The Perils of Gapping Down...and an exciting trade involving the Swiss Franc

Bad Assed Trader:  Well it's been an eventful week, to say the least.  I still feel my trading is turning a corner so some good news there, but I've had ups and downs this week and my biggest disappointments have been concerning a couple of "gapping down" scenarios.

Last Sunday I did my analysis for the week, calmly and objectively.  It was good quality analysis as I managed to get into the flow of a number of markets, as I can see now that the week has passed.  Two trades in particular screamed out at me which is generally a good sign.

FTSE 100 daily chart

Firstly, the FTSE 100 (see chart on left) had just retraced up the 50 day Moving Average (the red line heading down).  Price had been ranging below a zone of resistance (horizontal blue line) since early August and price was just above this zone.  The last couple of times price got this high it dropped and the bar from Friday 16 September (the arrow is pointing to it) was a bit high testish (a long section at the top) which is a bearish (down) indicator - it shows price went up but was firmly pushed down again.
These signs all suggested price would come down so I placed a trade as an order to kick in Monday morning if price dropped below the low of that bar by a couple of pips (the horizontal red line shows my entry level at 5335.  My initial target for half my stake was for price to drop to 5108 (a target of 227 pips) with the other half to be trailed and I place my stop loss above the high of that bar and above the 50MA line at 5408.  So my risk was 73 pips with a possible reward of 227 - a decent 3:1 reward to risk ratio.
Now there's good news and bad news here, which demonstrate well the exciting, unpredictable and at times frustrating nature of trading.  But even with bad news there are lessons to be learned...

Monday morning saw the FTSE 100 "gap down".  This means that price dropped so fast that sell orders (such as mine) could not be filled at their order level and so were filled at a lower level.  Mine was filled at 5297 instead of 5335, increasing my risk by 38 pips.  This meant I had a decision to take.  Should I take the trade off as my risk was now over 1% (and my potential reward reduced too of course)?  Or should I swallow the extra risk and wait and see?  Or should I stick with the trade but move my stop loss down 38 pips?

It's a tough one.  Now of course I wish I'd just stuck with the trade.  If I had I would have hit my target on 22 September.  But I didn't do that.  Instead I moved my stop loss down by the 38 pips (mainly because most previous price action at this point did not show a rebound up to that level) and got stopped out at a loss of 1% when price went back up on 20 September.  So although my trade was technically good I made the wrong decision about the risk element.  Those extra 38 pips represented 0.5% to me and I wasn't prepared to risk that so instead I lost 1%.  Hmm.

EUR USD daily chart

A similar thing happened to the other trade which screamed out to me on Sunday evening. This was EUR USD daily (see right).  Movement is definitely down but there had been a retrace up to the 10 day Moving Average (the black line) and a reversal seller bar (the red one highlighted by the arrow) on Friday 16 September.  This bar is also an "inside" bar which means it is fully engulfed by the previous bar in terms of size.  This is an indicator that price is about to reverse direction. The fact that on the Thursday price had hit and rejected a horizontal resistance level (which I had marked by the blue line) also added evidence to these bearish indicators.
So again I placed an order with my entry at 1.3748 (shown by the red horizontal line along the bottom of the bar) with my stop loss at 1.3890 (142 pips above) and my target at 1.3506 (242 pips below).  A decent reward to risk ratio as well over 1:1.
So what happened?  Again the market gapped down (this had never happened to me before and now twice on one day!) and took me in during the early hours of Monday morning at 43 pips below my planned entry increasing my risk by about 0.3%.  Again I was faced with the three choices but I decided differently this time as the trade was in profit at the time I first saw it.  I reasoned that the trade parameters had changed and negated the trade so I took the trade off for a profit of 0.3%.  If I'd left it on it would have hit my target on 22 September.

Ouch.

What have I learnt and what will I do differently if it happens again?  I think that gapping down demonstrates a collapse in price to some degree and I should read that as a very bearish sign and not pull out of the trade unless I am exposed to an unacceptable level of risk as a result.  What is unacceptable?  I think in future I will put that at 2%.  So now I have a new and clear rule to stick to and have learnt something from the experience.

But I have one more exciting(!) trade to share with you which had a better outcome.  Although technically it was not as good a trade as those two so I'm rather embarrassed to share it.  I confess I was influenced by the fundamentals on this trade rather than sticking to technical indicators alone.

The Swiss bank had announced it was pegging the value of the Swiss franc to the 1.2 Euros so, in effect, guaranteeing price would not fall below this level.  That's tempting for traders if you can find a way in and to tuck your stop loss below the 1.2 level, which is what I did.  It's not often you can say your stop loss is protected by a massive and possibly rather obsessional national bank.  I took a trade on the Euro against the Swiss France (EUR CHF) on Monday 12 September when I saw some technical signals which allowed me a way in.

