My first ‘proper’ trade!

This post should show how the comments from David Jones and the examples he gave fed into a very successful trade. Extremely useful for me and what I’d describe as my first ‘proper’ trade…

Why proper? Well, firstly I managed to control a bunch of negative psychology and acknowledge that I was taking a risk which actually had a high probability of going in my favour then placed the trade. Important step that! Also I was just keeping it simple with trend lines, support, resistance and watching the price action. A veritable ‘light-bulb’ moment. Then I managed to not quit out of the trade as initially it went against me. Keeping faith with the trend! So let’s break it down…

EUR/USD had been on a really solid up trend since mid/end Jan 2011 so we’re searching for an opportunity to go LONG. What’s a good opportunity to go long? Buy on weakness! In other words when the price falls it should at some point go back up!

So the black triangle section has a support/resistance line at 14,250 off a trend that began back in Jan from 12,850 above a previous s/r line at 12,610 ish. It’s a daily chart so as far as intra-day price movement it’s got more ‘weight’ than a 4 hour chart or any shorter time period.

This is a very important point. We’re interested in making money, not being right so lets loose the ego and look at this properly!! The trend is up on the daily price so look for long opportunities!! Duh!!

Anyway, let’s continue. There’s also a significantly key level coming up at 14250 (ish) so it’ll be very interesting to see what happens to EUR/USD when it gets near to this level… PLUS I can also see that in the current trend when the price gets back down to the trend line every time in the last month it bounces right back up. Maybe not a lot but enough to indicate a high probability of it being a successful long trade.

So I’m sitting looking for retracements back to the trend line on a 15 minute chart at work.

Why fifteen minutes? Well I’ll be honest about the reasons. I’ve been attempting to trade on 1-5 minutes because: –

  1. I thought that’s what ‘proper traders’ did – that’s how it looks in the movies 😉
  2. I really hate(d) having a trade out in the market that didn’t immediately go my way. The underlying reason for this (I now realise) was totally around fear of loss. I was afraid of losing money and the pressure of making a bad mistake meant I was trying to scalp a few points instead of analysing what was going on and reacting accordingly. Fear was essentially screwing up all my trades.
  3. I’d completely failed to take into account market noise in the fluctuations of price across really short timescales. I wasn’t giving the market room to sort itself out and confirm what was going on. Like the ‘small stop’ strategy (read my earlier blog comments ref: David Jones) not waiting and using a longer timescale just means you’re giving no margin of error to your trade.
  4. Looking at 15 minute timescales means I absolutely have to sit on my hands and be patient
  5. Signals, like the size of candles relative to each other, have significance when they do actually arrive. You have time to play out different scenarios. You have time to analyse
So it’s only taken me 6 months to figure this out 😉

Right. So I’m looking at EUR/USD on a 15 minute chart before the Friday NFP (Non-Farm Payroll) results and although I know the results are better with less people in the US unemployed I’ve gotno idea what will actually happen to the pricing. The price falls off a cliff and I do something daft, like I have so many times before. I go short at £1 per pip and lose money for two reasons.

  1. I’ve not really thought about the context of what I’m doing. The price holds then fluctuates up where I’m down a few quid and like all my previous excursions I’m thinking about what I’m going to lose.
  2. I remember I’m betting against the trend for the last 3 months in shorting the market and I close the trade.

However, I don’t want to quit, logout and leave it. Then the ‘light-bulb’… I reduce my bet size to ‘just’ 50p per point and go long because as the euro falls people will then perceive it to be cheaper and buy back into the trend. I’m now long with the overall sentiment of the market. I’m with the crowd and the tide rather than trying to fight against it! Huzzah!

Here’s my position about 20-25 minutes(?) after opening the trade. And hopefully you can see two things. After I opened my long bet the trade continued significantly south… and I was deep in the hole but I had remembered the second key FX point from David Jones’s talk and put my stop way out under 14,040 below previous areas of support.

In the snapshot I’ve just moved my stop up to 14,056 but it was under this to begin with.

If I’d have placed my stop at 14,080 out of fear of loss or out of some sense of impatience I’d have been stopped out as the price continued to completely obliterate the trend line
  • Previous support/resistance levels are more powerful than the trend
  • Longer time-frames have more ‘authority’ than shorter ones

My stop was 60+ points away from my entry. Well under previous support/resistance and the trend line too. I’m giving the market loads of space to re-establish the trend but much more importantly I’m not trying to fight the whole market placing a short bet in a long market and I’m giving the whole thing time to breathe.

As you can imagine I was extremely pleased at this point but I was also sitting behind my desk at work so that’s not a helpful environment for calm decision making. Euphoria as all these pieces of thinking came together may have also contributed as I closed the trade 30 points up. I could have waited an hour or more and closed the trade 100 points up instead – LOL.

There is no point beating myself up though as this was an awesome learning experience. It’s also clear that my trading account size is way too small – especially for FX where there can be wild fluctuations. I think this really brings home the message  that if you’re too emotionally attached to your potential losses (or gains) then it’s extremely difficult to make good decisions. This is additional psychological pressure that encourages the ‘fight or flight’ response and increases stress. Making good decisions under stress is very hard. Also from a money management perspective you’ll kill your account in no time at all.

So I take this as a significant personal milestone, general wake up call and win as the decision making (the second correct time around) was based on trend analysis, support/resistance levels and managing my own psychology. No EMA’s, no formulas, no indicators apart from looking at the RSI which I’m quite liking.

Now all I need to do is work on an exit strategy. Sitting on my hands may be the first one 🙂


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