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 closeras 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

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

Paper trade: Short AUD/JPY 50% @ 83.60, Stop 85.50

I placed this order to short AUD/JPY before going to bed last night. The order was filled overnight. I have tweaked my strategy a little and this is a first test. I think I need to start naming my strategies and giving them version number. It will make it easier to keep track in my trading log and for quick comparisons.

Here’s what I saw to make me throw my dice at this pair. Figure 1 is the daily and Figure 2 is the 3-hour chart. My reasoning are as follow:

1. AUD/JPY is testing the top of a channel, Fig. 1
2. Its RSI is pushing above 80, a level not seen since January when it was trading about 67.50.
3. USD/JPY tested 91 and headed downward.
4. AUD/USD heading up to the sky with a worsening divergence.
5. EUR/JPY (a recent +500 pips trade) failed to break 136 and showing an evident negative divergence too.
6. Short term testing of ascending support line, Fig. 2. (Should have given this more room though)

Position size: 50%, another 50% waiting to enter below 82.90

Entry: 83.60

Stop: 85.50, see Fig. 1.

Target: 77.50, bottom of channel, see Fig. 1.

Reward / Risk =610 / 190 = 3.2.

The stop is a lot wider than my previous trades because I’m finding it not worth my time to micro-manage my trades. However, notice that my total position size is adjusted accordingly to not risk more than 1% of my forex portfolio in a trade.

My focus is on the daily so it’s only natural to give it more room as I’m not a prophet and couldn’t tell when a trade would work out. This is one of the revision made to this strategy as learned from my recent lessons. A trade is only as good as what you have learned from it. Profit is only secondary.

AUD/JPY

AUD/JPY, 3-hour

Paper trade: Covered NZD/USD @ 0.74302 (-60 pips) and AUD/USD @ 0.90917 (-88 pips)

Got stopped out of both my NZD/USD and AUD/USD shorts around lunch time. The big mistake in both of these trades is that I shorted them while they’re making new highs. As written on my 3 rules, never catch the top/bottom. At the time of entry, I was looking too far back into the charts for the resistance levels. In NZD/USD’s case, it was January 2008 (Fig. 1) and for AUD/USD, I was looking at April 2008 (Fig. 3). It’s not that they aren’t important levels, but recent momentum (Fig. 2 and 4) takes precedence over some price level over a year old.

A lesson to remember is that recent memory is always fresher than older ones. If I’m to extrapolate from older price levels, assume a lower probability and manage the risk accordingly.

NZD/USD

NZD/USD, 3-hour

AUD/USD

AUD/USD, 3-hour

Paper trade: AUD/USD short 50% @ 0.90040, stop 0.9100

Just got stopped out of my USD/CHF long. But USD seems to be holding ok in spite of this AUD/USD surge of 100 pips, see Fig. 2. I’ve been observing AUD/USD and now seems to be a good short opportunity for the following 5 reasons.

1. Negative divergence on RSI, see Fig. 1.
2. Nice round number resistance at 0.9000
3. At top of the Fibonacci fan line
4. EUR/JPY still holding 130.00
5. USD/CHF also holding 1.0300
6. No big move in other USD pairs

A big cautionary note in this is the fact that AUD/USD is making a new high. However, based on the above 6 reasons (usually I only have 4), I’m going to give this a try.

Entry: 0.90040

Stop: 0.9100

Target: 0.8700, back to the recent up-trending top line, Fig 1.

Reward/Risk = 304 / 96 = 3.2 > 3

AUD/USD

AUD/USD