29th March 2013 - win on silver, update on trading journal

Silver

A ripe pinbar presented itself at a resistance level yesterday. Just now, I closed for profit after trying to actively manage this trade.

In the last few hours, bearish momentum became very strong. As price moved within a few pips of my original take-profit target, I decided to move my TP further and place my stop-loss about 20 pips behind the price. This cemented around 70% of profits gained already. In exchange for risking the remaining 30%, I hoped price would move beyond my original TP and break support, potentially doubling my reward.

Alas, price retraced and took out my stop-loss.

As I actively managed this order, I could feel my emotions (mainly excitement) rising to the surface. Emotion is the bane of all traders.

This trade yielded a return of 66%. I need to increase my average return to 100% (1:1 R:R). Although all my trades are high probability, the general guideline is a minimum R:R of 1:1.

Trading Journal

I've also updated my trading journal. It now documents every order I execute, rather than every "trade". The term "trade" can be confusing. Suppose I enter two orders shorting the USDCAD simultaneously, with one order having a 1:1 R:R and the other 1:2 R:R. Should both orders be considered a single trade since I'm basing both orders on the same market setup? Or should both orders be considered separate trades?

Instead of focusing on each "trade" and confusing myself and other readers, my trading journal now catalogues every order executed. That way there is no more confusion.

The Zurich Axioms by Max Gunther

I recently finished reading the Zurich Axioms by Max Gunther. Ever wondered how a landlocked, resource-poor country like Switzerland became wealthy? Max Gunther explores Swiss investment philosophy to determine how the Swiss succeed. The book is excellent brain-food, although there are a few parts that I don't agree with. I've summarised the axioms below. The mentality between the rich and the poor is very large.

ZURICH AXIOMS by Max Gunther

ON RISK

• Worry is not a sickness of but a sign of health. If you are not worried, you are not risking enough.
• Always play for meaningful stakes.
• Resist the allure of diversification.

ON GREED

• Always take your profit too soon.
• Decide in advance what gain you want from a venture, and when you get it, get out.

ON HOPE

• When the ship starts to sink, don't pray. Jump.
• Accept small losses cheerfully as a fact of life. Expect to experience several while awaiting a large gain.

ON FORECAST

• Human behaviour cannot be predicted. Distrust anyone who claims to know the future, however dimly. (take predictions with a grain of salt)

ON PATTERNS

• Chaos is not dangerous until it begins to look orderly. (avoid illusions of order)
• Beware the Historian's Trap (avoid believing that history repeats itself)
• Beware the Chartist's Illusion (accept that trends can break)
• Beware the Correlation and Causality Delusions
• Beware the Gambler's Fallacy (no such thing as a “lucky day”)

ON MOBILITY

• Avoid putting down roots. They impede motion.
• Do not become trapped in a souring venture because of sentiments like loyalty and nostalgia.
• Never hesitate to abandon a venture if something more attractive comes into view.

ON INTUTION

• A hunch can be trusted if it can be explained.
• Never confuse a hunch with a hope.

ON RELIGION AND THE OCCULT

• It is unlikely that God's plan for the universe includes making you rich.
• If astrology worked, all astrologers would be rich.
• A superstition need not be exorcised. It can be enjoyed, provided it is kept in its place.

ON OPTIMISM AND PESSIMISM

• Optimism means expecting the best, but confidence means knowing how to handle the worst. Never make a move if you are merely optimistic.

ON CONSENSUS

• Disregard the majority opinion as it is probably wrong. (think for yourself)
• Never follow speculative fads. Often, the best time to buy something is when nobody else wants it.

ON STUBBORNNESS

• If it doesn't pay off the first time, forget it. (never chase)
• Never try to save a bad investment by “averaging down”

ON PLANNING

• Long-range plans engender the dangerous belief that the future is under control. It is important never to take your own or other people's long-range plans seriously.
• Shun long-term investments.

