One That Got Away

Mark Thomas– Trade On Track

When reading articles from experienced forex traders trying to teach you something, you normally only hear about how this one was a winner and that one made you 500 pips.  Well, here’s a spanner in the works – here’s how things can go wrong too, because it happens to all of us and it’s part of trading.  If you want to be a good trader, you’re going to need to be able to deal with losses, sometimes big or very frustrating losses.  So, here’s my story from Friday trading …

These days I don’t have a great deal of time to trade at all, but I still like to keep the charts open and if I spot something that looks promising and I have a few minutes to assess it, I’ll check it out.  Earlier in the week I’d had some success with the GBP/USD – I went long and was able to catch 200+ pips, then on Thursday I went short and caught nearly 100 pips.  There were a couple of stopped-out trades in there too, but they were only 20 or 30 pips each.  So, on Friday I was looking at the GBP/USD hourly chart and it seemed that there could be another short setup.  Price had almost touched a resistance line for the 3rd or 4th time and it had just broken through a bullish trend line … see below.

Hourly GBP/USD on Friday, just before my first entry.

If I went short, I knew my stop level would be just above the current resistance level (around 17-18 pips above), but I wanted to know what the potential reward could be, so I went back to a daily chart to have a look. On the daily we were getting lower highs and lower lows, a definite downtrend, and we were just closing a daily bar which was inside the previous daily bar. In addition to that, the body of the inside candle was quite small, almost a doji. The bulls and the bears were obviously fighting it out hard and were undecided which way things could go. I drew a fib retracement from the bottom of the last move up to the current resistance level (see the yellow lines in the chart below) and also a support line which ended up just above the 50% retracement. This seemed an ideal target if I went short, so with the risk/reward ratio being so good, I sold the Pound.

Daily chart

Having decided to take a trade, I zoomed into a 15 minute chart to fine-tune the entry. The chart below shows a 15 minute candle breaking through the bullish trend line and closing. The MACD was also rolling over nicely – it looked like a good time to enter.

Just before first entry

A couple of hours later, I was stopped out. Ok, not a big deal, there wasn’t a great deal riding on it because the risk/reward ratio was so good. The chart below shows the point at which I went short (the vertical blue line) and the horizontal red line was the stop level. The candle that took out my stop was quite strong, but that makes sense because it was a fairly strong resistance level. The strong move up in price wasn’t reflected in the MACD indicator though – we had some divergence. This is a good sign that the push up in price was unwarranted, overbought, so another short entry was on the cards. I kept my eye on things for a few more hours and price was just starting to punch through the current minor support level. It also made a feeble attempt to push up again, only to result in a shooting star candle (see the 2nd last candle below). I went short again, with a stop loss about 18 pips above the last high and a target at 1.6319, just above that 50% retracement on the daily that I pointed out above. So once again, the risk (about 50 pips) to reward (over 300 pips) was still very good.

15min GBP/USD – just before my 2nd entry

At that point I had babies to feed, bath and put to bed, and my own dinner to have, so I left the charts alone for awhile. When I checked back, I saw that my stop had been taken out by about 2 pips, and price had dropped like a rock. In fact, it kept dropping – right to where my target was originally set!

15min GBP/USD – How it ended up

I had this fish on the line twice and both times it ate my bait and got away. If I had put the line into the water a third time, I would have caught that big fish! Not to worry, these things do happen and I hope that at least some of you caught this drop down. Technicals aside, it was the -0.4% GDP figures that came out confirming that the British economy is in a deep slump that sent price down the way it did.

So, how does an experienced trader think about and deal with a situation such as this? He or she should record it, analyze it, and figure out if something could or should have been done differently. Then, the trader should put it aside and move on with the next trading day with an extra experience under his/her belt. That’s exactly what I’m doing and by sharing my experience with you, I’ve been able to analyze it quite thoroughly. What should I have done differently? I probably shouldn’t have taken that first trade so impulsively and I should widen my stops, particularly on the pound, just a little bit more. Alternatively, instead of having a hard stop – I would be better off waiting for a candle close above my ‘virtual’ stop level before closing the trade.