12th April 2012 - loss on XAUUSD

XAUUSD

This trade went quickly against me. An inside bar formed below resistance, and so I placed a pending short at the IB's low. The short was triggered a few hours ago. Not long after, major economic news came out of the US showing a spike in jobless claims. The market forecasted 355k, but the real figure came out at 380k. This gap is bad news for the US dollar, causing it to weaken.

Emotional analysis

I was really confident about this trade since the IB formed during a retracement to the overall downward trend, the IB was positioned at the extreme end of the previous bar, it was small and provided an attractive R:R (1:1.5 to 1:3) and resistance held. Watching the market swing against me so quickly after my order was triggered was quite infuriating. I was unable to execute my "big news" contingency plan as market movement was frantic and a part of me hoped the market would turn in my favour again.

The best way to react to this loss is to be philosophical and not take it personally. Any news release can just as easily fall in my favour.

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.

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.

29th Feb 2012 - update on USDCHF

My pending short was finally triggered this afternoon. At the moment price is meandering around support as you'd sort of expect. The last half dozen bars have formed a descending triangle so I feel it's only a matter of time before the bulls are defeated. As always, anything can happen.

I decided to move my TP much further along to 0.86150, a little short of the next support level. Because this is such a large R:R ratio, I've put in a trailing stop loss of around 75 pips.

28th February 2012 - inside bar on USDCHF

An inside bar just formed around a support level on the USDCHF which looks promising. It's currently testing a support/resistance level that was last breached back in November 2011. The next significant support level is around 0.85750, providing plenty of scope for bearish action. As you can see in the graph below, my TP is very short of this level, at around 0.87900. My TP is currently set at 2 * SL. Once my TP is hit, there's a good chance the USDCHF will continue to fall to 0.85750 but I'm going to stick to my 2:1 R:R rule and leave my TP for now.

27th Feb 2012 - USDJPY hits TP

This was a textbook trade. My pending long on the USDJPY was triggered on Friday as resistance from August 2011 broke and the pair entered a bull run. It hit my take-profit target today before bouncing off resistance from July 2011. Profit = 99 pips.

USDCAD

I saw an inside bar form in the USDCAD, but price action over February looked pretty ugly. Price WILL breakout, but there's alot of potential to get whipsawed in an undecisive market before then, so I decided to sit this one out. 21 EMA looked very flat too.

24 Feb 2012 - inside bar on USDJPY

I took a bit of a break over the last week. I'd spent so much time backtesting that I couldn't use my mouse for more than an hour. My index finger needed a rest from all the clicking.

Two inside bars formed on the GBPUSD and USDJPY at the close of yesterday's market, which was only 15 minutes ago.

USDJPY

Of these two bars, the USDJPY presents a cleaner setup with a TP target slightly below a significant resistance level at 81.500. This has been illustrated below. What I like about this setup is if the inside bar breaks, it will simultaneously break resistance around 80.250-80.350, providing plenty of space for a bull run. The 21 EMA also indicates a clear trend. Summing the probabilities, this looks like a suitable trade.

GBPUSD

This setup is not as clean. Probably the most important observation is the fact that the 21 EMA is flat. Flat EMA = ranging market. This is where inside bars fail. Having said that, the inside bar is around a level of support, so if that support breaks, there is scope for a bearish run. However, price movement over the last few weeks suggest the cable is currently ranging.

Since inside bars are a trend-trading strategy, a pre-existing trend presents better probabilities, hence why I will trade the USDJPY and not the GBPUSD.

USDJPY inside bar backtest - 2001 to 2008

I just compiled a backtest of inside bars for the USDJPY pair between 2001 and 2008, using a 21 EMA to measure the trend. I'm completely fatigued. This took around eight hours to complete, a great way to spend my Saturday, but I think it's a good indication of my seriousness.

The results of the USDJPY backtest are comparable to the EURUSD, which is excellent, as the USDJPY and EURUSD are one of the least correlated currency pairs. Trading inside bars would be profitable, as seen below.