EUR CHF on the 5 minute chart (more exciting to watch!)

I then sat on that trade with it bobbling about for over a week (see chart on left, that flat price action on the left was like that for ages).  On Tuesday 20 September I was at a Forex Trading Bootcamp so I happened to be watching my trading account and charts at the time when suddenly what had been a marginally losing trade was zipping at great speed into a profitable position.
I checked my chart and as you can see it was absolutely flying.  I asked at the bootcamp if anyone had noticed and we were then all looking at the chart and trying to find out what was going on.  Someone said there was a rumour that the Swiss bank had raised the level at which it would peg the franc and so the market was responding to that.
It hit my target 1% (100 pips) within minutes.  And to be honest, I had considered taking that trade off that very morning.

Sometimes luck does go your way.

How did Gold go...and isn't it time I admitted I am an Earth Girl?

Bad Assed Trader:  Firstly a rain check on how Gold has gone since I rather boldly suggested on my last blog on September 12th that the price would drop, probably to around 1750.

Gold at close of September 16 2011

As you can see from the Gold daily chart to the left the price has gradually dropped down to 1762.50.  It might possibly drop further, but it does pretty much have what we call a "train track" at the bottom of the dip - this is where the seller (red) bar taking it down is matched in size by a buyer (green) bar taking it back up.  This pattern is bullish and suggests price is reversing and heading back up.
Where will it go up to though?  It's had some difficulty conclusively breaching the 1900 level and it is likely we'll get some interference at that level.  Price could push through this time, sometimes it seems to take a couple of tries before a third attempt pushes through a resistance level when it's a number of psychological significance which 1900 clearly is.
On the other hand we could end up with a head and shoulders pattern if price turns back down before reaching 1900.  This is a bearish pattern and so time to take a long trade off if that happens.
So that's gold and I'm still not trading it!  I do like to prove to myself that I can get into the flow of a market and anticipate moves but to be honest trading those moves is much harder as everything depends on your entry and exit points.  This is why we have strategies and why we have to conquer our psychology.

I've been taking my psychology into hand recently and it seems (early days yet) to be helping.  One way I've done this is by enrolling on a diploma course in executive coaching.  This has a number of benefits as my life as a Faceless Bureaucrat draws to a close in just 2 weeks and may generate private work to keep some income flowing my way.

My primary reason for doing the course was to learn to coach myself better with my trading.  The interesting thing is that I get free coaching on the course from other trainee coaches and I've started bringing my trading issues to them to work through.  Now you may recall I already have an amazing trading coach, Emmanuel, who I visit regularly at the live trading floor where I receive my trader training.  But I believe one can never have too many coaches - it all helps....

So just yesterday I was coached through my mindset when being a successful trader and when being an unsuccessful trader.  It was great to be able to describe out loud how I feel when I'm taking losing trades - or a string of them - as opposed to when I'm consistently winning.  I'm not talking about how I feel after the wins or losses, but the frame of mind I'm in when I'm trading which ends up bringing wins or losses.

Now I've been trading for over a year I'm starting to see and recognise the difference IN ME when I trade well and less well.  Maybe I'm just slow but it's taken a lot of trading to be able to start pinpointing the mindset, the feelings, the thoughts that guide or misguide me.

This is crucial if I'm to develop that level of consistent success.  Fully accepting (of course) that I will always have some losing trades as the market is so random, but that I have complete responsibility for creating the conditions to maximise my success.

This means controlling myself by putting myself into the optimum frame of mind for trading for a start.  For me this is a relaxed state, calm, almost distant.  I know that in life I am prone to getting absorbed in my tasks and I can't let myself get absorbed by trading or I end up letting my "ratty brain" as I call it control my actions and THIS ALWAYS LEADS TO MY BIGGEST STRINGS OF LOSSES.

I know, from recognising it happen twice, that after a string of successes I get absorbed in that way and end up over trading and giving it all back.  I know now I have to pause after a series of wins and regain my balance.

I have of course heard of this phenomena from other more experienced traders but I guess I was probably in denial.  Perhaps deep down I like to think I'm super human and not afflicted with the traits and weaknesses that others suffer.  Trading has shown me, with stark evidence, that I am actually a full paid up member of the human race and the sooner I come to terms with that and find ways to deal with it the better my trading results will be.  I suppose I should be relieved really to know I'm part of this big family of human beings, just a girl from the planet Earth and not part robot or alien or anything.

When I am in denial about my humanity in this way I am not acknowledging and therefore unable to recognise the completely normal human traits I have.  Coaching has already taught me that awareness raising about one's strengths and weaknesses is the key to improving performance.  I love this quote from John Whitmore in "Coaching for Performance" 


"I am able to control only that of which I am aware.   That of which I am unaware controls me.  Awareness empowers me."

