Category Archives: Forex Trading Plan

Cup and Handle on USD.CAD

Situation

Monday: US & Canadian holiday
Tuesday:
– 1000 USD ISM PMI
Wednesday:
– 0830 CAD Trade Balance
– 1000 Bank of Canada Rate Decision
Thursday:
– 0815 ADP Non-Farm Employment Change
– 1000 ISM Non-manufacturing PMI
Friday:
– 0830 CAD Employment & Unemployment, USD Average Hourly Earnings, Non-farm Employment Change, Unemployment Rate

Pending News: US & Canada NAFTA talks pending resolution

News Sentiment: Neutral. Nothing of consequence over the holiday weekend.

Up Next Week: Federal Reserve Rate Decision

Formation Status: Handle on a monthly cup and handle formation seeking a breakout, due to breakout with a likely Fed hike this month. Currently trading at the upper end of the channel. Possible continuation or reversal. Tighten stops.

Price Action: Sitting at Resistance of 1.3100. Monthly bias is strongly bullish as is the Weekly bias. Daily is neutral. 4HR and 1HR are pausing.

Key Question: If I tighten the stop and get stopped out, will I be able to re-enter at a lower price or will the pair rebound faster than I can get in?

Scenario Plan: NAFTA agreement reached ahead of Wednesday’s BOC meeting, which could enable the BOC to raise rates this week rather than waiting until October, as the market expects. If this happens, the pair could sell off by 100 pips, a 50% retracement of the recent move from the bottom of the channel.

Because the risk of this is limited to Tuesday and Wednesday, I will tighten the stop ahead of the meeting and re-evaluate afterwards.

If NAFTA breaks after the BOC meeting, I expect the USD to appreciate aggressively as one less barrier to a Fed hike is removed.

Action: Tighten stop to below daily and weekly open. A break below the open could send the pair appreciably lower and offer a strong re-entry point ahead of next week’s Fed decision.

Targets: 1.3385, 1.3585, 1.3750
– Update: 1.3385, 1.3690

Update: Tuesday 20180904
– 0930 USD.CAD strength broke resistance at the channel last night and kept going. As of this morning, the pair traded through another level of resistance at 1.3175 and is now hovering just below 1.3200. I stopped into another position at 1.3175 and placed the stop loss at break even for the new position.
– 1030 The pair has broken 1.3200, but not likely to hold it. I expect a retracement in anticipation of tomorrow’s BOC meeting.

Update: Wednesday 20180905
– 0830 Trade Balance and 1000 BoC Rate Decision served as a buying opportunity. I was previously stopped out at breakeven. I entered the same second position at 1.31805 with a GTC stop at 1.31575. So far so good. I expect further consolidation on the Daily with an upward bias towards 1.3290.
– NAFTA update: Now that the BOC decision is behind us, any NAFTA positive news will be bullish as another barrier is removed from Fed decision making. As the trade picture clears and the US economy shows continued strength, I expect a long-term bullish breakout for the USD.

Position Management: I will hold my initial position entered at 1.2950 for the month of September, perhaps longer. Secondary positions will be for trading purposes.

Update: Thursday 20180906
– The pair is forming a high base on the Daily chart with support above 1.3150. The next two targets are 1.3290 and 1.3375. Market sentiment continues to be positive and the opportunity to reverse course on a Wednesday came and went. NAFTA news is still outstanding as well, which is bullish. To that end, I would not be surprised to see the pair trade up to the next target at 1.3290 and possibly beyond it in advance of next week’s Fed decision. Buy the rumor, sell the news. With that said, risk remains for a bearish breakout to the moving average support at 1.3100. To that end, I will maintain the stoploss at 1.3149, just below S1 support, 20 period MA on the 4HR and the psychological level of 1.3150. Risk on this half position is 3%.
– 0815 ADP showed a modest decline in payroll growth. The market shrugged it off with little reaction. 0830 news was inconsequential.
– 1000 ISM and Fed-speak could send the pair into a 4HR correction as the chart is currently in consolidation mode after the run up on Tuesday. It also could send the pair to the next target or continue to consolidate ahead of tomorrow’s employment data. Hold the stoploss.
– 1125 ISM data outperformed and SF Fed President Williams says that the economy has room to grow and that muted inflation data suggests little impetus for faster rate hikes. Clearly the market is not buying it as the USD has broken short-term resistance at 1.3206 and climbing. Stops on all positions moved to break even on the last entry at 1.3149, locking in an account gain.
– 1644 USD rally peaked at R2, 1.3226 before reversing on bearish Fedspeak about inverting the yield curve and Trump talking up a trade revision with Japan after concluding NAFTA talks.