28th March 2012 - closed second order on USDCAD for minor win

Price on the USDCAD continued to retrace up past support level #1. When price moved to within 10 pips of my stop loss, I decided to close the order and salvage a minor win. The return from my second order is 13%.

Possible lesson: take-profit at the first support/resistance.

27 March 2012 - closed GBPNZD in profit

GBPNZD

I decided to close my trade on the GBPNZD after I identified a potential support zone that I had missed earlier. A doji formed around here so I decided to close the trade. My return was 29%. I need to pay more attention to possible support and resistance zones. As you can see in the chart below, my original TP would have provided an excellent risk-reward ratio.

USDCAD

As mentioned in the previous entry, I decided to short the USDCAD and split my trade into two orders, with the first TP at support level #1 and second TP at support level #2. My first TP was hit and I've moved my stop loss for the second order to slightly above breakeven, so whatever happens, this trade is now a win.

At the moment, price has slightly retraced, but price has already broken through support level #1 so this level should now act as resistance.

26th March 2012 - win on USDCAD, GBPNZD still in play

I'm not going to post my setups in this blog entry as I don't have much time. I'm currently live in two trades - the USDCAD and GBPNZD. I've taken profit on half of my order on the USDCAD and moved the rest to breakeven, so this is a win.

GBPNZD is in profit but hasn't moved much in either direction today. There's alot of scope for profit, so this trade may take awhile to conclude.

23 March 2012 - minor win on silver

Silver

This was quite a frustrating trade. An inside bar formed in what I'd call the "golden zone", an area just beyond support/resistance. It's my thinking that inside bars are best traded here as continuation signals.

Price moved to within a few pips of my TP target before reversing. Once price reversed 60%, I decided to close the trade and walk away with a minor win. I wasn't psychologically prepared to watch a winning trade turn into a potential loser. All up, made a 37% return on my trade.

I know this is a violation of my "staying faithful" policy, but now I feel like ditching it. If the market is telling you something, you need to listen. A few pinbars formed on other currency pairs suggested a high likelihood of a reversal, which compelled me to close my trade.

One thing to note is a possible improvement in placing my TP. I had set a hard TP target of 31.000. Price moved to 31.02 before reversing. 31.000 is a significant psychological benchmark and I should have moved my TP some distance before this, perhaps 31.05 or 31.07. When placing TP and SL, pay closer attention to whole numbers.

22nd March 2012 - premature close on EURUSD?

An inside bar formed on the EURUSD a few days ago. Rather than enter on the break of the IB's high, I set my entry on the high of the previous bar. My pending long was triggered before price retreated. However, the retreat halted short of my stop loss.

This morning I saw a bearish signal in silver. Shorting silver and going long on the EURUSD would've created a hedge, so I decided to close my EURUSD position. At the time of the close, price was about 65% towards my stop-loss.

Since then, the EURUSD has moved up a bit. Closing a trade before it hits its stop-loss might've been premature as the trade would still be alive if I had left alone. Meanwhile, my short on silver is still waiting to trigger.

The key question is:

If the market provides a new signal, do you close your current trade?

Suppose you see a continuation signal and enter a trade. The next day, the market then signals a reversal. Do you remain faithful to your trade and keep it open? Or do you close to accomodate the latest market conditions, and perhaps even trade it?

A tricky question.

Staying faithful vs respecting present market conditions

Staying faithful	Adjusting to the market
+ Market conditions always fluctuate, so no need to panic. + Stop-loss has already been defined and turning point against your trade identified. + Eliminates propensity to whimfully and emotionally modify orders. This improves discipline. + Less baby-sitting required. + Eliminates susceptibility to fake-outs.	+ Vis-a-vis, today's information is more relevant than yesterday's. + Can allow for further optimisation of profit-taking and reduction of losses. + Allows exploitation of new opportunities.

After some consideration, I believe I should remain faithful to my original orders. Modifying or closing live orders too often can harm discipline, especially if you're still a newbie like I am.

18th March 2012 - weekend setups

Two possible setups have presented themselves over the weekend.