This is just so totally applicable to trading and to where I am now on my journey of discovery.  By coaching myself I hope to gain deeper knowledge of my trading behaviour and therefore take more control of it.

It's one of the most exciting journeys I've ever made because I'm discovering parts of me that were unseen, unknown and yet silently pulling my strings.

We journey abroad to make new discoveries, sometimes the most fascinating are inside ourselves.

Where is Gold going next?

Bad Assed Trader:  I've discovered some of my discipline and have made recent progress in catching up with my analysis of the trades going back to June.  I've also noticed that my trading has improved a little recently and I'm currently ahead this month which is encouraging.

So I've been doing a look-ahead analysis to see what might be setting up in the next week or two and noticed interesting signs on gold.

Gold on the monthly chart: Meteoric

Now I haven't done much trading of gold and when I have it hasn't generally been successful but I still like to watch it to see where it's going as everyone likes to talk about it.  I'm just looking at the charts to see what's happening and thought I'd record it on my blog.

Firstly, the monthly chart (left) shows just how much gold has shot up - it shows something akin to an exponential curve, which is why everyone keeps harping on about it.  It is pretty meteoric and I'm not going to be the first one to say that's all about to change in the medium to longer term.

So what about the shorter term?  Would you want to buy gold right now?  With all the problems everywhere else - the falling FTSE, the artificially deflated Swissie and Yen, there don't seem to be many safe havens other than gold so you may think it's the best bet.  And you may well be right and I may miss out on something really amazing but I won't be going for gold myself just yet.

MACD Divergence on Gold over the last week or so

Why?  Only two things really, both of which show on the daily chart (right).

The first is that price action shows difficulty breaching the 1900 level.  Understandable as this is a new high, but the rejection of that price level is pretty sharp on both occasions with strong selling coming in as soon as price gets there (2 long red bars taking price back down from the level I've marked with the red horizontal line).

The second is the divergence of the MACD indicator (see bottom of the chart, the two peaks connected by the thick green line).  This indicates that when price rose the second time to the 1900 level it had less potential to continue to rise than the first time.  I suppose this means that buyers are thinning out considerably at that point.

Gold MACD divergence during winter 2010

I looked back in time at the Gold chart to see what happened when MACD diverged previously and found the section shown left which was during November 2010 to January 2011.
Three times price tried to breach the 1430 level but got beaten back and each time the peak on MACD was lower than when price had peaked at 1387.  Sure enough, before price could rise again it needed to drop and touch the long term trend line (the straight blue line between the pink 120MA and green 200MA lines).
My feeling is that gold needs to get rid of a few sellers by dropping off a bit before it will be able to pick up sufficient buying momentum to crack categorically through that 1900 level and push north again in line with its underlying trend.

Gold this morning on the 5 minute chart

Strangely enough, whilst I've been putting this blog together this morning Gold has been quietly tanking on the 5 minute chart (see left) with big chunks of selling coming into play.

I think it'll come down further over the next few weeks maybe to about 1750, before pushing back up again.  It may bounce up a little, like it did before, to make a third attempt to breach 1900 but I don't think it will make that breach until it's drawn some breath by dipping.  And when it dips, then I might get interested in looking for a buying opportunity....

Moving onwards (and hopefully upwards)...

Faceless Bureaucrat:  On Friday I passed the point at which my redundancy package flips from being worth absolutely zilch to being worth nearly two year's pay.  I was also told earlier in the week that the local NHS has approved this hefty redundancy package for me in anticipation of chucking me out, so I'm rather more relaxed these days.  The end of month sees my NHS career drawing to a close and a new chapter opening.

Those who have gone before me tell me it's a tough job market at the moment.  So it's just as well I'm not looking for a job.  Well of course I am for redundancy eligibility purposes but between you and I....not bloody likely.

Last time I blogged I mentioned my youngest daughter, Ruby, and her determination and discipline in getting the GCSE grades she wanted to get into the sixth form of her choice.  We shopped for her new school uniform the other day.  I think she may have had an identity crisis in relation to her size/age during the trip.  We came away with a jumper for a 40 inch chest and a skirt for a girl aged 9.  But hey, this is a girl who is starting a career in fashion and somehow when she put the outfit on it worked.  But you have to be 16 to get away with this combo.

Bad Assed Trader:  The other good news from my alter ego is that finally I have managed to find the strength to embark on my overdue analysis...of the last 200 trades.  The Faceless Bureaucrat in me provided admin support to the process by developing action plans and setting out tiny steps with rewards and punishments (we call it "incentivising" in the NHS) to get me started and it seems to have worked.  I have made a flying start and already qualify for 3 "treats" as I've managed to plough through nearly a quarter of the lot in one day, well ahead of schedule.

As I work my way through the process it reinforces for me what I do well and what I do badly when trading, it's all about raising my awareness to help me improve my skill.

And so Autumn falls upon us, things are moving on...