Weekly Review #14

April 7, 2019

Table of Contents

Forex Trading Review – Week 14

Another frustrating week, but nothing to be too concerned about.

I am still in a fairly decent drawdown (6%) but I didn’t make it too much worse this week so that’s a positive. Overall this week’s damage was about 0.5%.

Which is actually quite impressive considering I over-traded yet again (given the market conditions), taking 7 trades, most of which lost. That goes to show how important risk:reward is and that your reward covers your risk on average.

Still, I am not very happy with my performance over the past few weeks and I really need to hunker down and go back to the basics.

This drawdown is natural and to be expected, but as I said in my previous trading review, I have compounded my losses through poor decision making.

My only job is to keep executing my trading plan consistently regardless of how I feel, and that is what I plan to do. I am doing my best to put emotions aside and stick to the plan.

So sit back, get some popcorn and entertain yourselves by watching me beat my head against a wall for the next few weeks. It will be very interesting to see how this month ends.

For me, this is what trading is all about. Perseverance through eternal frustration.

The good times are fun, but it’s important to remember that they are often followed by times like these. You can never let your guard down.

1st April – 5th April

Trade #52

I’ve noticed a trend in my trading lately.

I seem to like to start the week off with a losing trade. Usually a mediocre setup that I could have passed on.

I was extremely eager to enter this trade at the blue line marking previous resistance (expecting it to turn to support). When I didn’t get a valid setup there, I was disappointed.

So later that day when I saw this mediocre setup after a very weak break above the double-top I naively jumped on the opportunity.

Technically this trade meets my rules 100%. And there is an edge with this specific setup (when there is room to a HTF structure zone).

You can see that price did in fact rally in the direction of my profit target before reversing on the back of bearish AUD news that came out a few hours after I entered.

But given that I am in a drawdown I feel like I should be more selective in my trades.

I should be waiting for unquestionably good setups, and I know what they look like when I see them. This was not one of them.

So what am I going to do about it? I’m going to spend time re-backtesting my strategy with new filters until I find filters that drastically reduce the discretion required to determine what makes “great” trades great.

I will elaborate on how I plan to achieve this in the reflection at the end of this review.

Trade #53

This was a pretty good reversal trade.

After AUD/JPY failed to reach resistance, it broke back down below the blue line and the 50-EMA marking previous-resistance-turned-support. Expecting that blue line to potentially act as a resistance zone yet again, I went short.

This trade barely managed to hit T1 before some news dropped the next day that reversed the momentum entirely and sent AUD/JPY climbing back towards resistance.

One target winner, good trade.

Trade #54

This was an interesting trade.

The chart was actually quite ugly leading into this setup, but given that we had just impulsively broken clear of a major HTF resistance zone in the blue area, I was willing to give this setup a chance.

Solid 2:1 winner.

I did however make a mistake on this trade. I was in a hurry when I entered my order and I failed to notice that I had the wrong position size entered. I risked 1.12% on this trade instead of 1%.

Not a big deal in terms of accidental increased risk, but a huge deal in terms of negligence. That could have easily been 10% or more and I may not have noticed until it was too late (as I don’t have my $ P&L showing on my charts).

This is not the first time this has happened, but it is the first time in a long time. I must be vigilant against these kinds of silly mistakes. I have gotten into such a habitual routine with placing trades that it’s easy to overlook certain errors.

When I place trades all I do is enter my risk percentage as a number and TradingView calculates my position size for me.

What happened here is I entered my risk % and my stop-loss price, but as the setup evolved, my stop-loss size reduced slightly and when I entered in the new SL price I did not notice my position size increase automatically.

I love how TradingView make it so easy to place trades, but with that ease comes the danger of complacency. I need to be sure that I am paying utmost attention for every trade I place.

Thankfully the market Gods didn’t punish me for this mistake and instead rewarded me, which is arguably worse – but since I don’t plan on making the same mistake again, I’ll take it!