Trade Results: Stoploss at 1.3149 locked in a 199 pip gain from an entry of 1.2950. The re-entry target is set for 1.3101.

First Position
Entry: 1.2950
Exit: 1.3149
Gain / Loss: +199 pips

Second Position
Entry: 1.3180
Exit: 1.3149
Gain / Loss: -31 pips

Weighted Average Result: +180 pips, +32% account gain

Analysis
Just when the path towards a stronger began to accelerate, President Trump put on the brakes by announcing that Japan was next. That plus Fedspeak and a BOC announcement that a NAFTA deal was “still possible” cast doubt on the deal getting done and caused the reversal. Had this occurred on a Wednesday, I would’ve been prepared to sell at the high. In shortened weeks, I’ll now anticipate reversals in the afternoon on Thursdays.

After Action Review
The decision to raise my stop loss to Daily support appears to be a good one with the 4Hr chart showing more bearish sentiment to 1.3100-1.3050. One should never complain about a 32% gain.

  • Maintain tighter stops on charts that are elevated well above the Daily MA in order to lock in gains.
  • The Administration is working in concert with other officials to actively manage the currency and prevent aggressive breakouts.
  • The good news is that with this in mind, there should be plenty of trade signals based on the daily pivot points.

We’re Baaaaack! Market Monday: April 4, 2016

Eight years after starting this blog in 2008, the Federal Reserve has raised rates only once, in December 2015. The .25% rate hike coincided with a Wave 5 top on the monthly chart of most emerging market currencies, including the Dollar / Ruble (USD.RUB). Of these currencies, I’ve selected the USD.CAD (Canadian Dollar) and the USD.ZAR (South African Rand) because of their chart formations.

Weekly USD.CAD

20160404 USD.CAD Weekly Short

The Dollar Cad is set for a Wave 3 Elliott Wave move. In order to protect against a missed drop through support, I’ve set a sell stop with a sell limit set above the market at weekly resistance.

Prognosis

The Bank of Canada issues a rate statement in two weeks on 4/13 at which point I expect the BOC to sell strength in the Canadian economy. Until then, after the strong US jobs report on Friday, a pullback to weekly resistance is possible. I’m positioned for both outcomes.

20121228 Trade Plan

Screen Shot 2012-12-28 at 1.37.32 AM Screen Shot 2012-12-28 at 1.35.15 AM Screen Shot 2012-12-28 at 1.32.20 AM

Hard Rules

Rule #1 – Accept no unnecessary risk. Risk no more than 1% on the entry {unless there is a 2:1 reward ratio}.
Rule #2 – Plan the trade in off-peak hours: Pair’s Most Likely Course of Action (PMLCOA), Profit Target and Reversal Trade.
Rule #3 – Be fearless. Play to win. Play “Eye of the Tiger” for proper mindset.

Best Practices

1. Play the 4hr in the context of the daily. Enter on the 15 minute chart.
2. Don’t chase the breakout. Enter on the wave 2 pullback or ahead of the breakout.
3. Execute according to the plan.

Enemy Situation

News

Friday: 10am US Pending Home Sales
Saturday: Market closed
Sunday: Nothing significant

Support & Resistance

Price & Time: 1.6119 as of 20121228 0046
Daily MA: 1.6155 & 1.6181
4hr MA: 1.6123 & 1.6129
R2: 1.6259
R1: 1.6179
PP: 1.6123
S1: 1.6043
S2: 1.5987

Formations & Trends

Monthly: Flag with an long bias.
Weekly: Bearish – Pull back to weekly trend line. Reversal candle last week.
Daily: Bearish – Multi-months long cup & handle formation. Daily breakout regressed to weekly trend line after hitting reversal target at 1.6300.
4hr: Neutral/Bullish – Possible reversal signal. Over-sold.
1hr: Bullish
15min: Bearish

Pair’s Most Likely Course of Action (PMLCOA)

The hourly is looking to break above PP, but will hit resistance at R1, which coincides with the Daily MA. I’m torn between two COAs (Course of Action) once the cable hits R1. Because I anticipate a strong move breaking upside resistance at 1.6300, I’m watchful for a reversal of the downward daily trend. The pull back to the weekly trend line yesterday may be that reversal. That said, the daily chart continues to trend bearish towards the zero line of the MACD.

