How do you minimize risks when EURUSD moves 100 pips up and back down in 2 hours?

And this happens quite often.

EURUSD, 5 min

There are a few choices to minimize your risks in times like these:

1. Stay on the sideline until the dust settled.
2. Target higher time frames with larger stops and smaller positions.
3. Partner up with someone from another timezone.
4. Set a trailing stop.
5. Set alerts to wake you up on extraordinary events.
6. Use a position management bot.

I opted for #6. What about you?

The picture is worse in equities as you are locked in your positions overnight.

S&P500 ETF

First QTD trade, 0.19% gain long EURGBP

My semi-automated trading system, Quantised Trading Desk, closed its first trade this week. I was bullish EURGBP and USDJPY, and bearish NZDUSD as per the previous discussions. The QTD system saved me from the premature calls in both USDJPY and NZDUSD by not making any trade this week. That, in and of itself, has made me very happy with QTD’s first week of live trading. Particular in light of how fierce that USDJPY down move has been.

As a bonus, QTD entered a long position in EURGBP for a small 0.19% gain as illustrated below. My parameter were a maximum of 0.25% risk per position. The gain could have been better if it weren’t for that 61% retracement. Not that I’m complaining as I haven’t even looked at the market this past couple of days while the system is trading for me.

USDJPY touched my threshold support price 80.70, my bullish sentiment needs to be reevaluated. NZDUSD just cracked a higher high (marginally though), so I’m easing on the bear button for now. EURGBP is testing some resistance to, so I’m not so eager to dive in again. Overall, I’ve been 2/3 wrong. I’ve told you before that I’m very bad at timing the market. That’s why I developed QTD to trade for me.

Seeing that it’s a long weekend, and I’ll be way from town, I’m just going to shut down my remote trade server in London until next week when I can have some time to re-do my analysis.

EURGBP, hourly

Bullish EURGBP as hedge and Bearish NZDUSD as diversification

I’ve had more time to study the market tonight and is running a second and a third instances of Quantised Trading Desk (QTD) to trade 3 currencies in total simultaneously. For my dollar bull sentiment, I’m dividing between USDJPY long and NZDUSD short. QTD still hasn’t taken a position in USDJPY in the past 24 hours. That’s a good thing as USDJPY is still drifting downward today even as the dollar is gaining some ground. My line in the sand is at 80.70 for USDJPY and above 0.8100 for NZDUSD.

EURGBP long is a hedge against my dollar longs. Again, I’m not making any trade at this point but merely setting up QTD to wait for the right moments to enter. A break below 0.8660 for EURGBP would challenge my bullish bias.

These three currencies should be my complete market bias for a while. I’m just going to let QTD do its thing and trade for me. Hopefully this will be the last you’ll hear from me about my market bias for a while.

NZDUSD, weekly

EURGBP, weekly

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

How to stockpile a trade position one step at a time

Arguably the single most important skill a trader needs to master in trading any market is to cut your losses short and let your profits run. This is simply another saying of managing risks and maximizing opportunities. However, this is easier said than done. Ever tried to cut your losses short but only to see the price run in your favour soon afterward? Or, that you’ve built a sizable and profitable position only to see it turn into a loss? As with much of other trading skills, managing your trade is not an exact science. That is why you need to have probabilities in your favour on every step. You enter a trade because it is likely to be profitable. You exit a trade when it is not. If you can apply this axiom on every trade you do, it is likely that you will be profitable, with all things being equal. So what does this have to do with cut your losses short and let your profits run? In this post, I will discuss one trading strategy which I use to do exactly that.

The key to this strategy is divide and conquer. Instead of taking one trade for each position, consider taking multiple smaller trades by scaling in and out of a position. That way, you can have more freedom in your trade by using your position size to your advantage. Here’s the gist of the strategy and the rationale for it.

The rule is simple: increase a position by scaling in as the probability of success increases; and decrease a position by scaling out as the probability of success decreases.

One way to do this is to add on a position as the price breaks support on a faster timeframe. You keep adding on this position as long as your trade setup (on a higher time frame) is valid. At the same time, you limit your risk by lowering the stop of your previous trade to breakeven. That way, even though you are stockpiling a position, the overall risk stays the same. This is an essential step in the technique. Otherwise the risk would just multiply. It is as much managing the entries as well as the stops/exits.

Let’s put this into perspective with a real-world example. Figure 1 shows the support levels for my EUR/CHF short on a 3-hour chart. I identified this trade using my FTC setup on the daily chart. The failed break above 1.4800 on January 14 was the signal for entry. I took an initial short position risking 0.20% of my account as EUR/CHF reverted back below 1.4800 (first support, not marked).

Then I kept adding on to this position below 1.4787, 1.4761, and 1.4742 supports as shown in Fig. 1 with the horizontal dashed red lines. On each subsequent new entry, I move the stop on the previous entry to b/e. I only risk 0.1% on each of these additions with half the position size after the initial entry. As I keep adding, I keep moving the stops one step behind. So on my third scale-in, my initial stop have locked in some profits at a price level between my first and second entries.

Figure 2 is the same chart but with the actual filled orders (yellow triangles) and current stops (red lines) marked. As you can see, I have effectively accumulated a sizable position size in this short while limiting my risk to just a fraction (0.2% versus 1.0%) if I were to enter my maximum size all at once. Furthermore, my confidence and probability of this trade increase gradually as I see the short-term support levels break one after another.

EURCHF, 3-hour, showing supports

EUR/CHF, 3-hour, showing orders

There are limitations to this strategy. First of all, this strategy is mostly suitable for trading setups with an expected high reward/risk ratio. You might not want to use this for a range trading strategy as there’s probably not enough price move to break the trade into steps.

Secondly, this technique is mostly for an automated system or longer term manual strategies (hours or more). Just so you have sufficient time to manage all these extra work without adding on an unnecessary amount of stress.

Lastly, an obvious downside to this approach is that your account will take a hit from the spreads and commissions for each move. So do take those costs into account in building your own adaptation to this concept.

Now that I’ve discussed my scaling-in technique, what do you think?

Update January 22: I’ve closed this position and it turns out to be one of my best trade ever.