Trade #55

This was a somewhat ugly setup, but so was the last setup. The higher-timeframe momentum was bullish and there was still room until HTF resistance, so I decided to go for a second stab at this EUR/JPY rally.

Unfortunately the ascending wedge pattern I was anticipating didn’t unfold to the upside and price rolled over instead and began consolidating.

I don’t regret taking this trade as it met my rules, but this is an example of a potentially over-extended setup.

The RSI was above the midpoint (50) for this trade, which I have noticed seems to have a lower probability of winning than if the RSI had been 50 or below.

I still have more backtesting to do before I can determine whether some kind of RSI filter will help reduce my loss rate on momentum setups but I suspect that it may help.

The only issue I have is that the best momentum pullbacks are often over-bought and over-sold, so I must find a balance between defense and offense.

On a side note – how good would it have been to go short on the break and close below that lower trendline? That is a strategy idea I ought to test in the future.

Even according to technical analysis and trading legend Peter Brandt, classical chart patterns are notorious for failure these days. But I believe that with the right R:R management there is still potential there in certain situations.

Interestingly, since writing those blog posts, Peter Brandt has gone back to using his traditional classical charting patterns with success. So as always, where there is a will and a willingness to adapt, there is a way.

Trade #56

This is always fun.

Price stopped me out by the spread before hitting my first target.

There’s nothing you can do about this. It’s just sheer bad luck. People don’t mention this very often, but luck actually plays a vital role in trading.

Obviously we have our strategies and our edge which (should) give us a higher probability of making money than losing money over the long-term.

But in the short-term, you would have to be crazy not to acknowledge the role that luck and random chance plays in trading. This is a situation where I followed my plan to the letter, I was correct in my analysis, and I still lost by a hair.

These trades are real tests of my patience. I remember having a burst of anger when I saw price hit my take-profit without me. It took me a moment to chill out and let it go. It’s easy to personalize your experiences in the markets.

It’s easy to feel like the market is out to get you. But that’s hubristic. The idea that central banks and large traders are out for my tiny stop-loss orders is laughable.

The more likely reality is that luck was just not on my side this week.

Trade #57

As I mentioned in the previous trade, luck plays a vital role in trading. And in this case I got very lucky.

I didn’t win this trade which obviously sucks. But rather than having two exact same situations as AUD/JPY, at least this time I was not filled on my stop-loss order even though price literally came within 0.4 pips of it.

Instead, price came within a hair of taking my money and then reversed on a dime, rallying to my break-even point, resulting in a break-even trade.

The average spread at that time of day for USD/CAD for me is 0.4 pips on the dot. So the fact that price ticked down to my stop-loss and yet the spread remained at 0.5 pips or above is remarkable.

Situations like these remind me that brokers and institutions are not hunting my stop-losses (a common and convenient trading conspiracy theory). If they were, it would have been nothing for them to push the market down 0.1 of a pip to take me out.

Obviously I just got very lucky here, and unlucky on the previous trade. It happens. You get used to it.

Trade #58

This was a sub-optimal trade that I should not have taken.

Price was in consolidation on the higher timeframes (below the thin blue line at 1.125), but I took a shot at this “reversal” setup anyway.

The only problem is that there is no such thing as a reversal in consolidation. Yet again, I was trading what I wanted to see instead of what I was seeing.

I was anticipating a retest of the lows near the dotted line at 1.12, but what I failed to notice until after I’d entered this trade is that the wick on the candle near 1.12100 actually touched the lower body of the Daily close on the 8th of March.

In other words, I went short against a rally from a Daily double-bottom pattern right near a major level of support. Not the wisest trading decision I’ve ever made, but this trade still technically met my rules.

Keep in mind that when I tested my strategy I only tested it on the 1-hour timeframe. I didn’t account for higher-timeframe levels. And it performed pretty good on the 1-hour timeframe without that filter. I have a lot of long-term confidence in it.

