Follow Your Rules And Avoid Second-Guessing
Always Follow Rules
Last week the FX markets tested one’s resolve. While the trades placed early
on in the week played out nicely by weeks end, it was a game of chess. Rarely
does a trade (I am talking about Swing and Position Trades here) immediately
gratify a trader. Rather, it is a delicate game on probing the market and
evaluating the viability of the trade as it progresses. The short trades
described below were a good example.
For the last few weeks I had determined that the Dollar, despite all the
reasons to hate it, had put in a bottom and was embarking on a leg higher. It
was also obvious to me that the 89.03-.05 level would need to be breached in
order for any further follow through to take place. It traded briefly above
these levels a few time, but the move was never sustained. Last week when I
placed shorts in the EUR, color=#0000ff>AUD and NZD, it
appeared that the Dollar was in fact on the verge of making that much needed
move through 89.03-.05.
As you can see from above, the Dollar had a solid move higher throughout last
week. In this case I was even more sensitive to price failure around the 89.03
level. The pull-back (Y) was deeper than the previous pull-back and after once
again failing to hold above 89.03. That was my exit. I covered all three
shorts for roughly 139 pips ($10 per pip if trading minimum lot size)
but was
expecting far more when the trades were initiated.
The last sentence of the previous paragraph is the point I want to make. I
have to tell you, I second guessed that decision for the rest of the day on
Thursday. However, after having a chance to reflect I realized that I had made
the right decision. Sure, I thought the trades collectively had 300-400 pips in
them, maybe more, however, I could not ignore the fact that a key technical
level was preventing higher price in the Dollar. Taking profits was the right
decision. As you can see from the chart below, the Dollar continues to struggle
as of Sunday evening, and with the exception of the EUR, the AUD and NZD are
higher then where I covered.
As you progress as a trader, and especially as you start trading longer time
frames, the rules become more rigid. Unlike color=#0000ff>HVT, if you get out too early you can typically
identify another entry point in the next 5-10 minutes. Swing and
Position Trades do not work that way. Trading is a process like any
other, when your rules say buy, you buy; when they say sell, you sell. If at the end of
the day you have some money in your pocket, you cannot second guess, at the
time, you based your decisions on what was happening then, without any knowledge
of what ‘may’ happen.
As always, feel free to send me your comments and questions.
Dave