Early bird does not get the worm in forex trading

[This post was updated on January 13, see addendum below.]

I have discussed my enthusiasm in shorting the Aussie a few times this week.  First trade was shorting AUD/JPY at 84.53.  After that got stopped out, I re-tried at the same level the next day.  My trade history in this currency pair is shown in Figure 1 below.  Evidently, I am early in my trades as the recent upward momentum is still going.  But that’s just speaking from hindsight advantage.  What is actually wrong with this play is that I was too eager at the first entry when the price was just at a minor resistance (short-term trendline of Fig 1).  In turn, that caused me to lose my confidence and not be as aggressive as I should be when the price reached a major resistance at 85.50.

Referring to Fig. 1, I made 5 attempts on the minor resistance below 84.60 in the first round.  What’s worse is that I didn’t have enough patience to wait after these shorts failed and I tried again at 84.52.  Even though that resistance level is voided already.

But here comes the kicker.  I actually noted the important 85.50 level before my first attempt.  It was clearly on the chart and I even mentioned about its significance.  I just figured that it wouldn’t be touched.  How wrong I was.

As I said, another problem with being early in a trade is that it stripe you of your confidence prematurely in a good setup.  My setup to short AUD/JPY is as good as ever now.  I am drooling over that negative RSI divergence shown in Fig. 1…  But since I’ve already taken a beating in this pair this week, my account drawdown dictates that I limit my risk.  As such, I can’t back up the truck to pile in on this trade at this point.  But why not?

I won’t break one rule to compensate for another.  Although I am light in this trade now, I will not compromise my risk management rules to compensate for my own mistakes.  That would just open a whole new can of worm.  Besides, I can’t say this often enough — risk management is always the top priority in trading.

In any case, there will always be other opportunities.

The moral of the story is this.  Do not be too eager to get into a trade.  Secondly, adjust your position size accordingly to the significance of the setup in play.

AUD/JPY, 3-hour

Update January 13:

Figure 2 below shows an updated view of AUD/JPY a week later.  The red dot on the 9th was my last stopped out entry.  As you can see, I missed the smooth 200 pips ride down.  This experience is proving to be better than I expected to illustrate how being early in a trade can really hurt your account.

A week later in AUD/JPY, 3-hour chart

Related posts:

1. An introduction to my Forex Trend Continuation Setup (FTC)
2. An example of how trading in fear is bad for your account
3. How to use FX futures to narrow down which forex pair to trade
4. Paper trade: Stopped out AUD/JPY longs @ 81.3 (+7 pips) and 81.29 (-28 pips)
5. An undisciplined trade: Shorted EUR/USD @ 1.499, stopped 1.505 (-62 pips)