However, the win ratio and quality of setups could definitely be improved. And it’s filters like these that would improve it. Unfortunately backtesting a 1-hour timeframe against Daily structure is extremely difficult to do objectively.

I am in the process of learning how to backtest multiple timeframes at the same time, but the problem is that I am obsessive compulsive about eliminating any hindsight bias during my testing.

And it is difficult for me to manage backtesting using two timeframes without introducing accidental hindsight bias. I am working on processes to sort this out, and TradingView‘s multi-chart feature is extremely helpful.

But the replay feature only works on one chart at a time, so it is difficult to properly test a strategy like mine across multiple timeframes.

But I’m working on it. Just because it’s difficult doesn’t mean I won’t do it.

Reflection

I have a lot of work to do.

I am happy with my consistency, but not with the quality of the trades I am taking. I don’t know if it’s a discipline issue or an issue with my trading plan. I suspect it’s a bit of both.

My trading plan often gives valid trading signals that I am reluctant to take. I need to work on that. I need to evolve my strategy to the point where I have utmost confidence in it.

I backtested the hell out of this strategy, and I know it works. But now that I have been live-trading it for a while I’ve realized it allows me to take too many sub-optimal trades for my liking.

So I need to better define what a “sub-optimal” trade is and develop clear variables to identify and eliminate them.

I have a few ideas I plan to explore in my backtesting.

One is to only take trades where my stop-loss is below the EMA. Another is to use an RSI filter to reduce the amount of over-bought and over-sold trades I take which immediately reverse on me.

Another is to only take momentum trades that give me a structure level to place my stop-loss behind, but I have noticed that the best momentum trades don’t usually offer that kind of protection.

So I should also come up with a way to objectively gauge momentum. I have a few ideas on how to achieve that, such as using multiple timeframe EMAs as a filter.

For example, only taking day trades if price is above the 15-Minute 50-EMA and the 1-Hour 50-EMA or 20-EMA (or the reverse for shorts).

I could also experiment with different entry candlestick patterns, like shooting star and hammer candles. I already eliminated engulfing candles from my trading plan which have a large rejection wick (ie. a top wick larger than the body for longs).

That has definitely improved my strategy and my confidence in it.

The other issue I have is my first trade of the week. I am still getting over the mentality of more work equals more profit. I don’t like being flat. Whenever I am out of a trade I instantly feel the urge to be in one or else I feel like I’m not moving forward.

But this doesn’t lead to good trading decisions. Out of the past 8 weeks, I have taken 6 losses on my first trade of the week. Not just on Mondays, like I identified last week, but on Tuesdays as well. According to my testing, something is not right with this statistic. It doesn’t match my testing results.

The problem is I am too eager to get into my first trade for the week, so I take the first setup that presents itself no matter what quality it is.

This is something I really need to work on. There are two approaches to solving this issue. One is to better define what a “sub-optimal” trade is and implement those filters into my trading plan (as I already mentioned) – the other is to address the psychological elements that cause me to feel this way.

I think self-talk will help with this. I need to constantly remind myself that doing nothing counts as a trading decision too. As the great Jesse Livermore says:

Remember this: When you are doing nothing, those speculators who feel they must trade day in and day out, are laying the foundation for your next venture. You will reap the benefits from their mistakes.
Jesse Livermore

A lot of this will come with practice. I am already considerably better at sitting on my hands than I was last year. So that’s good to see, but it’s something I still need to focus on going forward, probably for quite some time.

I am in the process of building good habits and muscle memory. My main focus since June last year has been to be consistent. I am probably about 80% consistent right now.

I am happy with that progress. At this rate I feel like I will be really hitting my stride as a trader within the next two years.

So I am excited to share that journey with you guys, and I hope that you will get some valuable insights out of observing my mistakes and challenges.

I have a long way to go before I will be anywhere near as good a trader as my mentor or most average professional traders, but I will do the work in order to get there.

Or I will die trying. That is the spirit it takes to be successful as a trader.