RESULTS

Trading with the trend
187 trades initiated

Risk:reward ratio = 1:3
Expected return per trade = 19.79%

Risk:reward ratio = 1:2
Expected return per trade = 13.9%

Risk:reward ratio = 1:1
Expected return per trade = 17.65%

Trading against the trend
182 trades initiated

Risk:reward ratio = 1:3
Expected return per trade = 16.48%

Risk:reward ratio = 1:2
Expected return per trade = 13.74%

Risk:reward ratio = 1:1
Expected return per trade = 9.89%

CONCLUSION

It's good to see positive results for a different currency pair. It means that inside bars can be traded beyond the EURUSD. Trading with the trend seems to yield slightly better results, which is expected. Scalping with the trend seems like a safer way of trading with a 1:1 risk:reward ratio.

I'm very pleased. This strategy is looking solid.

11 February 2012 - potential weekend setups

Gold

On Friday's close, a promising pin bar formed as a rejection of the 21 EMA, short-term support and a Fibonacci retracement level. How to trade this pin bar is a little tricky. I'll most likely enter a pending long that'll trigger on the break of the pin bar, with a stop-loss around 50% of the pin bar. Take-profit will be set just below resistance at 1760. This resistance level has been respected twice already. The setup should provide a 1:2 risk:reward ratio, which is how I like it.

EURJPY

An inside bar has formed just above a resistance-turned-support level, so this setup is looking optimal. Take-profit has been highlighted below.

What I don't like about this setup is that other yen currency pairs are much more bearish. I assume the neutral-ish tone of the EURJPY is due to a prospect of a breakthrough over Greece. I'll probably trade this, though.

10th Feb 2012 - inside bar backtest 2001-2009

I've spent most of this week researching and backtesting. 90% of successful trading is psychological. No matter what strategy you use, if you don't have confidence in your setup, you will fail. The best way of building confidence is to do your own research and backtesting. Manual backtests are very time-intensive but it gives you a better idea of a strategy than automating your backtest.

This week I decided to extend my backtests of inside bars from the start of 2001 to mid-2009. I focused on the EURUSD on the daily timeframe and used a 21 EMA to measure the trend.

RESULTS

Trading with the trend
156 trades initiated

Risk:reward ratio = 1:3
Expected return per trade = 28.21%

Risk:reward ratio = 1:2
Expected return per trade = 23.08%

Risk:reward ratio = 1:1
Expected return per trade = 15.38%

Trading against the trend
130 trades initiated

Risk:reward ratio = 1:3
Expected return per trade = 29.23%

Risk:reward ratio = 1:2
Expected return per trade = 20.00%

Risk:reward ratio = 1:1
Expected return per trade = 3.08%

CONCLUSION

I was quite surprised to see that counter-trend trading is just as profitable as trading with the trend. A 1:2 or 1:3 risk:reward ratio seems ideal, although I am leaning towards 1:2, just to be a little conservative. Higher rewards usually take longer to achieve. The longer you leave your trade open, the more exposed you are to market shocks that invalidate your entry.

Weekend trade setups

I currently have no trades open, but the close on Friday has presented two trading opportunities come Monday.

Trade Opportunity #1 - Inside bar on the AUDUSD

An inside bar also presented itself on the AUDCAD pair, but since it is highly correlated with the AUDUSD, I will stick with the Aussie for my analysis.



Normally I'd be happy to trade this inside bar by going long on the breakout, but as you can see, the inside bar is just short of a major resistance level that has held twice in the last six months. Additionally the RBA is expected to announce a reduction in interest rates on February 7, giving me about a week for a pending long to hit and achieve a 1:2 R:R ratio. Additionally the inside bar is bordering the upper-side of a trend channel. All these factors make the Aussie dollar look bearish.

The only factor that'll favour a bullish breakout is the 8 and 21 EMA. I'm thinking of skipping this possible trade because of these conflicting signals.

Trade Opportunity #2 - Pinbar on the EURJPY

The following setup on the EURJPY is looking more juicy.



We have a bullish pinbar that is favoured by the following factors:

- It formed as a result of bouncing from support and the 8 EMA.
- It is in the direction of the 8 and 21 EMA.
- It has plenty of scope for a bullish run (the next level of resistance is around 105.600, about 400 pips away).
- If we examine the bull-run from January 17th, it looks like part of Wave-4 in Elliot wave theory (a minor point for me as I'm not a big user of wave theory).

The only factor against the bullish pinbar is a potential resistance level around 102.500, although it looks minor.

On the sum of probabilities, this would make a suitable trade.