now closed because of my adjusted stops. These positions have single-handedly lifted me half way out of a deep drawdown in my demo account. These trades netted me about 1.5% in my demo funds. Yes, you read that right, a meager 1.5% gain and I’m calling these my best trades. No, it’s not like I haven’t had good trades in terms of the money made or the fastest pips. These shorts aren’t even close from just looking at the numbers. Heck, it would have been a lot more profitable if I shorted Euro and Pound with a Dollar or Yen counter this week. So why?

If you read my post on measuring trading performance, you may recall that I don’t measure success by profit alone. It is performance in terms of amount risked that matters in trading.

These shorts in EUR/CHF and GBP/CHF are my best forex trades ever (in my 4 months of fx trading so far) simply because I risked no more than 0.2% at any given time (most of the time there were no explicit risk as my stops have locked in profits) to make that 1.5%. 1.5% gained by risking maximum of 0.2% gives a Reward/Risk ratio of 1.5/0.2 = 7.5!

There were several occasions when I had doubts to add to my position or were pondering about taking profits to settle my worries. Despite all of that, I soldiered on, managed my stops like they were my babies, and piled more into the position according to my plan and trading setup (Fig. 1). By the time I started scaling out, I have built my biggest (non-scalp) position. That gave me a lot of freedom in scaling out as you can see on my exits shown in Figure 1 (red dots).

This Reward/Risk ratio is the highest I have achieved in recent memory. I have always read about 10x or even 20x trades at the SMB Capital blog. Those guys can achieve this type of reward/risk ratio day in and day out (I’m not affiliated with them). I guess that’s the difference between the pros and me. This is definitely something I am strifing to do myself. Executing consistently high reward/risk trades.

How I might do that? By continuing to improve on my trading skills and my understanding of the forex markets.

EUR/CHF, 3-hour

GBP/CHF, 3-hour

Paper trade: Short GBPJPY @ 146.32, Target 143

GBP/JPY finally broke below an intermediate term wedge pattern formed from Dec 30. See Figure 1 for the daily chart. I am noticeably late in this GBP/JPY short entry because I was preoccupied with other positions (e.g. my EUR/CHF and GBPCHF shorts) today.

In any case, this is an intermediate term (a few days at least) play so there is no rush. My first short was executed at 146.51 on obvious signs of short term pound weakness versus the GBP/CHF pairs. GBP/JPY made some retracement on a test of 146.00 but GBP/CHF kept on dropping, so I took a short position once it touched the 146.50 resistance. My average price in this is 146.32. I have set my stop loss to lock in some profits already (which might get taken out soon).

Note that I just happened to be watching the GBP/CHF currency pair as I have a position on shorting that too. Otherwise EUR/GBP and GBP/USD would have been better for short-term intermarket analysis because of higher liquidity.

With regard to this formation, as you can see on Figure 1, today’s break of 147.50 gave way, all the way, down to 143.00. This target price is estimated from the height of the wedge pattern which it just broke through. The distance from 147.50 to 143.00 is about the distance of the height of the wedge (Dec 29th low to 30th high).

Another reason for targeting this 143.00 price is because of my weekly chart of Figure 2. 142.50-143.00 is the next support according to a long term trendline (lowest ascending white line) as shown in Figure 2.

GBP/JPY haven’t seen these prices for a good month, so hopefully the move down shouldn’t be too difficult. As usual, I will stockpile my short position in this gradually to limit risk.

GBP/JPY, daily chart

GBP/JPY, weekly chart

EURCHF breaking 1.5100: A textbook perfect breakdown and reversal

Last night, EURCHF finally broke below the 1.5100 zone after weeks of consolidation around the area. See Figure 1 for a daily chart of EUR/CHF. I just happened to be looking at the charts when this breakdown occurred last night so I made a few day trades. These scalps turned out better than I thought because a particular technical analysis phenomenon worked really well on this move. Referring to Figure 2, a 5-min. chart of the move, you’ll notice that I’ve marked some Fibonacci levels on each of the big dive in prices.

