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. [caption id="" align="aligncenter" width="580" caption="EUR/CHF, 3-hour"][][][/caption] [caption id="" align="alignnone" width="580" caption="GBP/CHF, 3-hour"][]1[/caption]

Posted 22 January 2010 in forex.

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. [caption id="" align="aligncenter" width="580" caption="EURCHF, 3-hour, showing supports"][][][/caption] [caption id="" align="aligncenter" width="580" caption="EUR/CHF, 3-hour, showing orders"][]1[/caption] 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.

Paper trade: Long USD/CHF @ 1.0122, SL 1.0060, TP 1.0225

Seeing that this is my first commitment after the big drawdown, I'll bring back my tradition of writing a post to log my rationale and market conditions on this entry for later review. I sifted through the weekly charts of all pairs on my watch-list tonight and found that USD/CHF long is the most promising. Figure 1 shows my daily chart for the setup and Figure 2 is a 3-hour chart with my entry timing. Let's talk about Figure 1 first. USD/CHF is making a triple bottom with a positive divergence as shown. I have also marked the current major support at 1.0010. USD/CHF has trade below it for about a week now but failed to break any lower. Today is the first day when we've opened somewhat above it. Secondly, note that we have broken above a descending channel as shown in Figure 1. USD/CHF has also tested the 1.0010 support twice already at both sides of that channel. And accompanied with a positive divergence as I said. The major caution as shown in Figure 1 is that we're still trading below the 10-day ma. As for the entry timing, observe Figure 2. Notice that USD/CHF just made a higher low outside and above the descending fChannel (the two thicker brown lines). This is the signal for entry. Note that the fChannel is my proprietary channel. This trade is initiated according to my new Forex Trend Fading (FTF) setup. Position size: 100%, 50% Entry: 1.0122, from fRays signal. Stop: 1.0060, below major support Target: 1.0225, first major resistance, ease off some at that point, add more above it. Reward / Risk = 103 / 62 = 1.66 \< 3. Not not good enough for my usual R/R target, but I've been considering lowering it to 1.5. So lets see if an R/R of 1.5 is a good enough number. I would have been more comfortable with a 2.0 though. Anyway, let's see how this goes. Update: I took half of it off at breakeven because of the lower R/R and the new setup. Only 50% in this trade now. I'm looking to add a EUR or JPY cross for my other half allocation. Update 11/19: I'm stopped out of this position @ 1.0150 for +27 pips.

[caption id="" align="aligncenter" width="580" caption="USD/CHF"][USD/CHF]USD/CHF[/caption] [caption id="" align="aligncenter" width="580" caption="USD/CHF, 3-hour"][USD/CHF,
3-hour]USD/CHF, 3-hour[/caption]

Posted 18 November 2009 in forex.

Paper trade: Long USD/CHF @ 1.009, out 1.0245 (+155 pips)

The U.S. dollar finally picked up some strength last Thursday and I loaded to ride the trend. One of the earliest trade I made in this wave is going long on USD/CHF. Figure 1 is taken today after a full week since the initial move in USD. The vertical line marks the day when I entered this trade on Thursday 22nd late afternoon. Here are my reasons for making the entry:

  1. Parity level 1.0000 was a mere 30 pips away from the low the day before
  2. Obvious positive divergence on the indicator, Fig. 1.
  3. Breakout on the shorter 3-hour timeframe, Fig. 2.

I placed the order just above the resistance and beyond the short term channel. The order was filled the next day in the morning on the 23rd. In hindsight, I should have used a half position only and added to it once it broke the longer term descending resistance as shown in Fig. 2. That's because a short term break is a low probability move given that the downtrend was strong. However, USD/CHF was testing parity, which is as strong a support as you can find for many reasons. As you can see from Fig. 2, the entry was rather good overall (could have been better as discussed above). However, I think the exit was also a disciplined move. My original target was 1.026 as noted below. It was just below that horizontal resistance at 1.0267 which I marked on Fig. 1. Yet, there's also the longer term trendline marked on both Fig. 1 and Fig. 2. I had 4-5 positions open at the time and this was one of my strongest two (the other being CAD/JPY short), so I tried to add to my position once the pair broke that longer term trendline. However, the line proved to be strong as USD/CHF retraced and took out my stop as shown in Fig. 2 (red dot, 2nd from right). Nevertheless, the pair remained above 1.0200 and my core position was safe (I moved my stop up). But not all was well. USD/CHF eventually broke 1.025 but it didn't go far. It printed a couple more bars on the chart while I kept moving my stop closer and closer. Also noting that the pair was short-term overbought, I moved my stop right up to below 1.025 at 1.0245 to lock in most of the profit. That stop was eventually taken out and the pair took a dive as shown in Fig. 2. Moving the stop up tight in a short-term overbought condition was a good choice. I learned this from my recent trades when I left profits on the table. So I got out against my hope for higher pips even when the talk of USD making a return to strength was ubiquitous. I traded what I saw and not what I hoped for, and against the opinions of other people. If only my entry was a bit more patient, this would have been one of my best executed trades. Below are the data for my entries. Position size: 100% First Entry: 1.009 First Stop: 1.0030 First Target: 1.0260 Reward / Risk #1 = 170 / 60 = 2.8 \< 3, but close enough. Second Position Size: 25% Second entry/stop: 1.0232/1.0220 I didn't have a target in mind for this addition because it was only to add on the strength of the existing position.

[caption id="" align="aligncenter" width="580" caption="USD/CHF"][USD/CHF]USD/CHF[/caption] [caption id="" align="aligncenter" width="580" caption="USD/CHF, 3-hour"][USD/CHF,
3-hour]USD/CHF, 3-hour[/caption]

Posted 29 October 2009 in forex.

continue   →