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

Paper trade: Short GBPJPY @ 146.32, Target 143

GBP/JPY finally broke below an intermediate term wedge pattern formed from Dec 30. See Figure 1 for the daily chart. I am noticeably late in this GBP/JPY short entry because I was preoccupied with other positions (e.g. my EUR/CHF and GBPCHF shorts) today.

In any case, this is an intermediate term (a few days at least) play so there is no rush. My first short was executed at 146.51 on obvious signs of short term pound weakness versus the GBP/CHF pairs. GBP/JPY made some retracement on a test of 146.00 but GBP/CHF kept on dropping, so I took a short position once it touched the 146.50 resistance. My average price in this is 146.32. I have set my stop loss to lock in some profits already (which might get taken out soon).

Note that I just happened to be watching the GBP/CHF currency pair as I have a position on shorting that too. Otherwise EUR/GBP and GBP/USD would have been better for short-term intermarket analysis because of higher liquidity.

With regard to this formation, as you can see on Figure 1, today’s break of 147.50 gave way, all the way, down to 143.00. This target price is estimated from the height of the wedge pattern which it just broke through. The distance from 147.50 to 143.00 is about the distance of the height of the wedge (Dec 29th low to 30th high).

Another reason for targeting this 143.00 price is because of my weekly chart of Figure 2. 142.50-143.00 is the next support according to a long term trendline (lowest ascending white line) as shown in Figure 2.

GBP/JPY haven’t seen these prices for a good month, so hopefully the move down shouldn’t be too difficult. As usual, I will stockpile my short position in this gradually to limit risk.

GBP/JPY, daily chart

GBP/JPY, weekly chart

An example of how trading in fear is bad for your account

Having had a hard time day trading the EUR/USD last week, things haven’t been well for me this week either with the market in a gridlock. My one and only viable setup so far is built for a trending market. So this range-bound market is new territory for me as I experiment (in hindsight, haphazardly) to come up with more profitable forex trading setups. As you can imagine, trading without discipline is a recipe for diaster.

I have given back all the paper gain from this month by the start of this week and is treading on thin ice with my demo account dipping dangerously close to the November opening balance. Needless to say, I do not want to see my account in the red for this month.

But that is what happened after today’s string of failed trades. I am officially in the red for this month, for now. While there are several mistakes I made resulting in this mess, I think it all boils down to one flaw in my trading this week. Yes, those day trading stints I did surely have put a dent in my demo account, but what’s worse is that I’ve unconsciously have let those losses affect my trading mentality.

These losses were stuck in my mind and my mental “goal” for this week was recovering from them. However, I have approached the problem in the wrong way by not wanting to lose anymore in my account. In other words, I was afraid of losing.

So how did that materially affect my trading? Here is a simple example as illustrated in my order history on the GBP/JPY chart attached at the bottom of this post. The 3 yellow triangles are my short entries and the 3 red dots marks the stopped exits.

According to my setup, my original entry at 149.50 had a stop at 150.50. But I moved my stop closer to 149.80 in the morning because I didn’t want to risk more. That got taken out easily as 149.80 is within the congestion zone. Then I tried to short it a couple more times with tight stops because I see the downside potential to be still intact. Those were eaten up alive too and now I don’t have a position because it would have been more foolish to keep trying in vain.

While just 3 trades wouldn’t have done much damage, I was doing the same thing across the board in shorting CAD/JPY and EUR/CAD. A few here and a few there. They add up to a bad day.

As of this writing, it looks like these pairs are finally moving in my direction. But instead of being patient with reasonable stops, I thought I could do better and micro-managed my positions to end up taking multiple small losses and with nothing left on the table to ride the move.

So what is the correct way of following up on a dent in the account? I should have done the following instead:

1. Reduce risk exposure by limiting trade size or overall opened positions until I am back up.
2. Focus on what I did wrong last week and stop doing that, i.e. no more day trading.
3. Recall my best trades and do more of that, i.e. my one and only finalized setup, FTC.

Not so coincidentally, now that I’m in the deepest drawdown ever, this is as good as ever to put this emergency recovery procedure into practice.

GBP/JPY, 1-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

Missed opportunity review: GBP/JPY spiked 500 pips in 24 hours

It looks as though my analysis for GBP/JPY making a reversal was correct. However, my short term entry needed to be improved for me to profit on my intermediate term analysis. In particular, I should have looked at a major short term resistance line instead of an arbitrary weak resisitance line as I did when I entered the long previously. That didn’t go so well as I was stopped out soon afterward when GBP/JPY was consolidating.

In hindsight, if I’m to try for a reversal, at least wait for the price to break a strong short term resistance and then use the recent low as the stop. The preferred resistance line for GBP/JPY in this missed trade can be seen in Fig. 1, which I drew many days ago and also can be seen in my previous entry (Figure 2 on that page, the higher of the 2 lines). New Figure 2 attached below shows the bigger picture of GBP/JPY in a daily chart to see what could have perspired. My target of 148 was spot on too!

GBP/JPY, 3-hour

GBP/JPY