Thursday, January 22, 2009

AUD/USD, Rules and Risk.

Tried to get aggressive yesterday (with stocks and smaller risk) all my trades were shorts. One look at what the market did on Wed 21st Jan 2009 and you can guess what happended to me!! lol. I'm pretty sure I'm better off focusing on the Forex futures now but will continue to experiment just to gather more evidence to support (or refute) that belief. Luckily for me, I stuck to my rules today and took a trade in the AUD/USD that more than made up for the last two days of losses...I also paper traded (have NO idea why I keep doing this!)the EUR/USD for 56 points... :(

I've included the charts for the real (lol) trade...those blue lines are my entry and exit, with the red line my stop. As the drop into the lower trendline of the pattern (0.6467) was so steep I waited for the expected lower-paced, second attempt at lows, which played out perfectly. When it broke by a tick and stalled, I got in at 0.6468 (really pleased with that execution!) with a 8 tick stop- 0.6460. Then I trailed it all the way up, moving the stop a tick under last completed bar provided the highs have been taken out by the current bar until it reached the other trendline resistance around 0.6500 even. Got out 0.6494 for 26 points. The difference between today and the trade detailed under "Lost Discipline" is simple. I stuck to more (not all) of my rules which have been created by my many hundreds (thousands?) of hours of observation of this one scenario. I've internalized most of them...the three that keep giving me problems I wrote out on a piece of paper several weeks ago. Here they are as I wrote them that day:

"Trail stops and risk getting stopped for less than your target (and, sometimes, your risk)"

"Take off partials for particularly strong setups and run a trailing stop on the rest, taking off at larger targets or continuing to trail 'till stopped out"

"If you don't get the perfect entry, exit the trade as you would have if you had got it"

I'm currently taking about 20% of the resulting move from my successful trades compared to the potential offered by my analysis. This is because rule number 2 is especially difficult for me. They are all logical rules, seemingly simple to follow, but they're execution is challenged by the mechanisms of Ego and our need to use reference points that not only have no logical use, but, oftenly, damage our prospects. For example, personally...emotionally speaking, when I'm "up" a certain amount ("up" for useless reference point!)I stop trading. But if you have an edge that works (not taking into account changing market environments, which is another matter...)wouldn't it be more profitable to press that edge as much as possible in order to realise the results quicker??

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