Bad Assed Trader: I've been working my way through my January trading to identify my errors and find out exactly what caused my draw down. As part of that process I thought I'd share one of the losing trades I took. I've shared winning trades on this blog before but not sure I've done a loser so it's probably about time I did, particularly when one tanks as spectacularly as this Swissy one did on January 23 2012:
I've put three time frames up on this picture. I've marked on with yellow arrows where I entered the trade so you can see what it looked like on these three time frames.
The one on the right is the daily chart. You'll see why I decided to take a long trade: price was in an uptrend and had retraced back to the 50 Moving Average (the red line). On January 22 there was a small green bar which could be interpreted as a bounce off the 50MA - a signal that the uptrend was due to recommence. There was also a "soft" support level there, meaning price had reacted to that level before and changed direction, but not always.
The chart on the bottom left is the 4 hourly chart. This shows that just before price started to bounce up it hit a red horizontal line - this is the weekly Support 2 pivot line which often represents a good support level.
The top left chart is the hourly chart and you'll see that by the time I took the trade price had started to form an uptrend - or so I thought. After all, there had been a higher low and I took the trade long when a higher high was made.
This all falls in line with my rules, so how could I have known not to take the trade? Well, there may have been other indications of which I'm unaware, but in terms of my rules I do need to have the stochastic and MACD indicators suggesting that price is going to go in the direction of my trade. In this instance they weren't.
The MACD indicator is shown at the bottom of the daily and 4 hourly charts and the stochastic is at the bottom of the hourly chart and they are all showing price continuing to move down. I needed to wait for them to start pointing up.
So why didn't I see that the indicators were not with my trade? God only knows! But this is exactly the sort of thing I have to focus on better if I'm to consistently profit from my trading.
Also, the previous day's bar was a green up bar but it did not show a decisive rejection of the 50MA and was rather high test-ish (a long stalk at the top) which is a bearish indicator. This should have been enough to make me decide not to take the trade.
I was clearly too keen to get into the trade and paid the price. The important thing is that rather than seeing this as a failure I use it as an opportunity to understand my weaknesses better and find ways to overcome them.
My action point from this lesson has been to assign each of my rules with a personality which comes from someone I know. For example, one rule is that there has to be a trend of some sort. I've emotionally charged that rule by making my husband the trend. If there's no trend then in my head he is telling me not to trade.
Another rule is that there has to be strong support or resistance against which the trend reacts. I've assigned myself to that rule as it makes sense to me that my husband might react to me being supportive or resistant! So if I can't find that strong support or resistance then in my head I'm not present so there is no trade to take.
Another rule is that I have to find a safe place to put my stop loss. I've emotionally charged my stop loss by making it my youngest daughter - the person of whom I am most protective. If I am to take a trade I have to find a very safe place to protect my baby (ok, she's 16...).
And so it goes on. I hope that by giving more emotional meaning to my rules I will be less inclined to ignore, overlook or actively discount them. Let's see how it goes.
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| Disastrous Swissy Trade! 23 January 2012 |
The one on the right is the daily chart. You'll see why I decided to take a long trade: price was in an uptrend and had retraced back to the 50 Moving Average (the red line). On January 22 there was a small green bar which could be interpreted as a bounce off the 50MA - a signal that the uptrend was due to recommence. There was also a "soft" support level there, meaning price had reacted to that level before and changed direction, but not always.
The chart on the bottom left is the 4 hourly chart. This shows that just before price started to bounce up it hit a red horizontal line - this is the weekly Support 2 pivot line which often represents a good support level.
The top left chart is the hourly chart and you'll see that by the time I took the trade price had started to form an uptrend - or so I thought. After all, there had been a higher low and I took the trade long when a higher high was made.
This all falls in line with my rules, so how could I have known not to take the trade? Well, there may have been other indications of which I'm unaware, but in terms of my rules I do need to have the stochastic and MACD indicators suggesting that price is going to go in the direction of my trade. In this instance they weren't.
The MACD indicator is shown at the bottom of the daily and 4 hourly charts and the stochastic is at the bottom of the hourly chart and they are all showing price continuing to move down. I needed to wait for them to start pointing up.
So why didn't I see that the indicators were not with my trade? God only knows! But this is exactly the sort of thing I have to focus on better if I'm to consistently profit from my trading.
Also, the previous day's bar was a green up bar but it did not show a decisive rejection of the 50MA and was rather high test-ish (a long stalk at the top) which is a bearish indicator. This should have been enough to make me decide not to take the trade.
I was clearly too keen to get into the trade and paid the price. The important thing is that rather than seeing this as a failure I use it as an opportunity to understand my weaknesses better and find ways to overcome them.
My action point from this lesson has been to assign each of my rules with a personality which comes from someone I know. For example, one rule is that there has to be a trend of some sort. I've emotionally charged that rule by making my husband the trend. If there's no trend then in my head he is telling me not to trade.
Another rule is that there has to be strong support or resistance against which the trend reacts. I've assigned myself to that rule as it makes sense to me that my husband might react to me being supportive or resistant! So if I can't find that strong support or resistance then in my head I'm not present so there is no trade to take.
Another rule is that I have to find a safe place to put my stop loss. I've emotionally charged my stop loss by making it my youngest daughter - the person of whom I am most protective. If I am to take a trade I have to find a very safe place to protect my baby (ok, she's 16...).
And so it goes on. I hope that by giving more emotional meaning to my rules I will be less inclined to ignore, overlook or actively discount them. Let's see how it goes.
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