An undisciplined trade: Shorted EUR/USD @ 1.499, stopped 1.505 (-62 pips)

I started to doubt this move mere minutes after placing it, which rarely happens. And not because of the price action. It was solely for my reasoning for this trade. On a quick mental review of this entry, I noticed that they sounded more like excuses than reasons. First sign of it was that I laid in a 100% position to fade a strong trend on the daily on the basis of my 3-hour chart. My strategy is to not risk more than 50% (preferably 25% – 33%) to fade a trend on the daily. Lack of discipline #1.

Next, I already had six 50% positions open at the time. That would roughly translate to 3% of my account, without even taking into account the high correlations (working on a spreadsheet for this). By adding this 7th position, I’ve broken my fundamental rule of risk management to not risk more than 3% of the totals funds at any single moment.

Lastly, it was the end of the trading day on Friday. Carrying trades over the weekend is well known be even more risky than usual because so much could happen over the two days. To add a low probability trade on a loaded to the neck account into the weekend is practically suicidal. I’m just glad that I had a hard stop to limit my risk. At least I did something right here.

In terms of the dollar amount lost, the loss for this trade is $44.17 on paper. And after this stupid move, I have given up all my +500 pips gain (also on paper) from the week before. Much work remains to be done to improve my trading performance.

A last note to self from this what-not-to-do lesson. All trades should be taken with logic and reasons. I failed to do that in this trade by convincing myself that USD should reverse over the weekend. On top of it, I took as big of a position as my system allows to gamble on this intuition. These are two breaches of trading rules that could ruin an account. It’s good that I’m stopped out with a loss in this trade because if this became profitable, it could boost my ego and this problem would only get worse.

Another silver lining in this is that I am beginning to trade forex with paper trading instead of diving in with real money first. In addition to testing my forex strategies (which I haven’t followed as diligently as I should), I’m learning much about my weaknesses in trading in general by keeping a detailed journal and statistics of my trades.

Update: EUR/USD cratered to 1.4844 today. Another shortcoming with an undisciplined trade is the opportunity cost. If I weren’t so preoccupied with the stop loss from this morning, I would have followed my setup and shorted EUR/USD today as it went spiraling down.

EUR/USD

EUR/USD, 3-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

Paper trade: Long USD/CAD 25% @ 1.02988, stop 1.02080

This log is written about 18 hours after the entry. I entered long USD/CAD at the market last night for a 1/4 position size. USD/CAD took a brief run up of about 100 pips. Naturally, I moved the stop to just above breakeven to make this a risk-free trade for over the weekend.

I entered this position for the following reasons:

1. Strong support at 1.0300, Fig. 1.
2. Positive divergence of lower low, higher RSI since August.
3. Break of short-term resistance, see Fig. 2

Note that both Figures were taken at the time of entry 18 hours ago.

Position size: 25%

Entry: 1.02988

Stop: 1.02080

Target: 1.0550, although 1.0400 might be hard to break.

Reward / Risk = 251.2 / 90.8 = 2.7 < 3. That’s why I’m only entering a 1/4 position to test the water.

USD/CAD

USD/CAD, 3-hour

Paper trade: Long EUR/USD 50% @ 1.49212, stopped out @ 1.4875 (-46.2 pips)

EUR/USD looked as though it was going to break through 1.50 when it broke 1.49 (Fig. 1). I waited til it marked a short term top at 1.4920 (Fig. 2) and then placed a stop entry just above it at 1.4921. EUR/USD traded above it for a few hours but failed to break 1.4970. It has now retraced to a short term support. If it continues to decline, the double divergent top will be all written over the wall (Fig. 1) and it’ll be a good short for the next few weeks. Until it moves out of this trading range though, this is still an uncertain trade.

On another note, I have now had a string of 7 consecutive losses. Good thing these are merely paper trades for experimentation. Looking over the history and statistics, it’s apparent that many of these trades were taken to try for the top/bottom just after signs of reversal in the short term (except for this EUR/USD trade, which is with the trend). Thus, from now on, if I’m to go against the intermediate trend (daily), limit my position size by reducing a 50% position size entry to a 33% entry, at most. Furthermore, only enter when the instrument has marked a short term lower top and has broken the immediate support.

After paper trading for a month, my forex trending strategy is finally starting to take shape…

EUR/USD

EUR/USD, 3-hour

Paper trade: Short NZD/USD 50% @ 0.7381, stop 0.7430

I’ve just shorted NZD/USD at 0.7381 for a 50% position. I tried shorting NZD/USD last week unsuccessfully. But now I’m giving this another try for the following reasons:

1. Significant at 0.75 as described previously, see Fig. 1
2. Short term lower top right below 0.75, see Fig. 2
3. RSI divergence, although this is almost moot now since NZD/USD has been chugging upward relentlessly
4. EUR/USD is making a double top at 1.4850
5. So I’m using this to hedge my EUR/JPY long, in case EUR falls

I’m entering with a half position because the intermediate term trend is still up.

Position Size: 50%

Entry: 0.7381

Stop: 0.7430

Target: 0.7200

Reward / Risk = 181 / 49 = 3.7 > 3

Update: Stopped out overnight at 0.7430 (-48.60 pips) for a loss of $15.01.

NZD/USD

NZD/USD, 3-hour