Silver

I think this is a good quality setup. An inside bar formed on Friday's close. This looks like a good opportunity to short silver.

In favour:

+ around resistance
+ suitable R:R to next support level
+ with the trend (bearish)
+ similar signal in gold
+ break of inside bar's bottom clears resistance/support

Against:

- inside bar is not at an extreme end of the previous bar

GBPAUD

This setup is quite messy. An inside bar has similarly formed on Friday's close.

The current resistance level isn't well defined, so I've decided to use a zone instead. Going long here looks a little problematic as breaking the top of the inside bar will not put price beyond the resistance zone, increasing the likelihood of a fake-out.

In favour of a long:

+ with the trend
+ suitable R:R to next resistance level

Against a long:

- not an extreme end of previous bar
- break of inside bar's top will not clear resistance zone
- will be trading into 1.5000 (psychological benchmark)

In favour of a short:

+ suitable R:R to next support level
+ break of inside's bar bottom clears current resistance/support
+ trading away from 1.5000

Against a short:

- moving into "de-virginised" space on chart
- against the trend

This isn't a clean setup. Direction can move either way so I'll skip this one on Monday morning.

17th March 2012 - win on USDCHF

Chalked up a win on the USDCHF.

USDCHF

I traded my first two-bar reversal pattern yesterday morning on the USDCHF. At the moment it seems to be in the middle of a bear run, but the market close for the weekend is only an hour away so I've decided to close the trade.

I'm not 100% happy about closing here. Bearish momentum is very strong and price is hovering around the daily low as I type.

However, keeping the trade open over the weekend would've offered me a reward-to-risk of around 0.33 to 1. That's very unattractive, especially considering the extra risk of holding a trade over the weekend. Anything can happen over the next 48 hours. A candle on Friday is not so applicable on Monday. If this were any other day, I would keep the trade open.

One thing I noticed is the massive spread towards market close. The USDCHF usually has a spread between bid and ask of around 3 pips. As I closed my traded, this had widened to 9 pips. The professionals don't seem to like holding trades over the weekend.

All up, this trade netted 40 pips.

15th March 2012 - quiet week

It's been a quiet week so far. Staying out of the market when it presents few opportunities is challenging. I saw two setups that failed to trigger, which I will elaborate below.

USDJPY

Early this week, an inside bar formed at a perfect position on the USDJPY - at the extreme end of the previous bar, and around a resistance level. The break of the inside bar's high would've signalled a continuation of a bull run. As you can look at the graph, this is precisely what happened.

I attempted to trade this with a pending long on the break of the IB's high, but if you look at the chart, you can see that price fell and broke the IB's low first. This is what actually occured, and once the low was broken, I cancelled my pending long and missed out on the bull run.

A good question would be, why didn't I also enter a pending short as well? After all, an inside bar can go either way as it represents indecision? My feeling is that an inside bar should be traded with regard to its relative position to resistance/support. If most of an inside bar is beyond resistance, then I would regard as a bullish signal. If most of it is below resistance, then it would be better traded as a bearish signal. If it's split 50/50, trade it either way. As you can see on the chart, the inside bar is mostly beyond resistance, hence my inclination to only trade it with a long. It's about stacking probability in your favour.

AUDJPY

I may've made a mistake in trying to trade this pinbar this morning. The other Yen pairs looked bullish so trying to short the AUDJPY may've been a bad idea. Regardless, the high of the pinbar broke mid-afternoon and I cancelled my pending short.

There's another potential pinbar that is forming. I'll keep an eye out tomorrow morning.

Trading plan

TRADING PLAN

Last updated

15th May 2012

Source of my edge

I look for price action signals during the retracement of a strong trend to a previous support/resistancel level. These price signals increase the predictability of future price movement, providing me with an edge.

Price signals I trade

1. Inside bars
2. Pin bars
3. Engulfing bars
4. Two-bar reversals

Timeframes I trade

- Daily TF only

Indicators I use

- 21 SMA to measure the trend.

