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.
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.
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.
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.
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 |
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 |
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 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.
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