Risks: Planned headline risk at 1000. 4hr MA resistance 7 pips above PP. Daily MA resistance between PP and R1.

Risk Mitigation: Entry just above 4hr MA and seven pips above PP with planned profit targets at R1 and R2. Trail stops have been set to move the stop loss to break even as the pair approaches the Daily MA. Should it reverse at 1.6155, I have zero at-risk capital. If the 4hr lacks conviction and reverses off the MA, the trade will not trigger.

At-risk Capital: 2.25%
Reward Range Position 1: 45 pips
Reward Range Position 2: 120 pips
Total Reward Range:
 45 to 165 pips (2.25% to 8%)

Mission

Maximize gain on the hourly uptrend while cognizant of a likely reversal off Daily resistance and R1. Be prepared to participate in further gains should the 4hr reversal reverse the downtrend on the daily.

Scheme of Maneuver

If Break above PP at 1.6123 and 4hr MA at 1.6129

Position 1

Pair: GBP.USD
L/S: Long
Formation: Break of PP on 1hr
Time Frame: 1hr, possible 4hr
Target: 45 pips
Size: 50k
Entry Strategy: Buy Stop Limit at 1.61305, break of PP & 4hr MA
Exit Strategy: Market If Touched (MIT) at 1.6175
Stop Loss: 20 pip trail stop
Risk: 20 pips
Reward: 45 pips

Position 2

Pair: GBP.USD
L/S: Long
Formation: Break of PP on 1hr
Time Frame: 1hr, possible 4hr
Target: 120 pips
Size: 50k
Entry Strategy: Buy Stop Limit at 1.61305, break of PP & 4hr MA
Exit Strategy: Market If Touched (MIT) at 1.6250
Stop Loss: 25 pip trail stop
Risk: 25 pips
Reward: 120 pips

Take Profit note: If the 4hr gains steam and blows through Daily resistance then the daily uptrend is likely to reverse. In this case, we’ll take profit at R2 and play again on Monday.

20121212 Trade Plan – Fed Day – GBP.USD

20121211 Recap: Holding position ahead of the Fed announcement tomorrow at 1230 EST.

Trade Plan steps:

  1. Plan and publish the trade plan to this blog before trading.
  2. Using the Forex Calendar, identify news events which could affect trading.
  3. Evaluate trends on the Daily, 4hr, 1hr, 15 & 5 minute charts.
  4. Draft PMLCOA relative to pivot points, moving averages and trends, both prevailing and counter.
  5. Prepare orders to include limit entry, stop loss, a half-position profit stop, and a half-position trail stop, all around pivots and moving averages.
  6. Assess plan for risk, reduce and execute.

Situation

20121211 1237 Daily GBP.USD 20121211 1255 3Y Daily GBP.USD 20121211 1249 4hr GBP.USD

Support & Resistance

Price & Time: 1.6117 as of 20121211 2215
Daily MA: 1.6085 & 1.6077
4hr MA: 1.6102 & 1.6092
R2: 1.6154
R1: 1.6134
PP: 1.6101
S1: 1.6081
S2: 1.6049

News

Monday: 1215 EST – Bank of England Governor Mervyn King speaks at Economic Club in NY. – No text released. No impact on the market.
Tuesday: 0830 USD Trade Balance report – Steady move north. Little volatility.
Wednesday: 0430 GB Unemployment, 1230 Fed Statement & Rate decision, 1400 Fed Economic Projections, 1415 Fed Press Conference
Thursday: 0830 US retail sales and unemployment
Friday: 0830 US Core CPI & Manufacturing
Saturday: Market closed
Sunday: Nothing significant

Formations & Trends

Monthly: Flag with an long bias.
Weekly: Start of Wave 3 with a long bias.
Daily: Multi-months long cup & handle formation. Ready to break out of Daily & Weekly formations.
4hr: Uptrend, wave 5 – waiting on news to break out.
1hr: Sitting at upward resistance of Daily & Weekly trend lines
15min: Regressing toward zero line of MACD, no price regression

Narrative

Steady movement up throughout the day. British unemployment at 0430 and a Fed announcement at 1230 mean I’ll be up attending to the chart at 0300.

Mission

Between the hours of 0200 and 1100 EST, while risk minimal capital, position for a breakout of the formation or reversal within the flag.

