Why It’s Important To Follow A Clear Set Of Rules
There is a constant
debate that traders have with themselves, “Did I cut the trade too
early, or was it more important to follow my rules?” There is likely never an
answer that will satisfy each person, and that is what makes trading such a
fascinating but at times a frustrating head game. However, in the long run,
following your rules and not trading/investing in the rear view mirror will
yield far more consistent results. A recent example of one of my FX trades
illustrate this.
Short EUR/CAD:
When this trade was placed last Friday, I never
thought that my target price would be nailed by Monday. Sure, my analysis gave
me confidence that this was a reasonable price objective, but in 48 hours?
Either way, once I was filled (I was off the desk when my limit order was
triggered) I had that nagging feeling, “Should I have only cut half, or perhaps
lowered the limit price?” All common conversations. However, as I have begun
to spend more and more time trading FX on a Swing and Position Trade
basis I came to realize that subjectivity is far more dangerous on longer time
frames, you have to have a clearly laid out set of rules. Picking up that last
nickel can sometimes be very expensive.
I came up with 1.5775 as my target price by
simply cross referencing other time frames and looking for some “confluence” of
prices that would offer some degree of support. If there is one thing about FX
that every trader needs to know, it is that FX responds very well to technical
analysis. It is this observation that forces a trader to put in place a set of
rules.
^next^
Some other FX trades that were in the process of
being considered never made the cut, again, adhering to my rules may/may not
prevent losses that are avoidable. I always have to remind myself that unlike
HVT, you simply cannot “shoot from the hip”.Â
In this case, even though at first glance this
looked like a solid short setup, I simply could not ignore the higher low from a
few days ago that could potentially negate any follow through. This conclusion
made it clear that the risk/reward could not be justified.
** Overnight this pair rallied
strongly which would have resulted in a loss had I taken the trade.
Naturally if this trend-line is broken I may
decide to take the trade, but based on how I evaluate setups this one is just
not 100% developed and the higher time frames do not confirm this trade as of
now either.
Overnight saw some powerful moves in FX crosses
of the Yen, most notable EUR/JPY, GBP/JPY and AUD/JPY, this despite continued
strength in the Nikkei as well as capital flows. Given that I missed the bulk of
the move lower in USD/JPY & EUR/JPY this should provide a good opportunity to
establish short positions in the next day or so as all three rally into
resistance. The levels will likely provide some resistance as well as eligible
short entry points:
AUD/JPY:Â
81.10
EUR/JPY:Â
129.50 -130.00
GBP/JPY:Â
196.70Â Â
USD/JPY:Â
106.83 & 107.18
HVT:
It looks as though the S&Ps are poised to re-test
the highs at 1161 in the next few days/weeks. Friday’s employment numbers were a
huge catalyst for this market. The market still seems a bit subdued intraday and
HVT trades require immense focus and
concentration. Frankly, I am at a loss to explain how a market that seems so
robust in terms of looking at the performance over the last year can be
relatively dull in terms of intraday volatility.Â
As always, feel free to send me your comments and
questions.