28 Jan 2015 Daytrades

CADJPY - Trade #1

Went short on the break of the first H4 low. Got stopped out in the next candle.

Pips lost = -33.8

CADJPY - Trade #2

After I got stopped out, I saw that resistance along yesterday's high was holding. I reloaded and went short again on the break of the last major swing low.

Pips won = 41.3

Battle plan for AUDUSD 26 Jan 2015 daytrades

I spent the last few hours coming up with a battle plan for the AUDUSD on Monday.

Some notes about Monday:
- No major AUDUSD news
- AUD public holiday
- Daily ATR(14) is 103 pips, but the combination of Monday + public holiday + no major news should see volatility significantly below this. I'm predicting a quiet day of between 50-75 pips.

How price will behave will depend on where it opens relative to 0.79000. 0.79000 has good potential to be a strong S/R level, due to it clustering with Friday's low and close.

Scenario #1
If it opens above 0.79000, I expect 0.79000 to hold as support, and price to range 50-75 pips above it, with some potential to break down below 0.79000. If it rises all the way to 0.80000, I expect 0.80000 to hold as resistance. This would be a great place to go short. If it doesn't rise to 0.80000, I'd like to see how the range forms before buying or selling.

Scenario #2
If it gaps below 0.79000 on Monday's open, I expect price to fill the gap before hitting 0.79000, which will behave as resistance. Price should range 50-75 pips, with good potential to break down. I would short at 0.79000.

(click below to enlarge)

Snapshot of my tradestation

A snapshot of my current tradestation. I use MT4 for my trading, and keep two Chrome tabs open. 

The top RHS tab is the forexstreet.net chatroom. It's usefulness is debatable, but it's fun to chat with other traders sometimes (just be warned that these are RETAIL traders, so take their insight with a grain of salt).

The bottom RHS tab is from fxstreet.com, and lists the latest news in Twitter-like form. There's usually a news item pinging in every few minutes, and you can filter it by currency pair, news topic (technical, central bank, macro etc). The news tab literally pings with a bell every time some news comes in, which I think is neat. I guess it's good enough for us poor retail traders who can't afford a premium squawk box. 

I have a second monitor to browse the net or do any miscellaneous work. 

Latest day-trading stats

I spent the last few days going back to day-trading again. I'm pleasantly surprised to be making money.

Here are the stats (note that I'm trading micro-lots in my day trades).

Trades opened since 1 Jan 2015: 33
Win rate(%): 42.4%

Size of average winner (excluding commission): $1.09
Size of average loser (excluding commission): $-0.59
Profit factor: 1.86

Gross profit: $4.13
Commission paid: $-1.82
Net profit: $2.31
% Profit lost to commission: 44%

That last figure is quite discouraging. I'm wondering how this number compares to longer-term traders.

Still alive...

No, I didn't blow up last week during the big CHF move. Incidentally, I had a live CHF position, and was short the CHFSGD. It was a swing trade, and I had risked 1% equity with a 300 pip stop loss. I ended up losing 650 pips if I recall correctly (350 pip slippage), and ended up losing 2%. No big deal. But I know there were some traders who leveraged themselves to the hilt and went long on the EURCHF, and blew themselves up. Some went into negative equity to the tune of hundreds of thousands of dollars. 

I opened a thread at Babypips - What lessons can we learn from this? - listing some ideas on how to avoid or reduce the probability of a catastrophic loss in the future. 

I think the biggest lesson we can learn was posted by Master Tang - "Never believe a central banker". The SNB's sneaky decision to unpeg the CHF from the EUR has set a new precedent regarding the reliability of central banks. They can't be trusted anymore. The tactic of 'jawboning' by central banks will be less effective now. Words are cheap. 

Update on day-trading

I don't think I can do it. It's halfway through Jan and I've been trading mini and micro-lots.

The good news (again) is that I've made money and it looks like I'm picking good trades.

The bad news is that transaction costs ate up all of my profit, and a bit more. 

When you add in 4+ hours of screen time each day, it's kinda pointless.

I don't think there's any way around transaction costs when day-trading. It's just too much of a hurdle to overcome. 

What I can take away from my experience in the last few months is that discretionary trading can work. I am making money. If I can reduce or even eliminate my transaction costs (e.g. trade longer-term with positions that pay positive overnight rollover rates), I think I can do well. So I guess that's the next phase of this project. 

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.

My daytrading methodology

I'll be practising this method for January. This is based on my research that the day's high or low will tend to be established during the first 4 hours of each day (only applies to Asian pairs like USDJPY, AUDUSD, EURJPY etc). If you can identify significant S/R zones that held during this 4H period, there's a good chance you've identified the day's high or low. Trading a rejection off this S/R zone should put you in a good position to exploit the entire day's move. 

Timeframe

5M for entry and exit. 1D and 1H to identify the trend.

Pairs

USDJPY, AUDUSD, EURJPY, NZDUSD, AUDJPY, GBPJPY, EURAUD, AUDNZD

Method

1. Check the 1D and 1H timeframes to see if both are trending in the same direction. If so, proceed to step 2.

2. Identify the highest and lowest S/R zones that held during the first 4 hours of each day. Trade the rejection off the S/R zone that is in line with the 1D and 1H trend e.g. if the 1D and 1H trend is down, trade the rejection off resistance and go short.

