My bad EUR/USD day trading and what to do about it

I've stayed home from work this week because of the flu. So with spare time on my hands, I had the urge to experiment with day trading the forex market. Bad decision. After a good 3-4 days of day trading EUR/USD with my demo account, here is what I have to show as illustrated in my account balance graph for the past 4 trading sessions below.

[caption id="" align="aligncenter" width="580" caption="Account balance Nov 10-14, 2009"][Account balance Nov 10-14, 2009]Account balance Nov 10-14, 2009[/caption] Yes, you can push back up your dropped jaw now. I considered not accounting for these losses in my paper trading account because these trades were meant to be experimental only. However, as the whole point of me paper trading the forex is to learn and improve, I decided to keep these losses and suffer the consequences of my own doing. Heck, I wouldn't have had the choice if this were real money (which is the way that I should treat this demo account anyway). I stepped out of my circle of strength (swing trading) into something that has burned me many times before. Well guess what, history does repeat itself. Enough with lambasting myself. The real focus of this post is to point out what I did wrong and what can I do to improve in day trading the forex. Not that I'm intent on day trading though. This is merely to increase my arsenal in forex trading. Figuring out what I did wrong is actually obvious in hindsight. Figure 2 below depicts the trades I made on Nov 13, which led to most of that steady decline in my account balance as shown in Fig. 1. See the bounce from about 1.4820? I kept shorting it and shorting it all the way up to 1.4880. What was I thinking? The main reason for this epic failure is that I broke a fundamental rule in trading. Trade what you see and what you thought (Techniques of Tape Reading by V. Graifer). Based on the previous day's market sell-off from 1.5000 and the Asian markets failing to break 1.4900, I thought the market would follow through on Friday and break through this 1.4820 support. In particular, just before NY open before 9:30am, EUR/USD had a couple of big drops, as shown in Fig. 2. All these circumstances led to my believe that we'll see a weak day like yesterday.

[caption id="" align="aligncenter" width="580" caption="EUR/USD, 5m"][EUR/USD, 5m]EUR/USD, 5m[/caption] However, a support is still a support until it's broken. I shouldn't keep shorting it even though it has obviously bounced. While identifying the trend is trivial in hindsight, what evidence did I have at the time to tell me that? The evidence was in fact staring me in the face that morning. Figure 3 shows part of the screen that I usually use for intra-day observation. As you can see, S&P500 rejected the previous day's close with a strong negative TICK reading and then broke above the morning range. The TICK also remained strong with many +800 readings in the morning. All the classic signs that point to a strong positive trend.

[caption id="" align="aligncenter" width="577" caption="intraday sentiment"]intraday sentiment[/caption] Furthermore, if only I had stepped back and observed the bigger picture, as shown in Fig. 4 with a 30-minute chart, I would have seen that we have a great positive divergence swing setup (and which I normally would have exploited if I weren't so focused on trading the 5m that day).

[caption id="" align="aligncenter" width="580" caption="EUR/USD, 30-minute"][EUR/USD, 30-minute]EUR/USD, 30-minute[/caption] What is my goal in future day trading? Instead of a declining equity curve as in Figure 1, just flip it up-side-down and that's what would be perfect. All I needed to change is being able to spot the right trend and ride it. Easier said than done. So what is the moral of this story? I have once again proven that I am still no good at day trading. Stick with swing trades.