Execution

PMLCOA: The pair is poised for a breakout, sitting at the trend upper line on the Daily and Weekly formations. I expect news at 0430 and 1230 to push it out of the trading range into breakout territory.

Risks: News at 0430 and a Fed announcement at 1230 could make for an interesting trading day.

Risk Mitigation: Stop loss moved to below S1, which includes two pivot points, a fibonacci level, and both daily moving averages. This stop loss provides plenty of room to wiggle before an expected breakout.

Con-Ops

Holding for breakout

Pair: GBP.USD
L/S: Long
Formation: Break of upper Daily and Weekly trend lines at 1.6117 on all time frames.
Time Frame: Daily & 4hr
Target: 250 pips
Size: 100k
Entry Strategy: Limit at 1.6110 for Position 2 (60k), averaged price of 1.6103
Exit Strategy: Profit Stop at 1.6300 on breakout
Stop Loss: 1.6074
Risk: 29 pips (2.9% at risk)
Reward: 250 pips (26.8%)

Take Profit note: If a reversal candle occurs north of the breakout, be prepared to take profit and buy back at a lower price.

20121211 Trade Plan GBP.USD

20121210 Recap: Fail. Converted 23 pip gain into a 1 pip loss.

Trade Plan steps:

  1. Plan and publish the trade plan to this blog before trading.
  2. Using the Forex Calendar, identify news events which could affect trading.
  3. Evaluate trends on the Daily, 4hr, 1hr, 15 & 5 minute charts.
  4. Draft PMLCOA relative to pivot points, moving averages and trends, both prevailing and counter.
  5. Prepare orders to include limit entry, stop loss, a half-position profit stop, and a half-position trail stop, all around pivots and moving averages.
  6. Assess plan for risk, reduce and execute.

Situation

Support & Resistance

Price & Time: 1.6072 as of 20121210 1825
Daily MA: 1.6067 & 1.6064
4hr MA: 1.6060
R2: 1.6144
R1: 1.6109
PP: 1.6062
S1: 1.6027
S2: 1.5979

News

Monday: 1215 EST – Bank of England Governor Mervyn King speaks at Economic Club in NY. – No text released. No impact on the market.
Tuesday: 0830 USD Trade Balance report
Wednesday: 0430 GB Unemployment, 1230 Fed Statement & Rate decision, 1400 Fed Economic Projections, 1415 Fed Press Conference
Thursday: 0830 US retail sales and unemployment
Friday: 0830 US Core CPI & Manufacturing
Saturday: Market closed
Sunday: Nothing significant

Formations & Trends

Monthly: Flag with an long bias.
Weekly: Start of Wave 3 with a long bias.
Daily: Multi-months long cup & handle formation.
4hr: Uptrend, wave 4
1hr: Overbought.
15min: flat

Narrative

The pair traded up through two pivot points and settled just above the daily moving average. The 4hr chart is still below the zero line on the MACD, but the 1hr is overbought and the 15min chart is flat.

Mission

Between the hours of 0200 and 1100 EST, scalp no less than 20 pips in order to grow assets with minimal risk.

Execution

PMLCOA: The pair is trading right at the daily and 4hr moving averages. Although I expect the cable to close up tomorrow, given the current overbought position on the hourly chart, I will stand by for a break south of the pivot point at 1.6062. If it breaks, I’ll short to S1 and prepare to reverse positions for a higher close on the daily chart.

Risks: The day is clear of planned headline risk.

Risk Mitigation: Entry just above or below PP with planned profit targets and sell stops on the other side of the pivot.

Con-Ops

If Break below PP at 1.6062

Pair: GBP.USD
L/S: Short
Formation: Break of PP on 1hr, temporary reversal
Time Frame: 1hr
Target: 20 pips
Size: 2 positions of 20k
Entry Strategy: Stop at 1.6060, break of PP
Exit Strategy: Profit Stop at 1.6035 on both positions, 10 pip trail stop on half
Stop Loss: 1.6065 on Position 1, 10 pip trail stop on Position 2
Risk: 7.5 pips
Reward: 20 pips after commission
Take Profit (both positions): 1.6035

Take Profit note: Both positions have a profit target because if it breaks south of the pivot, it’ll be a temporary pullback followed by a reversal.