Entry

- 21 SMA must be strongly trending. 
- Enter at the break of the price action signal only.

Trade Management

- Enter pending orders with an expiry of 24 hours at the start of the market day.
- Do not interfere with stops once the trade is triggered. Exception: release of big news.
- Take profit some distance before the first and second levels of support or resistance.
- Split the trade into two equal-sized orders: 50% will take profit at the first level of support or resistance, 50% will take profit at the second level of support or resistance. 

Stops

- Place a take profit stop some distance before the first level of support or resistance.
- Place a take profit stop some distance before the second level of support or resistance.
Risk per trade

- Risk maximum 3% of account balance per trade.
- Using Kelly formula, a 1:1 R:R with 60% win rate would require an optimal risk of 20%.

9th March 2012 - EURAUD stopped out

My trade on the EURAUD failed overnight on the back of speculation from the ECB. The pinbar formed at resistance and around a significant psychological level (1.25000). I'd set a reward of around 1.5 x risk. Some time after entry, a news release from the ECB seemed to trigger bullish speculation and knocked out my stop loss.

I saw no viable setups this morning. TGIF.

Engulfing bars - an introduction

I deleted the pending order on the GBPAUD last night as the nose of the pinbar was breached, so the pinbar is no longer valid. I'm currently in a live trade on the EURAUD and will post an after-action report once my TP or SL hits.

Engulfing bars

So far I've only been trading inside bars and pin bars around levels of support and resistance. Another good price action signal is the engulfing bar. An engulfing bar is precisely that - it literally engulfs the preceeding bar or candle.

Engulfing bars should only be traded as reversal signals around support and resistance. A standard entry would be the break of the engulfing bar against the trend, and a stop loss on the opposite end of the engulfing bar.

My main reservation about the engulfing bar are potentially huge stop losses. Because engulfing bars must envelope the preceeding bar, they MUST be large. However, in exchange for a large stop loss, your trade will be backed by more momentum. In other words, you'll be lowering your R:R in exchange for a higher win%.

In the coming weeks I'll start trading engulfing bars. I'm very hopeful as a quick glance on my charts show that this price signal is pretty reliable in heralding reversals.

7th March 2012 - pinbar on GBPAUD

An auspicious pinbar formed overnight on the GBPAUD off resistance. GBPAUD has been ranging for the last few months and this seems like a good probability trade.

Rather than use a trailing stop loss, I've decided to split my order into two, with a TP at support level #1 and a second TP at support level #2.

Trading journal and income & savings projection

I spent tonight creating a trading journal for the last few months. My average return per trade is 48% so far. The sample size is very small, only 13 trades. Link is on the right.

I've also created a basic income and savings projection. I expect to retire by the age of 40 on an annual income of $75k, adjusted for inflation.

6 March 2012 - AUDJPY, GBPUSD, silver finish in the black

I opened three trades last Friday and Monday and all closed in profit. However, all three were closed when my trailing SL was hit.

AUDJPY

Profit = 38 pips.

A textbook pinbar formed around resistance on Friday's close. I decided to put a pending short on the break of the pinbar, which was triggered on Monday. My TP was the next level of support below it.

For this trade, I decided to use a trailing SL equal to 50% of TP. Essentially, once my trade is halfway towards my target, my SL would move to breakeven, making the trade riskless. Any further movement in my favour would pocket some pips.

However, there is always the chance of a retracement taking out my trailing SL before price reaches TP. This is precisely what happened, if you look at action over the 4HR time chart. My SL was hit, and then downward movement continued.

Daily Chart:

4HR Chart:

GBPUSD

Profit = 49 pips.

It's a similar story with the GBPUSD. My trailing SL was hit, but retracement has been much more significant. Price fell short of my TP by about 7 pips before reversing and hitting my trailing SL.

Silver

Profit = 20 pips.

Price moved a little over halfway towards support before retracing and knocking out my trailing SL. My profit was about 20 pips. Since then, price has begun moving downward again. My belief is that it will continue to trend downwards but anything can happen.

