Paper trade: Long USD/CHF @ 1.009, out 1.0245 (+155 pips)
The U.S. dollar finally picked up some strength last Thursday and I loaded to ride the trend. One of the earliest trade I made in this wave is going long on USD/CHF. Figure 1 is taken today after a full week since the initial move in USD. The vertical line marks the day when I entered this trade on Thursday 22nd late afternoon. Here are my reasons for making the entry:
- Parity level 1.0000 was a mere 30 pips away from the low the day before
- Obvious positive divergence on the indicator, Fig. 1.
- Breakout on the shorter 3-hour timeframe, Fig. 2.
I placed the order just above the resistance and beyond the short term channel. The order was filled the next day in the morning on the 23rd. In hindsight, I should have used a half position only and added to it once it broke the longer term descending resistance as shown in Fig. 2. That’s because a short term break is a low probability move given that the downtrend was strong. However, USD/CHF was testing parity, which is as strong a support as you can find for many reasons.
As you can see from Fig. 2, the entry was rather good overall (could have been better as discussed above). However, I think the exit was also a disciplined move. My original target was 1.026 as noted below. It was just below that horizontal resistance at 1.0267 which I marked on Fig. 1. Yet, there’s also the longer term trendline marked on both Fig. 1 and Fig. 2.
I had 4-5 positions open at the time and this was one of my strongest two (the other being CAD/JPY short), so I tried to add to my position once the pair broke that longer term trendline. However, the line proved to be strong as USD/CHF retraced and took out my stop as shown in Fig. 2 (red dot, 2nd from right). Nevertheless, the pair remained above 1.0200 and my core position was safe (I moved my stop up).
But not all was well. USD/CHF eventually broke 1.025 but it didn’t go far. It printed a couple more bars on the chart while I kept moving my stop closer and closer. Also noting that the pair was short-term overbought, I moved my stop right up to below 1.025 at 1.0245 to lock in most of the profit. That stop was eventually taken out and the pair took a dive as shown in Fig. 2.
Moving the stop up tight in a short-term overbought condition was a good choice. I learned this from my recent trades when I left profits on the table. So I got out against my hope for higher pips even when the talk of USD making a return to strength was ubiquitous. I traded what I saw and not what I hoped for, and against the opinions of other people. If only my entry was a bit more patient, this would have been one of my best executed trades.
Below are the data for my entries.
Position size: 100%
First Entry: 1.009
First Stop: 1.0030
First Target: 1.0260
Reward / Risk #1 = 170 / 60 = 2.8 < 3, but close enough.
Second Position Size: 25%
Second entry/stop: 1.0232/1.0220
I didn’t have a target in mind for this addition because it was only to add on the strength of the existing position.
USD/CHF
USD/CHF, 3-hour
An undisciplined trade: Shorted EUR/USD @ 1.499, stopped 1.505 (-62 pips)
I started to doubt this move mere minutes after placing it, which rarely happens. And not because of the price action. It was solely for my reasoning for this trade. On a quick mental review of this entry, I noticed that they sounded more like excuses than reasons. First sign of it was that I laid in a 100% position to fade a strong trend on the daily on the basis of my 3-hour chart. My strategy is to not risk more than 50% (preferably 25% – 33%) to fade a trend on the daily. Lack of discipline #1.
Next, I already had six 50% positions open at the time. That would roughly translate to 3% of my account, without even taking into account the high correlations (working on a spreadsheet for this). By adding this 7th position, I’ve broken my fundamental rule of risk management to not risk more than 3% of the totals funds at any single moment.
Lastly, it was the end of the trading day on Friday. Carrying trades over the weekend is well known be even more risky than usual because so much could happen over the two days. To add a low probability trade on a loaded to the neck account into the weekend is practically suicidal. I’m just glad that I had a hard stop to limit my risk. At least I did something right here.
