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Tuesday, July 19, 2011

Gained a "Smidgin" on a Trade that Went Against Me ...

So, yesterday I discussed the fact that I was developing a Forex strategy in which I would move in and out of positions by 'picking and scratching'. In other words, as a position began, I would begin to slide into that position and when a position moved against me, I would begin to dump out.

I thought that today I'd throw up a few screenshots of just such a process. I think it's a good example because a) I gained a few pennies in profit, but b) the trade actually whipsawed me out, and moved against me.

So, let's begin.

This morning, knowing that I had an 8:30 news item coming out ... I thought I would try a short in the EUR/USD. Now it's important to note trade management principles before we go any further. If it's profitable, I'm looking at a time frame of about 9 hours ... again, if profitable. If it moves against me, I'm the kind of trader that likes to know right away. So if profitable, then I will begin to add to the trade at key spots. If it isn't profitable, I'll probably be out within the hour.

So I began, by only going short 150 EUR/USD. After I went short that 150, I saw another region develop that I would begin to short another 50, as you can see below ...

(Click to enlarge)

At this point, I'm already thinking, that if we look to the larger time frames (not pictured here, but I'm keeping an eye on through my ToS platform)? I'm looking at a situation that could coil against me and push higher. Remember, I always have my eye on multiple time frames whenever I'm in a trade ... to push into the trade. But I also have my eye, not on the profit, but on the risk. So at this point, I know that 8:30 is approaching, and that is my wild card by which we'll see higher volatility. But regardless of 8:30, the coiling is occuring in the here and now. It has to break lower, and break right away.

This area of support continues to build, so as you see in the next frame, I pull up the order to short that 50 little closer to this support ...

(Click to enlarge)

Very shortly thereafter, I'm filled short. So now I'm short 200 EUR/USD. I'm willing to add to my short. But at this point, I know that it has to break lower, and I'd like for it to break lower hard and fast.

(Click to enlarge)

And that's what starts to happen ...

(Click to enlarge)

At least at first.

Then the market stalled, and if memory serves, this is the point that I started thinking ... "It's going to coil against me. That's based on nothing more than reading the price interact with the moving averages. Very simple. But I'm thinking that at this point, this isn't playing out as planned. Switch your mind to getting out Dan, and getting out profitably."

But you know ... I've learned that it's very, very foolish, to just start dumping out of the position immediately. Build parameters and let the market tell you what's going on. Take advantage of the market when you can. At this point, I still believe that the market is going to coil against me and move higher. But that doesn't mean that I have to take action immediately when that thought is formed.

(Click to enlarge)

I mean, just look at the trade in this chart? Yes, on the longer time frames (again, not pictured here), I'm looking at a situation that could coil against me. But I'm still below our shorter time frame moving averages / trend. I no longer like this trade ... but I have my mind open.

8:30 continues to approach, when I know the volatility will increase.

The market pops higher, up to the moving averages, and then turns around and again ... starts to move lower.

But simply because the chart is now moving in my direction, I don't begin to feel that suddenly 'no, I was wrong ... the market won't coil against me'. I'm not going to waffle back and forth within the trade, simply because it takes a few ticks in my direction. I don't like the trade. I'm convinced this thing is going to coil against me.

Thus, I'm still thinking ... "Don't push further Dan, just get out when you can" ...

(Click to enlarge)

I start shredding out of the position as I have a bit of profit. I began by buying back 40.

The trade can still convince me but it had better act fast, or I'm out the door.

It moves lower, and I grab some profit on a bit more, but not 40 this time. Now, I only take profit by buying back 30. At this point? If it moves drastically in my favor, I would think about staying in the trade longer. But it has to convince me ... immediately.

Which it doesn't do. So I begin to shred out of the position completely as it stalls. And then I dump more as it moves against me, until I'm completely out of the trade.

EUR/USD Trade Activity
(Click to enlarge)

The market continued to move against me, but I somehow managed to gain a penny. I was pleased with myself at this point.

This type of trading means that I'm going to greatly have to sharpen my trade management skills. With commodity futures, I never 'push in', or 'push out'. I have my position size, and then as it moves in my direction, I take profits. Period. This is due to the fact that commodity futures are nowhere near as liquid as Forex, and thus, I have developed a particular position size management style. With Forex, I have a little more flexiblity due to the higher liquidity.

Then I did something I tell new traders to not do ...

I took a look back at the chart, and saw that it then moved lower.

So quite frankly, I got whipsawed here in this example ... but I never ... ever mind that. In fact, I think that makes this an excellent example. The second a trader tries to figure out how the or she can 'stop getting whipsawed', in my humble opinion ... they are sunk as a trader. Because you can't avoid it. It's going to happen. The trick is learning how to not a) believe that the 'market whipsaw' is the problem and b) emotionally ignore market action after you're out of the trade.

Trading is psychological in nature. It doesn't matter if it's stocks, commodity futures, forex or at a pawn shop.

I'm going to conclude by saying that I am adding $5.00 to this tiny account, to represent my aforementioned comments of how rule number two will have impact on my actual Forex trading, according to the rules of the Challenge Project.

EDIT: 11:10 am est - And that's why we don't care about whip-sawing. Moved higher again. Market is choppy. When you're out of the trade, you're out of the trade. Don't worry about it, because the market is going to do whatever it wants to do ...

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Note: The above statements should not be construed as an investment or trading recommendation. Airelon's Investing and Trading Journal is a blog that allows subscribers to look 'over my shoulder' as it were, for my own personal specific trading and investing ideas and thoughts for the next week. But they are only thoughts as of the moment of publication, and are subject to change.. Any trades or investments that I discuss within this blog are simply my own thoughts regarding my own investing and trading outlook. Remember that entering any market is an individual decision. There is no guarantee that I will enter, or have entered any of the trading or investing ideas that I discuss in this blog; as larger accounts may require a different strategy as the ones presented here. This blog simply contains my trading and investing thoughts for the next week. I, the author do not grant this work for wide distribution beyond any single individual subscriber as this publication is protected by U.S. And International Copyright laws. All rights reserved. No license is granted to the user except for the user's personal use. No part of this publication or its contents may be copied, downloaded, stored in a retrieval system, further transmitted or otherwise reproduced, stored, disseminated, transferred, or used, in any form or by any means except as permitted under the original subscription agreement or with prior written permission. I personally only enter any market after watching and reading the tape and I trade using money management principles. The losses in trading can be very real, and depending on the investment vehicle and market, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. I do have 15 years of experience in trading and investing in these markets. Airelon's Challenge Chronicles are demo accounts,with all of the inherent problems therein, which are used within this blog in an attempt to track the results of my own thought processes., and is run as a model. Traders who should make their own decisions based off their own research, due diligence, and tolerance for risk. Any pictures used within this blog are believed to be public domain. Any charts that displayed using the ThinkorSwim platform, or any other charting software are believed to be public domain. Any other pictures were obtained through Wikipedia's public domain policy. As a reminder, any trades discussed for "Airelon's Challenge Chronicles" would only be 'day trades' according to the parameters discussed for Airelon's Challenge Chronicles, at this stage of the game in order to escape the risk of over-leveraged gap opens in the commodity futures markets. As a 'trading sister' would have grown to the $30,000 level, I would have graduated the account into 'swing trading'. In addition, it is understood that readers have read my YouTube methodology series. It is also understood that the writer of this blog has repeatedly warned against the dangers of shadowing any other traders thoughts. The Challenge accounts are run for the education of other traders who should make their own decisions based off their own research, and tolerance for risk.

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