Month 2, Day 33 - 36-month forex trading challenge - trading observations and fine-tuning rules.
I'm not feeling the best this morning. A tough session at Jiu Jitsu yesterday and a late night with my youngest son banging his head and my wife having to take him to hospital, means I'm pretty tired. What's more, I've also woken up with a sore throat. I need to be careful today that these factors don't impact my trading decisions. Psychology is everything in the markets, after all the only thing I can control is me, so caution is the order of the day.
Before jumping into the charts, the second part of last week's video blog, or vlog is now out. It covers the last few days on the ship with some stormy seas, and I guess you could say, stormy markets too.
As always this is available on the STG FOREX TV YouTube channel and the videos support these blog posts with more discussion and analysis – I also do my best to make them entertaining by broadcasting from interesting places. If you're reading this, please take a look and be sure to 'Subscribe', so as not to miss future episodes.
Yesterday the announcement of a delay on US tariffs being imposed on China certainly shook up the markets. As you'll see below I was stopped out of my EURCHF (T26S) short and EURAUD (T1L) long on the frenzy that followed.
This was surprise news, i.e. not scheduled in Forex Factory, which reinforces the need to always have a stop loss in place and to reference Paul Tudor Jones once again, to play good defence at all times. I'd moved both stops to entry ahead of hitting my initial target (T), as the 50 SMA had fallen below (T26S) and risen above (T1L) my respective entries. The 50 SMA is my reference point on the 240 chart for when I'm on the right side of a trade.
While frustrating to be out of two trades that were in paper profits and happily pressing toward their respective targets prior to this announcement, this is forex trading and stuff like this happens all the time. The main thing is I came away unscathed and protected my capital to fight another day. As I highlighted in yesterday's blog post, trading is about survival and always about playing good defence (thanks again Paul Tudor Jones).
As the days progress I'm learning more and more about my trading edge and unique approach to the markets. This may sound strange as after all it's my edge, so why don't I already know everything about it?
Well it's a good question and one that's quite difficult to answer. The best analogy I can come up with takes me back to the fog on the cruise. At the start of the 36-month forex challenge, while I had my approach and trading plan written down on paper, in understanding the many components it felt at times like I was looking through fog.
As the weeks have progressed this fog has begun to lift and I'm now seeing things more clearly. One important breakthrough, which helped to fine-tune my approach was a better understanding of the daily trend line, and prior to this the recognition of the importance of the weekly trend too.
I now have a clearer vision as to the longer-term view in the market, which is helping to inform my decision-making on my four-hour trading time frame.
This morning, I've made three additional observations, which I'll use to further fine-tune my approach. These serve to not just get me in, but more importantly to keep me out of suboptimal trades.
1) My TREND and FULL HOUSE strategies have specific rules to lighten up on any give position if the market moves against me. Worst-case scenario in any trade is my initial stop loss being hit. This stop loss is designed to protect me if something unexpected happens and the market moves faster than I could ever react (see above, as an example).
The majority of the time however, the market should give me a clue that I could be wrong before my initial stop loss is hit. Getting out of any trade, particularly when I need to click the button to crystallise losing money (cutting my losses now to avoid a potentially bigger loss later on) is emotional and extremely difficult to do. On day 8 of the challenge I likened this to cutting your own hand off to save your arm.
My rules state:
Emergency Exit 1 (EE1) > If the 10 EMA crosses back and closes past the 30 EMA, exit 1/3 of open positions.
Emergency Exit 2 (EE2) > If the 10 EMA crosses back and closes past the 50 SMA, exit 1/3 of open positions.
Emergency Exit 3 (EE3) > If the 30 EMA crosses back and closes past the 50 SMA, exit the final 1/3 of open positions.
But what happens when an EE signal shows up and I miss it, with price subsequently showing signs that the trade is in fact going in my favour? It becomes much harder to cut your hand off when there's a chance your arm might be saved anyway, and this is the situation I was presented with this morning in my AUDUSD (T21S) short.
I'd already executed EE 1 (note, on the chart above I annotate this as CS 1), and on the 2am candle overnight, both EE 2 and EE 3 triggered too. At this time, I was of course sleeping (I can't and wouldn't want to be in front of my charts 24/7), and when I woke up this morning price was beginning to turn again in my favour.
This was a new scenario for me. My rules say cut, and in this case exit the position in full, but the market acting on the very latest information could be telling me something different?
What I decided to do, which will be a new rule to fine-tune my existing exit rules, was to roll my stop to the price level I would have exited had I been awake at 2am, i.e. the closing price of the 2am candle (0.6794 in this case).
The new element of my exit rules, now reads as follows:
If I miss the exit signal and price has moved in favour of my trade I have the option to move my stop loss to the closing price of the signal candle and continue to hold the position.
Your trading approach has to fit your personality and I feel much more comfortable with this amendment. I should explain that this rule never works in reverse. Had I woken up this morning and price was trading above the 0.6794 level I would be out immediately.