While there are several Fibonacci levels that are notable and commonly used, I pay attention to the 50% retracement level almost exclusively. A half retracement is easy to spot even with the naked eyes without any technical analysis so even those that don’t use Fibonacci can see it. With this hypothesis in mind, I shorted EURCHF a few times last night on the bounce to 50% of each of the move.

The first entry was at 1.5048. EURCHF retraced about 50% after that big dive from 1.5080 to 1.5030. Then it formed a descending triangle on the 1-minute with the support at 5050. A nice round number support level. The entry was triggered near the end of the triangle and right when it broke the support. I held on to this short looking for the move to take us all the way down below 1.5000 since there’s bound to be lots of stops there (which never happend last night probably because of SNB intervention). Before that though, we made another quick dive and then retraced 50% again. I shorted some more with a limit order placed at the 50% level before hand. So I had two positions sitting from 5048 and 5039. See Figure 2 at the bottom for a chart with the levels marked.

However, by the third dive, it is now obvious that the move down is getting smaller and smaller. Then when the 50% level of that last move held for like eternity, and numerous tests of resistance at 5030 failing yet didn’t back down by much every time, I took profit at 5027-5028.

The reward/risk ratio were impressive with these trades. I risked a few pips to make 10-20 pips. However, one mistake I made which made all these efforts wasted. Simply put, I did not have enough position size to make these pips gained worthwhile. Being used to swing trades with much bigger stops, I merely used my usual lot size for these trades. The reason being that I didn’t expect these to go so well since I’ve always been burned by day trading and was just testing the water with these days. Oh well, these could all have been just because I was lucky last night.

In hindsight, I could have saved myself from all that stress and made a lot more simply by betting on SNB intervention as many traders have done. Recall my lesson on fundamental analysis and the SNB pegging up the EURCHF market? Well, last night presented a great opportunity to profit from that open secret again when EURCHF tested 1.5000. The reason why I didn’t go long is because it was just too obvious that SNB would come to the rescue. I thought that they would have waited for running the stops below 1.5000 before intervening (note to self, don’t second guess). Well, it seems that obviousness works. The optimal entry for a long EURCHF would have started at the point when I covered for the same reasons. I should have eased in a long position around 1.5030 with stop at 1.5000. A reasonable profit target would have been 1.5100.

Why 1.5100? Aside from that the fact that it’s an obvious resistance, this is just something I noticed while drawing up the chart for this post. In Figure 2, I’ve drawn the 161.8 % Fibonacci extension levels for those 3 down moves discussed. See that they formed the reversal targets perfectly with equally impressive textbook perfect consolidation reaction afterwards? If the price action adhered to the Fibonacci retracements so well as described above, it’s no surprise that a Fib. level would work well for the reversal too. Just because the same people are probably involved with the move down as well as the move up when all these happened within mere hours.

So two lessons from last night.

1. I should pay more attention to the 161.8% level in my analysis along with the 50% level in the future.
2. and more importantly, don’t think the central bank (e.g. SNB) will not intervene just because everyone is milking them out.

EURCHF

EURCHF, 5 min.

An example of how trading in fear is bad for your account

Having had a hard time day trading the EUR/USD last week, things haven’t been well for me this week either with the market in a gridlock. My one and only viable setup so far is built for a trending market. So this range-bound market is new territory for me as I experiment (in hindsight, haphazardly) to come up with more profitable forex trading setups. As you can imagine, trading without discipline is a recipe for diaster.

I have given back all the paper gain from this month by the start of this week and is treading on thin ice with my demo account dipping dangerously close to the November opening balance. Needless to say, I do not want to see my account in the red for this month.