If no break of PP and 1hr develops upward bias

Pair: GBP.USD
L/S: Long
Formation: Continuation of upward trend, wave 5 on 4hr
Time Frame: 4hr
Target: 20 pips
Size: 2 positions of 20k
Entry Strategy: Limit at 1.6075
Exit Strategy: Profit Stop at 1.6100 on Position 1, move to break even on Position 2 after support closes above S1
Stop Loss: 1.6060 on both positions
Risk: 15 pips
Reward: 25+ pips
Take Profit: 1.6100

Take Profit note: Profit target set for half the position. No trail stop for the second half, but will move to break even after it moves in favor. If it holds the upward momentum, I have a position to participate in the greater movement when I’m not in. I’ll continue to add positions daily with the same strategy as long as the upward trajectory holds.

Update as of 2124 EST, the pair started to move up. I’m in with a half position at 1.6076.

20121210 Trade Plan GBP.USD (0056 EST)

20121207 Recap: Trade Plan worked. I had a perfect entry and a two-phased exit that locked in gains and minimized risk.

Trade Plan steps:

  1. Plan and publish the trade plan to this blog before trading.
  2. Using the Forex Calendar, identify news events which could affect trading.
  3. Evaluate trends on the Daily, 4hr, 1hr, 15 & 5 minute charts.
  4. Draft PMLCOA relative to pivot points, moving averages and trends, both prevailing and counter.
  5. Prepare orders to include limit entry, stop loss, a half-position profit stop, and a half-position trail stop, all around pivots and moving averages.
  6. Assess plan for risk, reduce and execute.

Situation

Support & Resistance

Price & Time: 1.6021 as of 20121210 0027
Daily MA: 1.6055 & 1.6052
4hr MA: 1.60305
R2: 1.6092
R1: 1.60645
PP: 1.60335
S1: 1.60065
S2: 1.5975

News

Monday: 1215 EST – Bank of England Governor Mervyn King speaks at Economic Club in NY.
Tuesday: 0830 USD Trade Balance report
Wednesday: 0430 GB Unemployment, 1230 Fed Statement & Rate decision, 1400 Fed Economic Projections, 1415 Fed Press Conference
Thursday: 0830 US retail sales and unemployment
Friday: 0830 US Core CPI & Manufacturing
Saturday: Market closed
Sunday: Nothing significant

Formations & Trends

Current Formations: Multi-months long cup & handle formation on the daily chart.

Elliott Wave Cycle: Possible reversal candle closed at 1100 on the 4hr on Friday. If that holds, then we’re closing a wave 2 on 4hr chart.

Trend

The pair broke out and retraced to the top of the channel at 1.6000 as anticipated and has since rebounded to the pivot point (PP) at 1.6033. The daily trend could be just a retracement before an aggressive move upwards. The 4hr trend downwards is maturing and nearing a turn. The 1hr lacks conviction in its upward trajectory and the 15-minute is flat. News on Monday and Wednesday will determine the direction of the pair for the near future on the Daily. Still, the path of least resistance is down as the pair trades below the daily moving averages, below the pivot point.

Mission – 20 pips

Execution

PMLCOA: I expect a regression toward S1 (which is still a higher low than the Friday’s reversal candle) although it appears that the pair may have put in a bottom on the 15-minute chart above S1. So with that said, it’s likely that I won’t get into this trade, but at this late hour, I’m ok with that. The major news doesn’t hit until tomorrow at 1230 EST anyway, so there will be an opportunity later in the day and certainly on Tuesday. Commentary from the BOE tomorrow and the Fed on Wednesday could change the direction of the market.

Risks: News on Monday and Wednesday could make for large losses if the entry isn’t timed right and the expected volatility could make for a challenging entry since the direction hasn’t yet been clearly defined. 4hr resistance is at 1.6030.

Risk Mitigation: Entry just above S1, tight stop south of S1 with a 20 pip trail stop on both positions and a target of 1.6050 on one position.

Target: 20 pips
Size: 2 positions of 20k
Exit Strategy: Profit Stop at 1.6050 on 20k and 20 pip Trail Stop on 20k
Entry Strategy: Limit at 1.6010
Stop Loss: 1.5999
Risk: 11 pips
Reward: up to 40 pips @ 1.6050 (.8% of account value on half position)
Position 1 Take Profit: 1.6050
Position 2: 20 pip trail stop

Trail Stop note: Going with a trail stop on both positions because my first target is above 4hr resistance and the daily pivot. I’m playing a more aggressive move on the 15 and a turn on the 4hr.

