Week in Review: 22nd July to 28th July 2013

Discretionary daytrading with confluence

I spent most of July trying to daytrade with technical confluence. My overall result was mixed. As time passed, I also tried to include fundamental analysis by looking at the news and economic figures. But how do you make sense out of it all? This isn't something that you can backtest. Anyway, once I encountered the inevitable losing streak, I didn't have anything "solid" like backtest results to restore my confidence, so I bowed out. I also found that daytrading isn't a healthy lifestyle. If you're trading the 1H chart, you set your life by the hour, with your alarm going off every 60 minutes while you're awake. Long-term, that is not feasible.

 

Trades

 

On to last week's trades. I opened two trades using my Hermes and Daikoku systems.

 

GPBUSD - 1D - Hermes Low Volatility System

 

This trade was triggered on the 24th July and closed in profit. I used a 0.5:1 reward:risk ratio. Anything larger than 1:1 and I would've been stopped out. Trust your backtest.

EURUSD - 1W - Daikoku Low Volatility System

This was a trade on the weekly chart using my Daikoku system. Spotted a low volatility candle and traded the break of its high with a 0.25:1 reward:risk ratio.

System Development - weekly dojis

I spent the last week backtesting dojis on the weekly chart. A pic of a doji is below. It's basically a candle with a very tiny body in the middle. It suggests neutrality or indecision.

 

I haven't had any success testing dojis on the daily charts or below, but dojis are surprisingly profitable on the weekly chart, so far. I've tested the GBPUSD, NZDUSD, AUDUSD, USDJPY, USDCHF and USDCAD and so far the results are very promising. I hope to finish the EURUSD tonight, then move on to gold and silver.

Very much alive...

I know it's been more than a few weeks since my last entry. I intend to post something tomorrow once I have more time, including a summary of last week's trades.

Failed trade - Gold 1HR

Gold -1HR

I opened a short last night during the NY session. I thought this was a good setup. I went short after the bearish pinbar marked below. I saw some good confluence here, confirmed by a decent-sized pinbar, but the bulls took me out quite quickly.

I entered short at the 50% level of the pinbar, but price never really went down after my entry. A time stop would've been useful here?

"This is known as the agony" - GBPUSD

I missed out on a 1:5 risk:reward trade on the GBPUSD just now because of an aggressively tight, trailing stop loss.

 

This was the setup I saw last night on the GBPUSD 1H chart. A prominent pinbar formed off a good confluence of technical factors that consisted of:

 

- contact and reaction off the 200 SMA (dark blue solid line)

- a major trend line

- 38.2% - 61.8% Fib retracement level off a major swing high

- prominent pinbar price action signal

 

I used a short limit order at the 50% level of the pinbar, with my profit target just above support at 1.51300. This provided a 1:5 risk:reward ratio. The graphic below shows my setup (you may need to click on it to zoom in, apologies for the tiny detail).

 

As you can see, price slowly meandered down, until it suddenly crashed as a result of the Bank of England's latest monetary policy decision.

 

I don't like trading news, so just before this moment, I moved my stop loss to breakeven, just in case the news went against me.

 

The news was in my favour (BOE elected to retain loose monetary stance), but the spread just went wild, perhaps over 30 pips, as liquidity evaporated. Most of my trading experience has been on the daily timeframe so far, so I don't see live market reactions to news that often.

 

But that spread was insane, and was enough to hit my stop loss, even though I picked price movement correctly.

 

This bruised my ego since this trade had been working perfectly and I really liked the technical confluence.

 

Lesson: anticipate wide spreads during major news release, and move your stop loss accordingly.

How to triple your upside by halving your risk

Reducing your risk can provide a disproportional benefit to your return through some mathematical wizardry.

 

Suppose, for example, you see the setup below, and you wish to trade the pinbar that has formed at the swing low. The pinbar is about 10 pips in length. Many traders would trade this setup by entering on the break of the pinbar, with a stop loss at the end of the long wick. For this example, suppose we trade this conservatively and aim for a 1:1 reward:risk ratio, so our profit target is 10 pips (the same size as our stop loss).

Suppose we trade this more aggressively, and decide to enter at the 50% level of the pinbar, while keeping our stop loss and profit target at the same locations. The size of our stop loss is now 5 pips, half of the original setup. Our profit target is now 15 pips, instead of 10. Our new reward:risk is now 3:1. Even though we've halved our stop loss, we've tripled the size of our reward.

With a bit of aggression, we've tripled our reward from the same setup.

 

Of course, this doesn't always work. Sometimes price may not retrace 50% at all, and we miss out on a profitable trade. Or price will simply smash its way through our entry and hit our stop loss. However, this shows the benefit of tight stop losses and the disproportionate benefit it provides to R:R ratios. Remember, it's not about how many pips we win or lose, but how big our reward is relative to our losses.