Month 3, Day 54, 55 & 56 - 36-month forex trading challenge - gaps galore.

Waking up this morning (Monday) was hard and always is. This is where the discipline kicks in. As winter sets in (it's getting darker and colder now), getting up without question to do the job in hand will be a true test of character and my commitment to the challenge.

When you're winning, getting up early is much easier. When you rise to book losses, the journey out of bed to the computer is a much more difficult one. Both scenarios are the same physical action, but as with everything in life it's the emotional element that has the power.

I was pretty busy on Thursday (day 54) and Friday (day 55) last week. Being out and about I felt somewhat disconnected from the market and what was going on. The weekend was a great time to get back in the swing of things. With the currency markets closed, early evening on a Sunday is a time of calm where I can view things without the emotion associated with moving price action.

This morning (day 55) I've woken up to what currency traders risk (and fear) by holding trades over the weekend. Being a 24-hour market, gaps on currency pairs are not as common as gaps in stocks, but from time to time they do occur, and it's the Sunday open when they make themselves known.

A gap occurs when price opens at a different price level to its last close, and this morning two of my trades, NZDJPY (T8L) and EURJPY (T11L) have been victims of a gapping market. The gap looks to have been associated with a move into haven currencies (CHF and JPY). As far as I can tell there's nothing in the news to suggest why, but whatever the reason (and it doesn't really matter what it is) gaps have shown up. I'll talk about these two trades in a moment, but before I get to them I've now been stopped out of my NZDUSD (T10L) long.

NSDUSD (T10L) >
This has been a frustrating trade that never really went my way. Entering on a close above the 200 SMA on the 240 chart against the prevailing trend I was looking for a continued push above this level. The push never came and in fact the very next candle was a Z reversal, which was then followed by a close back below the 200 SMA.

This should have put me on alert that my assessment of market conditions and future order flow was not quite right. I had an early opportunity to get out of this trade and look for better opportunities, but I chose to stay in.

Why did I choose to stay with this trade? On reflection I can put this down to two reasons:

1. The affliction of many a trader – the desire to be right over the need to protect capital and make money.
2. My rules were not clear enough.

On the second point, and as things stand at the moment, when I enter a TREND strategy on a close beyond the 200 SMA, my first specified exit point is the 10 EMA crossing past the 30 EMA against the direction of my trade. This works well when my entry is driven by the 10 EMA cross beyond the 50 SMA (in the right direction), but on a second opportunity to get positioned with this strategy linked to the 200 SMA, this exit rule shows up too late to protect capital.

On the chart below, and in my own words ('DIDN'T TAKE OFF 1/3, AS ALMOST AT IS'), I make this very observation. Almost at my IS (initial stop) I decided it was better to hold on just in case things turned round, which they ultimately didn't.

My whole approach is contingent on losing less when I lose and winning more when I win. On average I know I'll be right about 50% of the time, so adhering to the lose-less-win-more principle is critical to my success.

I also know from my analysis of months 1 and 2 that on my winning trades, on average the stop pressure (move against my entry) I incur is less than 25 pips. Put another way, if things don't go my way early, they probably won't, and I should just get out.

Moving forward I'm fine-tuning my approach to specify:

1. On TREND trades having entered on a close beyond the 200 SMA, if price closes back past the 200 SMA against the direction of my trade I will exit the whole of my position.
2. On any of my strategies, if my trade has not shown a paper profit within three candles (12 hours) and has closed beyond my average stop pressure plus 10 pips, I'll exit the whole of the position. If I'm within my average stop pressure plus 10 pips, but not yet seen a paper profit I can give the trade another 12 hours, before exiting in full if the trade still hasn't shown me a paper profit (24 hours in total), even if price hasn't crossed beyond the stop pressure plus 10 pips line. This threshold will be identified by a turquoise dashed (small) line I will now add to my charts. [Note, once my trade has evidenced a positive close beyond my entry this exit rule falls away. I still have the red dashed (small) line placed halfway between my entry and initial stop where I ask myself the question – does this trade still make sense? In addition, I have my staged exit rules signalled by EMA crosses.]

I will now record a rolling average stop pressure for the prior three months on my weekly trade management sheet.

So with NZDUSD done and dusted with important lessons learnt, it's now back to the gaps.

NZDJPY (T8L) >
My trailing stop was tight and probably too close to the 50 SMA. This stop was set at 68.58, but on the gap price opened at 68.451. This was my exit price in my broker account and cost me 12.9 x £20.95 = £270.26.

Ouch!

This turned a fully protected trade into a loss – a loss that cost me c.0.5% of opening capital.

The lesson here is that my stop was too close, probably due to the fear of losing locked-in profit. I must remember that winning trades need room to breathe and it's on the losing ones that I should be more aggressive with my stops.

EURJPY (T11L) >
It was a similar story on this trade, albeit I wasn't stopped out, and price is now moving back in the direction of my trade to fill the gap.

I placed this trade in ETX Capital on Friday, but frustratingly was unable to do so in eToro. I'm not sure exactly why, but in placing the trade the platform wouldn't give me as wide a stop as I required. As such I placed this trade only in my private broker account.

I have been getting increasingly frustrated with eToro, an in particular the wider spreads and issues (as with this trade) of placing trades. I've debated just focusing on my private account, but would miss the social interaction eToro offers, in what can be a very lonely business. For the moment I'll stick with it.

Well that's it for today. I now need to jump in the shower and drive into town. I'm a guest on BBC Radio Nottingham at 9:20am to comment on the news.

They've asked me to bring in a news article from the weekend. I've chosen speed cameras, so it should be an interesting discussion!

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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.
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[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.]