But that is what happened after today’s string of failed trades. I am officially in the red for this month, for now. While there are several mistakes I made resulting in this mess, I think it all boils down to one flaw in my trading this week. Yes, those day trading stints I did surely have put a dent in my demo account, but what’s worse is that I’ve unconsciously have let those losses affect my trading mentality.

These losses were stuck in my mind and my mental “goal” for this week was recovering from them. However, I have approached the problem in the wrong way by not wanting to lose anymore in my account. In other words, I was afraid of losing.

So how did that materially affect my trading? Here is a simple example as illustrated in my order history on the GBP/JPY chart attached at the bottom of this post. The 3 yellow triangles are my short entries and the 3 red dots marks the stopped exits.

According to my setup, my original entry at 149.50 had a stop at 150.50. But I moved my stop closer to 149.80 in the morning because I didn’t want to risk more. That got taken out easily as 149.80 is within the congestion zone. Then I tried to short it a couple more times with tight stops because I see the downside potential to be still intact. Those were eaten up alive too and now I don’t have a position because it would have been more foolish to keep trying in vain.

While just 3 trades wouldn’t have done much damage, I was doing the same thing across the board in shorting CAD/JPY and EUR/CAD. A few here and a few there. They add up to a bad day.

As of this writing, it looks like these pairs are finally moving in my direction. But instead of being patient with reasonable stops, I thought I could do better and micro-managed my positions to end up taking multiple small losses and with nothing left on the table to ride the move.

So what is the correct way of following up on a dent in the account? I should have done the following instead:

1. Reduce risk exposure by limiting trade size or overall opened positions until I am back up.
2. Focus on what I did wrong last week and stop doing that, i.e. no more day trading.
3. Recall my best trades and do more of that, i.e. my one and only finalized setup, FTC.

Not so coincidentally, now that I’m in the deepest drawdown ever, this is as good as ever to put this emergency recovery procedure into practice.

GBP/JPY, 1-hour

Paper trade: stopped out of AUD/JPY 83.59/84.90 (-130 pips) and EUR/JPY 136.73/137.50 (-77 pips)

I shorted AUD/JPY on the 20th and then shorted EUR/JPY on the 21st. Both positions were stopped out before Tokyo opened tonight. I didn’t write an opening post for EUR/JPY because it’s the same as usual, long term setup, short term timing. I’ll briefly go over the two trades here and what I have learned in hindsight.

First let’s talk about the AUD/JPY trade. I wrote about the entry here. Figure 1 shows the daily chart. AUD/JPY has managed to edge out of its channel with an obvious negative divergence on the RSI. However, it feels as though it’s going to turn any time soon as seen in Fig. 2. I’m not going to try again though because I need to learn to trade what I see and what I feel. I shouldn’t even consider to short it until its below the short term channel.

For this AUD/JPY short entry, I entered too early because I drew my channel too tight. If you compare Fig. 2 in this post with Fig. 2 from the entry post, you’ll see that the supporting line is lower here. The previous line didn’t enclose everything as it should.

For my EUR/JPY trade, I tried to short the top again…. When will I learn? Fig. 3 shows the setup on the daily. EUR/JPY is obviously testing a strong resistance. So far so good. Fig. 4 shows the 3-hour chart for my entry (yellow inverted triangle to the right, the last red dot is the exit). This is where I failed. EUR/JPY was testing 137 and the top of the channel before I entered. Then once I saw that EUR/JPY failed to touch 137 again for a few bars, I entered.

Shorting a new top is ill-advised because the price can consolidate upward along with the channel as shown in Fig. 4. You’ll be fighting a losing battle as the momentum is working against you. In any case, the lesson from both of these trades is that I need to learn to be more patient with my entry.

The loss for AUD/JPY is -130 pips for -$29.82 and the loss for EUR/JPY is -77 pips for -$26.46. At least my position size was halved because I knew these are risky trades.

Note: All the charts were taken just now after the exit.

AUD/JPY

AUD/JPY, 3-hour

EUR/JPY

EUR/JPY, 3-hour