Position 1 (Projected)

Entry Time (EST):
Pair: GBP.USD
L/S: Long
Formation: Start of wave 3 on 4hr and daily
Time Frame: 15 minute, 1hr & 4hr
Entry: 1.6010
Stop Loss: 1.5999, 11 pips
Profit Target: 1.6050, 40 pips
Exit Time:
Gain / Loss:

20121207 Trade Plan – GBP.USD

Yesterday, I got crushed due to a failure to plan, which as you know is planning to fail. Today will be different.

Trade Plan steps:

  1. Plan and publish the trade plan to this blog before trading.
  2. Using the Forex Calendar, identify news events which could affect trading.
  3. Evaluate trends on the Daily, 4hr, 1hr, 15 & 5 minute charts.
  4. Draft PMLCOA relative to pivot points, moving averages and trends, both prevailing and counter.
  5. Prepare orders to include limit entry, stop loss, a half-position profit stop, and a half-position trail stop, all around pivots and moving averages.
  6. Assess plan for risk, reduce and execute.

Situation

The 4hr sold off hard yesterday, but closed at daily support. The 4hr still shows bearishness as it approaches the MACD, however the 1hr and 15 minute charts are showing a pull back possibly up to the moving average. If it weren’t for this post requirement, emotion would have compelled me to enter the market without fully planning the trade. This is working already.

Price & Time: 1.6053 as of 20121206 2307
Daily MA: 1.6063 & 1.6072
R2: 1.6160
R1: 1.6105
PP: 1.6072
S1: 1.6017
S2: 1.5984

Current Formations: The Daily chart cup & handle formation is still in tact. The pair broke out and is retracing, which is common.

Elliott Trend: Unclear. Possible wave 4 retracement on the Daily. Currently trading just below the Daily moving averages (MA) at 1.6063. No action tonight until the news breaks at 0430 EST. The 4hr downtrend is just starting to move through the MACD, but will run into support at the upper channel line and pivot points.

News: Heavy at 0430-0500, 0830 & 0955 EST.

Trend: Daily trend could be just a retracement before an aggressive move upwards. The 4hr trend downwards is maturing. Looking at a possible wave 5 in the next few hours.

Risks: 1hr chart is poised for a move up, opposite the 4hr continuation pattern. News at 0430 and 0830 will make for a choppy ride, but will create opportunity to trade.

Risk Mitigation: Trading short of the moving averages and PP lessens risk exposure. Stop loss ensures potential loss is minimized.

PMLCOA: This is not an 80% trade. That said, I’m betting on capitulation to S1, possibly to S2 in accordance with the maturation of the 4hr trend before a possible reversal. After that, it’s anyone’s guess. As a chartist, I would say that we’ll see a reversal on the 4hr ahead of a resumed breakout move on the daily upward.

Mission – 20 pips

Execution

Target: 20 pips
Size: 2 positions of 20k
Exit Strategy: Profit Stop at 1.6025 on 20k and Trail Stop on 20k
Entry Strategy: Limit at 1.6063
Stop Loss: 1.60755
Risk: 13 pips (.6% of account value)
Reward: 38 pips @ 1.6025 (.8% of account value on half position)
Position 1 Take Profit: 1.6025
Position 2: 10 pip trail stop

Trail Stop note: Going with a tighter stop, just 10 pips, because of a possible reversal on the 4hr chart upon completion of wave 5.

Position 1 (Projected)

Entry Time (EST):
Pair: GBP.USD
L/S: Short
Formation: Continuation of 4hr to S1
Time Frame: 4hr
Entry: 1.6060
Stop Loss: 1.6075, 15 pips
Profit Target: 1.6025, 35 pips
Exit Time:
Gain / Loss:

A Trader’s Confession – 20121206

FUTURES & FOREX TRADING INVOLVES SUBSTANTIAL RISK OF LOSS. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

 

FOR QUESTIONS REGARDING TRADING SPECIFIC TERMINOLOGY, REFER TO THE “TRADING TERMS & GLOSSARY” SECTION OF THIS WEBSITE.

 

Forgive me Father for I have sinned.

Confession in the Catholic faith helps people to face their failings, which is the first step to recovery.

I returned to the trading desk two weeks ago for the first time since 2007, when I made the decision to join the US Marine Corps in service to my country. In those four years, I experienced remarkable growth as a person, a leader, and as a manager, which will undoubtedly pay dividends in business.