2) My TREND strategy is designed to take advantage of changing market conditions (when the 10 EMA crosses and closes beyond the 50 SMA on the 240 chart). There are additional criteria that need to be met, but the idea is to get me into potentially reversing market conditions as early as possible. There are a number of similarities between this strategy and my FULL HOUSE strategy, and a situation on EURUSD this morning caused some confusion.
Above the 10 EMA has crossed below the 50 SMA. This is not yet a TREND signal as the 50 SMA is sloping upwards, but if the 50 SMA flattens or turns down, is this a potential TREND or FULL HOUSE trade?
It can't be both, but on first look this morning I was uncertain, as to which potential trading opportunity could show up.
Having thought about it, this (even with a signal) can never be a TREND sell, as the trend on the daily chart hasn't changed. The daily trend (gold lines) is BEARISH and by definition my TREND strategy goes against the prevailing trend. By contrast, my FULL HOUSE strategy goes with the prevailing trend, so now with price action below all SMAs and the daily 10 EMA, it's only a FULL HOUSE entry that could show up.
Through thought and analysis, clarity from confusion has prevailed. I've fine-tuned my TREND strategy rules to say:
This trade is only evident when there is a move in the opposite direction of the daily trend.
[Note – a 10 EMA cross showed up on this pair in the middle of the daily trend line with the 50 EMA sloping upward. Although a legitimate signal this did not meet all entry requirements of my TREND trade strategy, as there was a preceding lower low, which tested the bottom of the trend.]
It's always more dangerous trading against the longer-term trend, so my TREND strategy rules are very specific, which means compared to my FULL HOUSE strategy, signals rarely show up.
3) Any TREND signal should ideally be close to or near what I call a SIG. LEVEL 1 (levels corresponding to 3, 5 and 10-year lows) or at daily / weekly trend lines with the signal being in the opposite direction to the daily trend (point 2 above).
Finally for this blog post, I have a new short trade on in USDCHF (T29S), which was opened at 6pm yesterday evening using my FULL HOUSE strategy. Price tested and rejected the 50 SMA on the 240 chart at the daily trend line centre. So far, so good on this trade with price tracking down today in the direction of my initial target (T).
However, this is currency trading and as such, anything can happen. My stop is in place and my downside risk is therefore capped. As I reminded myself of in yesterday's blog post – I don't attach too much importance to any individual trade (points 6 and 9).
*********
Is it really possible to turn £50K into £1M? Over the next 36 months I'm going to find out by trading my personal account with full transparency.
Follow my 36-month challenge to turn £50K into £1M.
Read my blog here: https://stgforextvforexchallenge.blogspot.com
Subscribe on YouTube here: https://www.youtube.com/channel/UCyGySJ5IeDjq-DIJPU7nYvw
[Please note, the information presented is general educational material and does not constitute trading advice.
Trading foreign exchange (forex) on margin carries a high level of risk and may not be suitable for you or your circumstances.
Before trading forex you should investigate all of the risks, including the possibility that you could lose more than your initial investment.
It’s important to consider your investment objectives, level of experience and risk appetite. If in doubt seek advice from an independent financial advisor.]
Before jumping into the charts, the second part of last week's video blog, or vlog is now out. It covers the last few days on the ship with some stormy seas, and I guess you could say, stormy markets too.
As always this is available on the STG FOREX TV YouTube channel and the videos support these blog posts with more discussion and analysis – I also do my best to make them entertaining by broadcasting from interesting places. If you're reading this, please take a look and be sure to 'Subscribe', so as not to miss future episodes.
Yesterday the announcement of a delay on US tariffs being imposed on China certainly shook up the markets. As you'll see below I was stopped out of my EURCHF (T26S) short and EURAUD (T1L) long on the frenzy that followed.
This was surprise news, i.e. not scheduled in Forex Factory, which reinforces the need to always have a stop loss in place and to reference Paul Tudor Jones once again, to play good defence at all times. I'd moved both stops to entry ahead of hitting my initial target (T), as the 50 SMA had fallen below (T26S) and risen above (T1L) my respective entries. The 50 SMA is my reference point on the 240 chart for when I'm on the right side of a trade.
While frustrating to be out of two trades that were in paper profits and happily pressing toward their respective targets prior to this announcement, this is forex trading and stuff like this happens all the time. The main thing is I came away unscathed and protected my capital to fight another day. As I highlighted in yesterday's blog post, trading is about survival and always about playing good defence (thanks again Paul Tudor Jones).
As the days progress I'm learning more and more about my trading edge and unique approach to the markets. This may sound strange as after all it's my edge, so why don't I already know everything about it?
Well it's a good question and one that's quite difficult to answer. The best analogy I can come up with takes me back to the fog on the cruise. At the start of the 36-month forex challenge, while I had my approach and trading plan written down on paper, in understanding the many components it felt at times like I was looking through fog.
As the weeks have progressed this fog has begun to lift and I'm now seeing things more clearly. One important breakthrough, which helped to fine-tune my approach was a better understanding of the daily trend line, and prior to this the recognition of the importance of the weekly trend too.
