Lessons learned

Lessons learned so far. As time goes by, I hope to expand this list.

1. Respect first support / resistance areas. Set possible TP here.
2. Remain faithful to your original order setup (SL and TP), especially if they have been well thought-out. Avoid impulse trading. Exception: release of big news
3. Do not overtrade. Trade quality setups only.
4. Entering at the end of a retracement presents the best opportunity to maximise R:R and probability. 
5. Do your own homework
6. Question EVERYTHING, even if it comes from Dr. Alexander Elder (i.e. the 2% rule)
7. Use context-sensitive, self-adjusting rules rather than hard, arbitrary rules
8. Equity curve growth rate is influenced by profit factor, equity risk % and frequency of trades.

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.

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.

Three black crows / three white soldiers backtest: USDCAD 2000-2009

I just finished a backtest on the three black crow / three white soldier candle pattern. This candle pattern is quite basic. It consists of three consecutive bearish or bullish candles. Three black crows represent a bearish pattern as seen below, while three white solders are the complete opposite (bullish).

The three candles must be of the same "colour" for it to be considered 3BC or 3WS.

For this backtest, I focused on the USDCAD pair with a 21 EMA to measure the trend. The years 2000 to 2009 were tested, as well as the first half of 2010. I thought about extending the backtest all the way to 2011 but too many orders would've been left open by the end of the backtest.

Stop loss will be located at the start of the first candle, and entry will be triggered at the break of the third candle.

RESULTS

Trading with the trend yielded superior results. In order to prevent cluttering of this post. I'm not going to bother posting the results of trading against the trend.

Final results have been tabulated by year and R:R ratios and are displayed below. 99 trades in favour of the trend were initiated.

Those are nice results. Trading with a reward-to-risk ratio of 6 would have yielded a beautiful average return of 50% on risk. However, that isn't a number that I'm comfortable using. A reward-to-risk ratio of either 2.5 or 3 seems ideal for me.

I'll backtest another currency pair to validate these results.