Thoughts

Trailing stop losses do increase your vulnerability to retracements, but it also minimises your losses if price truly turns against you and converts a losing trade into a (slightly) profitable one. A trailing stop loss also helps to maintain a reasonable R:R ratio as price moves towards your take-profit target.

Suppose we look at the following USDCHF chart and decide to trade the pin bar formation. If we use a static stop loss and price moves towards our take-profit, you'll see that our risk expands while our reward shrinks. A trailing SL will move our SL as price moves in our favour, helping to keep our R:R in check.

Itchy fingers and overtrading

Overtrading is the bane of many traders. It's the temptation of placing trades just for the sake of trading, and can hurt your bottomline when you're compelled to trade poor setups. This is something I grappled with late last year. Here are some techniques and principles that I've discovered over time to help control my "itchy fingers".

Trade daily timeframes

Trading the daily TF constrains your window of opportunity to the start of the new market day only. Depending on your level of analysis and how many pairs you're willing to trade, this "window of opportunity" to enter pending trades may only last an hour or so. Once that window is closed, your trading is done for the day.

Use pending orders

Try to avoid trading "live" as these decisions tend to be impulsive and emotional. Instead, identify key points on your chart where you think a high-probability trade should occur, and use a pending order that will trigger once that point is reached. Wait for the market to come to you.

Close your trading terminal once orders are complete

Don't stare at charts all day. Every moment spent staring at a chart increases the temptation to trade. It's easy to get suckered by an unexpected rally or crash out of fear of "missing the ride". Once your pending orders are complete, switch off and do something else. Leave the market to sort itself out - if you did your homework properly, you can't do anything more for your pending orders, so leave them to their fate.

Use other traders' trading histroy as a guideline

The mentors I study typically trade 5-10 times per month. If I find myself significantly over this figure, there's a good chance that I'm overtrading. Try to find fellow traders or mentors who trade with a similar strategy and philosophy, and use their history as a guideline for your own trading.

Control your emotions

Emotional control is fundamental for any successful trader. Trading should be BORING. If you find yourself getting emotional, cease trading and take a break. The market will always be there tomorrow.

Avoid babysitting

Don't babysit your orders, especially once they are triggered. If you've properly managed your risk (entering stop loss and take profit targets), there's no reason for you to "supervise" your order. The temptation to cheer or cry over price movement increases greatly once you're in an order, which in turn may encourage you to modify your TP and SL. Once you do this, risk management is compromised and you may as well trade without any stops.

Diversify trade-related activities

If you are a serious trader, you'll spend most of your free time pursuing trade-related activities. Instead of staring at charts all day, diversify your activities. Research, backtesting and self-analysis help you improve as a trader, and you don't need to be staring at a live chart to perform them.

1st March 2012 - USDCHF hits SL, pinbar on GBPUSD

USDCHF

I was feeling a little uneasy when price continued to meander around support. The support level held and the bulls eventually won, hitting my SL.

The trade was offering a good reward-risk ratio so I can't complain. One likely mistake that hindered probability was the fact that I was trading the break of the inside bar INTO a support level, rather than PAST it. A better entry may've been the break of the first bearish candle that had hit support (24th Feb). An inside bar that falls short of support or resistance is a sign of market hesitation / consolidation. Either the market doesn't know what to do or the big buys are accumulating positions for a reversal. Thus an inside bar that falls SHORT of a support or resistance level may be traded as a reverse signal, rather than a continuation. If the break of an inside bar occurs BEYOND a support or resistance level, then it should be traded as a continuation signal. My lesson for the day.

GBPUSD

A textbook pin bar formed overnight on the GBPUSD. The pin bar's sticking out like a sore thumb as both a rejection from resistance AND a significant numerical benchmark (1.6000). I've decided to split my order into two, with my first take-profit at support level #1 and my second take-profit at support level #2. I'll be using a trailing stop-loss so both orders will move to breakeven once they are halfway to their target. My initial stop loss is set at the 61.8% retracement level of the pin bar.