Tuesday, January 13, 2015

13 Jan 2014: Daytrade #1 & #2

Trade #1

I decided to trade this with a trend-following method, using a trend line to mark the trend, and trailed a stop loss just behind the trend line. I used fractals to mark the major swing highs and lows, and connected them with a trend line. 

This was on the NZDUSD. The H1 trend was down, but momentum was turning neutral. The D1 chart was neutral. This wasn't the best setup to go long, but price was breaking the first H4 high (marked pink) and it looked like price was preparing to break upwards (price was respecting the 21 EMA).

Ended up making 7.2 pips.

(click to enlarge)

Trade #2

I lost 4.5 pips in this trade. The trend line I identified was too steep, and I got stopped out shortly after my entry. It's better to draw trend lines along major swing points (i.e. fractals). But because I trailed my stop loss, I only lost about 67% of my initial risk.

(click to enlarge)

Some thoughts on trend following

With a trailed stop loss, getting stopped out at 1R (or 100% risk) should be uncommon. Plus you can catch the high probability 'meat' that exists in the middle of a move. I think the real edge from a trend following system is in catching the occasional "fear / greed" phase of the market, where rationality flies out the window. In these scenarios, humans become emotional and are happy to pay a very high premium to enter or exit their positions.

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