3. Entry = Break of rejection's high/low 

4. Stop loss = 3-5 pips, although it can be adjusted for volatility. I use a tight stop loss as I anticipate that the break of the rejection's high/low should trigger stops, leading to rapid price movement in my favour. If this doesn't occur, then there is still some strength in the market against me, and I want to be out. 

5. Profit target = 15+ pips, ideally before the next S/R zone. If the next S/R zone is too close to achieve 15 pips, then I'll anticipate that the S/R zone will break and place my profit target beyond that. Max profit will be 50% of the daily ATR(14).


Alternative Method

If price does not return to the S/R zone that you've identified as the potential daily high/low, then enter on the break of the opposite S/R zone.

e.g. The 1D and 1H trend is down. You've identified the 4H resistance zone that is a good candidate for the day's high, but price does not return here, so you're unable to trade a rejection. Instead, enter on the break of the first 4H support zone. If the resistance zone is going to be the day's high, then logic would dictate that the support zone will likely break.

Similar stop loss and profit target parameters will apply. Since I am trading a breakout, I anticipate that stops will be triggered, moving price in my favour rapidly. A tight stop loss will quickly get me out if there's a sign of opposing strength. 

7 Jan 2015: Daytrade #2

I lost this trade on the AUDUSD. Price returned back to resistance, and I saw what looked like a strong rejection. I went short on the break of the rejection's low with a tight stop loss (3 pips), hoping stops would trigger below here. I got stopped out myself shortly after entry. 

The trade never really went my way, so the tight stop loss got me out quickly. 

Did my two trades, so I'm out for the day.

(click to enlarge)

7 Jan 2015: Daytrade #1

I got out at breakeven with this trade on the AUDUSD. 

Price bounced off the first 4H resistance zone, and I went short on the break of the bounce's low. 1D and 1H trends were down, so longer-term momentum was with me. My stop loss was tight (3 pips). 

Price did breakdown, but then stalled halfway towards my profit target before returning upwards again. At this point, I moved my stop loss to breakeven. Shortly after, I got stopped out.

That's the good thing about tight stop losses. You don't need to move them much to put your trade at breakeven. 

(click to enlarge)

6 Jan 2015: Daytrade #1

I only took one trade today so far, in keeping with my "2 trades per day" rule. I may open another trade during the Euro / US overlap later on. 

This EURJPY trade didn't quite work out. 1D and 1H trends were down, so I was bearish. I saw price bounce off resistance during the critical first 4H period of the day, and set a short entry on the break of the bounce's low. My stop loss was 5 pips.  

I was aiming for 18 pips (almost 4R), but price reversed before it hit my profit target. I had moved my stop loss to breakeven, but when I saw how strong price was flying upwards, I closed the trade at 0.5R profit, or a few pips. 

(click to enlarge)

5 Jan 2015: Daytrade #2

This was a tight trade. Looking back, I probably shouldn't have taken this as this trade took place during the European session. According to my research, price usually doesn't go anywhere.

But I took this trade because it looked like a fakeout that had just breached resistance (the salmon pink zone), but then fell back. I went short with a very tight stop loss (3 pips) when I saw the lower swing high form. 

I was aiming for a reward of 10R, but closed out at 5R (15.6 pips) when I saw price hesitating. I probably should've aimed for 5R-7R (the next support level) if I knew I was going to exit at the first sign of hesitation. 

(click to enlarge)

5 Jan 2015: Daytrade #1

I took this trade on the AUDUSD yesterday morning. 1D and 1H trends were down. Price had bounced off 0.81000 and formed the high for the first 4H, so I felt this would be the start of a downtrend for the day. I went short on the break of the swing low, with a fairly loose stop loss (9.2 pips).

I got out at the next support zone. Reward was 18.4 pips, or 2R.

(click to enlarge)

Will continue daytrading for this month

So I decided to continue daytrading for this month, but this time I'll look for bigger rewards (15+ pips, ideally 20+). 

I've also restricted myself to 2 trades per day, to encourage myself to trade only high-quality setups. This should help stop me from wasting my two "bullets" on whimsical, low-quality trades.

Reflection on the last month of scalping / daytrading

Well, I spent the last month trying to sink as much time as I could day-trading.

The good news: I made money.

The bad news: The broker took it! And some more.

Excluding transaction costs, I made about 3%. Once commission is factored in, that number went negative. Basically I was working for my broker.

I don't think that scalping or daytrading for reward sizes of 5-10 pips is worthwhile. Broker fees represent such a major handicap at these small levels.

I do think day-trading may be viable if you're aiming for relatively large rewards like 40 or 50 pips. With a 5 pip stop loss and 50 pip reward, your reward will be 10R, so you're basically hoping to swing home runs with each trade. I'm not sure if I'd have the "psychological capital" to withstand this style of trading, though. You'll be enduring strings of losses before you finally hit your "home run". But when you do hit it, broker fees won't eat so much of your reward. I believe this can be profitable. For example, I know that the AUDUSD tends to establish its daily high or low within the first five hours of each day. If price is at a significant S/R level within this 5-hour window, there's a good chance that it will be the high or low for the day. You could trade a reversal at this level, and try to ride it for most of the day and hit that 10R reward.  

Day-trading also demands alot of screentime. Most of the time I didn't mind as I could listen to music or read articles / Facebook on a second monitor while waiting for a setup. However, if you have a job or an errand to do, you can't trade. The opportunity cost is definitely high. 

I'm still thinking about how to proceed for this month.