Unfortunately, these past two weeks have not been demonstrative of the cumulative lessons learned both as a trader prior to serving and as an officer in the Marine Corps. I’ve been too eager to get in the market, to stay in the market, and too willing to accept unnecessary risk for uncertain gain. The result of my ill-planned and executed trades the past few weeks has led to today’s culminating loss of 3.5% in a single day. The purpose of this post is to acknowledge and address the flaws of the past two weeks.

“A trader can do only four things in a market: win big, win little, lose little, and lose big. Small gains and losses will offset, leaving winning and losing big. Eliminate ‘lose big’ and a trader can only win big.” – Anonymous

In years past, a 3.5% loss would fall into the “small loss” category that would otherwise be offset by a small gain. However, now that I’m a professionally licensed Commodity Trading Advisor (CTA), registered with the National Futures Association (NFA), a manager of futures and forex, my monthly target is a mere 1%. In fact, consistent gains of just 1% per month would qualify my asset management service for consideration by funds of funds money managers. Steady performance with a good chunk of change under management (otherwise referred to as AUM or assets under management), will make for a successful career as an independent trader.

“Bulls make money. Bears make money. Pigs get slaughtered.”

Emotions of fear and greed rule the market. If you let them rule you, you will suffer a trader’s death.

The picture below is what I saw two days ago on the Daily chart of the cable (GBP.USD). As you can see, this is a multi-month long cup and handle formation which portends a sharp break to the upside.

 

Position 1

Entry Time: 20121203 22:37 EST
Pair: GBP/USD
L/S: Long
Formation: Handle breakout
Time Frame: Daily
Entry: 1.60995
Profit Target: 1.6300
Stop Loss: 1.6051, 48 pips, below lowest daily pivot point and daily moving averages
Exit Time: 20121206 12:22 EST
Take Profit: 1.6051, stopped at 48 pip loss
Percent Gain: -1.92%

But this is what happened…

You might notice two things. First, I held the position for multiple days even though I was bothered by what appeared to be a reversal candle on the daily chart. Most reversal candles appear at the top or bottom of a trend, with the final candle coming after at least three candles in the same direction. This candle formed after a single daily move up. Hence, I was concerned that I entered the trade at precisely the time when I should be going the other direction, but was frozen by both fear and greed. I counted five waves and a reversal candle on the daily. Even the 4hr chart showed an ominous drop in the near future. Rather than cutting my losses, I held and lowered the stop loss to an unreasonable level. Worse, I had numerous opportunities to get out at a profit and yet every time, greed won over and I held for greater gains. I went long on a breakout on a wave 5. That’s a big no-no.

My chance for getting out at a profit on that position passed over night. Had I set a take profit, I would have locked in gains of 20+ pips for nearly 1%. Today, I saw the pair trending down towards the daily moving average, but thought it could bounce back up. When it became clear that the pair had reversed, as I had feared could be in the cards, and wasn’t going to bounce, I entered into a bold, risky game. I doubled down on the bottom of a wave 5 on the 2 and 5 minute charts hoping that the pair would reverse just enough that I could get out at a small loss or break even. It worked. But instead of getting out, again I succumbed to greed and held. The pair eventually reversed minutes later, broke support and turned into a huge loss for a total of -3.5%.

The best and worst part about this trade is that it was wholly preventable. I recognized the pitfalls: a wave 5 reversal candle, a drill-down chart (4hr) portending an upcoming reversal, and yet I failed to act in both cases because I did not set a take profit prior to entering the trade. This last point, is critical because doing so enables you to plan using logic rather than reacting to emotions of fear and greed.

Lesson: Start with the end in mind. Know your exit strategy before you trade, then build it into the trade.

In 2007, before I started posting to this blog, my performance was lackluster at best. Publishing my performance for your review ingrained accountability into my psyche and forced better trade planning and reduced risk.

The Forex market can be challenging for many reasons, but especially because of the double edged sword of leverage, which is part of what attracted me to the market. By becoming NFA-registered and by passing my Series 3 & 34 examinations, I’ve committed to success. However, success requires discipline and discipline requires a plan.

Trading Plan (DRAFT)

  • Mission: Remove emotion from the conduct of trading in order to produce gains of 1% or better per month.
  • Components: Trend evaluation on Daily, 4hr, 1hr, 15 & 5 minute charts. PMLCOA (Pair’s Most Likely Course of Action), a summary of expected price action, will drive the entry and exit orders.