Paper trade: Closed GBPJPY @ 146.42 for +140 pips

Just closed my GBPJPY long at 146.42 for around +140 pips average gain, or 0.4% in the account balance. Damn good for a 24 hours holding. Obama just finished his State of The Union address at the moment. I am not impressed. Still all talk of change but nothing concrete yet. Anyway, that’s beside the point in this trade log.

146.50 price level for GBPJPY is the 10 day moving average. It has also been a strong support back in late December. This should be a good resistance level. My guess is that GBPJPY should stall, or even retrace, here for a while. Thus I’m taking profit at this price as shown in Figure 1 (yellow triangle).

I still believe my bullish setup from yesterday is still good. So I’ll be watching this pair for a re-entry.

Update: I re-entered at 145.24 the next day.

GBPJPY, 3-hour

Paper Trade: Long GBPJPY @ 144.24, Stop 143.60, Target 148

My previous short-side setup on GBP/JPY played out beautifully. Yet I wasn’t able to ride it down because I got stopped out on a stop-hunt counter-move before the dive, see Fig. 1. Now that GBP/JPY has reached its other end. I am betting for it to go reverse with a long position. I expect this move to be more fierce with more upside potential as it’s in the direction of the long term up trend. Some people are calling the top has been printed in the markets and the wind is now blowing the other way. I am not one to guess what the market is about to do. So it’s business as usual until the trendline is broken.

What I really like about this setup is that GBP/JPY is testing a double trendline cross on the weekly, Fig. 2. Secondly, the 3-hour chart of Figure 1 is showing a RSI positive divergence on this test of the long term support. I am quite confident of this setup. However, I am not confident about the timing as GBP/JPY is known to be a wild horse and volatility could very well stop me out, like last time.

With British preliminary GDP number coming out in about 6 hours, it might have been wiser to wait until the after that to enter. On top of that, the markets have been on a stall for the last few days waiting for data in the next 48 hours. End-of-week volatility this week is expected to be significant.

Anyway, I’ve put in a position already and will just let it run. This a small initial position with 0.1% of my account at risk. I have also placed limit orders above resistances to add to this position. We’ll how this turns out soon enough.

Lastly, even though I said I’ve been cut off from trading at my day job. It doesn’t mean I’m completely out of the game. I just have to adapt my manual trading strategy while my automated system is still in development. Basically meaning that I’ll trade with a slower timeframe for longer-term moves. All the better, as longer term moves are generally less deceptive.

Update: I closed this at 146.42 for +140 pips gain the next day.

GBP/JPY, 3-hour

GBP/JPY, 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.

Why I shorted CAD/JPY @ 88.57 instead of long USD/CAD @ 1.0251

CAD/JPY failed a major resistance level at 90 and has edged out an obvious intermediate-term downtrend (Fig 1). USD/CAD is also bouncing off a major support at 1.0200 (Fig. 2). And crude oil is below $80 on a slippery slope. As such, shorting loonie seems like a good move at the moment according to my FTC trading setup. Yet, here is why I am opting to short CAD/JPY and not long the more popular USD/CAD currency pair.

Figure 3 shows a 5-year, weekly chart of CAD/JPY (top) and USD/CAD (bottom). Evidently, the exchange rate of CAD/JPY is still in a depressed mode since the fall of September 2008. It’s also clear on this chart that why I say 90 is a major resistance level. Beside from being a nice round number, CAD/JPY has failed to break above 90 twice since August 2009.

As for USD/CAD, the picture isn’t as clear. 1.0200 is definitely a very strong support because it marks the top of a 6-month range in the first half of 2008. Yet, the downward slope in the long term since 2005 is not to be ignored. As such, I do not dare to bet on a bounce on this pair at this price.

Moreover, the intermediate-term move on both of these pair is giving us a confirmation. CAD/JPY is now testing a falling trendling (Fig. 1). Whereas USD/CAD is testing a falling support. Thus, I am shorting CAD/JPY under pressure. Going long on USD/CAD now would be like betting it to bounce on a slippery slope.

CAD/JPY, 3-hour

USD/CAD, 3-hour

CAD/JPY and USD/CAD, weekly chart