In terms of the dollar amount lost, the loss for this trade is $44.17 on paper. And after this stupid move, I have given up all my +500 pips gain (also on paper) from the week before. Much work remains to be done to improve my trading performance.
A last note to self from this what-not-to-do lesson. All trades should be taken with logic and reasons. I failed to do that in this trade by convincing myself that USD should reverse over the weekend. On top of it, I took as big of a position as my system allows to gamble on this intuition. These are two breaches of trading rules that could ruin an account. It’s good that I’m stopped out with a loss in this trade because if this became profitable, it could boost my ego and this problem would only get worse.
Another silver lining in this is that I am beginning to trade forex with paper trading instead of diving in with real money first. In addition to testing my forex strategies (which I haven’t followed as diligently as I should), I’m learning much about my weaknesses in trading in general by keeping a detailed journal and statistics of my trades.
Update: EUR/USD cratered to 1.4844 today. Another shortcoming with an undisciplined trade is the opportunity cost. If I weren’t so preoccupied with the stop loss from this morning, I would have followed my setup and shorted EUR/USD today as it went spiraling down.
EUR/USD
EUR/USD, 3-hour
Paper trade: Short GBP/USD 50% @ 1.634, Out 1.645 (-110 pips)
Well, that descending trendline didn’t last long for GBP/USD. I shorted it when it was testing it and saw that the RSI was at a prior high too (Fig. 1). I placed my order just below the short-term ascending support to hope for a break to the downside, see Fig. 2. GBP/USD consolidated around that short-term support for a few hours and has now broken upward to a strong resistance at 1.6600. It’s the top of a previous congestion zone, highlighted rectangle in Fig. 1.
GBP/USD at 1.666 is a very tempting short, but never short a new high, as my rules say. So I’m gonna wait for a few more hours with this and see how it goes.
Position size: 50%
Entry: 1.634
Stop: 1.645, stopped out.
Target: 1.6100
Reward / Risk = 240 / 110 = 2.2 < 3, so only 50% position. I think I’ll stick with the 3 factor as a limit. Even these 2+ trades aren’t working so well for me because my probability of success has been low.
GBP/USD
GBP/USD, 3 hour
Paper trade: Long EUR/USD 50% @ 1.49212, stopped out @ 1.4875 (-46.2 pips)
EUR/USD looked as though it was going to break through 1.50 when it broke 1.49 (Fig. 1). I waited til it marked a short term top at 1.4920 (Fig. 2) and then placed a stop entry just above it at 1.4921. EUR/USD traded above it for a few hours but failed to break 1.4970. It has now retraced to a short term support. If it continues to decline, the double divergent top will be all written over the wall (Fig. 1) and it’ll be a good short for the next few weeks. Until it moves out of this trading range though, this is still an uncertain trade.
On another note, I have now had a string of 7 consecutive losses. Good thing these are merely paper trades for experimentation. Looking over the history and statistics, it’s apparent that many of these trades were taken to try for the top/bottom just after signs of reversal in the short term (except for this EUR/USD trade, which is with the trend). Thus, from now on, if I’m to go against the intermediate trend (daily), limit my position size by reducing a 50% position size entry to a 33% entry, at most. Furthermore, only enter when the instrument has marked a short term lower top and has broken the immediate support.
After paper trading for a month, my forex trending strategy is finally starting to take shape…
EUR/USD
EUR/USD, 3-hour
Paper trade: USD/CHF sold at 1.03138 (+39.10 pips)
USD/CHF didn’t bounce as planned. Although my trailing stop did keep me some of the profit. But considering that the high of USD/CHF during my holding was 1.03598, this isn’t exactly good. However, as I’m focusing on the daily, I don’t want to micro-manage my trades either. So I guess this trade went as planned. USD/CHF has broken down below 1.0280 now and looks to be moving down. I’m not going to try this again just yet because I have a couple long USD positions open already with my short AUD/USD and NZD/USD.
USD/CHF, 3-hour
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