I now have a clearer vision as to the longer-term view in the market, which is helping to inform my decision-making on my four-hour trading time frame.
This morning, I've made three additional observations, which I'll use to further fine-tune my approach. These serve to not just get me in, but more importantly to keep me out of suboptimal trades.
1) My TREND and FULL HOUSE strategies have specific rules to lighten up on any give position if the market moves against me. Worst-case scenario in any trade is my initial stop loss being hit. This stop loss is designed to protect me if something unexpected happens and the market moves faster than I could ever react (see above, as an example).
The majority of the time however, the market should give me a clue that I could be wrong before my initial stop loss is hit. Getting out of any trade, particularly when I need to click the button to crystallise losing money (cutting my losses now to avoid a potentially bigger loss later on) is emotional and extremely difficult to do. On day 8 of the challenge I likened this to cutting your own hand off to save your arm.
My rules state:
Emergency Exit 1 (EE1) > If the 10 EMA crosses back and closes past the 30 EMA, exit 1/3 of open positions.
Emergency Exit 2 (EE2) > If the 10 EMA crosses back and closes past the 50 SMA, exit 1/3 of open positions.
Emergency Exit 3 (EE3) > If the 30 EMA crosses back and closes past the 50 SMA, exit the final 1/3 of open positions.
But what happens when an EE signal shows up and I miss it, with price subsequently showing signs that the trade is in fact going in my favour? It becomes much harder to cut your hand off when there's a chance your arm might be saved anyway, and this is the situation I was presented with this morning in my AUDUSD (T21S) short.
This was a new scenario for me. My rules say cut, and in this case exit the position in full, but the market acting on the very latest information could be telling me something different?
What I decided to do, which will be a new rule to fine-tune my existing exit rules, was to roll my stop to the price level I would have exited had I been awake at 2am, i.e. the closing price of the 2am candle (0.6794 in this case).
The new element of my exit rules, now reads as follows:
If I miss the exit signal and price has moved in favour of my trade I have the option to move my stop loss to the closing price of the signal candle and continue to hold the position.
Your trading approach has to fit your personality and I feel much more comfortable with this amendment. I should explain that this rule never works in reverse. Had I woken up this morning and price was trading above the 0.6794 level I would be out immediately.
2) My TREND strategy is designed to take advantage of changing market conditions (when the 10 EMA crosses and closes beyond the 50 SMA on the 240 chart). There are additional criteria that need to be met, but the idea is to get me into potentially reversing market conditions as early as possible. There are a number of similarities between this strategy and my FULL HOUSE strategy, and a situation on EURUSD this morning caused some confusion.
It can't be both, but on first look this morning I was uncertain, as to which potential trading opportunity could show up.
Having thought about it, this (even with a signal) can never be a TREND sell, as the trend on the daily chart hasn't changed. The daily trend (gold lines) is BEARISH and by definition my TREND strategy goes against the prevailing trend. By contrast, my FULL HOUSE strategy goes with the prevailing trend, so now with price action below all SMAs and the daily 10 EMA, it's only a FULL HOUSE entry that could show up.
Through thought and analysis, clarity from confusion has prevailed. I've fine-tuned my TREND strategy rules to say:
This trade is only evident when there is a move in the opposite direction of the daily trend.
[Note – a 10 EMA cross showed up on this pair in the middle of the daily trend line with the 50 EMA sloping upward. Although a legitimate signal this did not meet all entry requirements of my TREND trade strategy, as there was a preceding lower low, which tested the bottom of the trend.]
It's always more dangerous trading against the longer-term trend, so my TREND strategy rules are very specific, which means compared to my FULL HOUSE strategy, signals rarely show up.
3) Any TREND signal should ideally be close to or near what I call a SIG. LEVEL 1 (levels corresponding to 3, 5 and 10-year lows) or at daily / weekly trend lines with the signal being in the opposite direction to the daily trend (point 2 above).
Finally for this blog post, I have a new short trade on in USDCHF (T29S), which was opened at 6pm yesterday evening using my FULL HOUSE strategy. Price tested and rejected the 50 SMA on the 240 chart at the daily trend line centre. So far, so good on this trade with price tracking down today in the direction of my initial target (T).
*********
Is it really possible to turn £50K into £1M? Over the next 36 months I'm going to find out by trading my personal account with full transparency.
Follow my 36-month challenge to turn £50K into £1M.
Read my blog here: https://stgforextvforexchallenge.blogspot.com
Subscribe on YouTube here: https://www.youtube.com/channel/UCyGySJ5IeDjq-DIJPU7nYvw
[Please note, the information presented is general educational material and does not constitute trading advice.
Trading foreign exchange (forex) on margin carries a high level of risk and may not be suitable for you or your circumstances.
Before trading forex you should investigate all of the risks, including the possibility that you could lose more than your initial investment.
It’s important to consider your investment objectives, level of experience and risk appetite. If in doubt seek advice from an independent financial advisor.]
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