Some may ask why write a blog, well I can safely say it's not out of vanity. What I hope to show (both of us) is a real-life journal of my trades with the aim to learn from my mistakes and progress along this most intriguing, interesting and at times downright frustrating of paths.
Keeping a journal is an important step to undertake in order to make progress. Many traders that I have read about, spoke to, or listened to over the years have mentioned that keeping a journal was one of the things that really helped turn their performance around, they keep saying that, so here is my attempt. Perhaps we will look back on these posts in a few years and laugh. But not now, I can't, I just tried.
Today is July 4th, whilst our friends across the pond are celebrating I am in the process of losing around 20% of my portfolio in a few minutes. Here's how I did it kids....
I have a spread-betting account here in the UK. This enables me to trade stocks, forex, commodities, you name it, in a tax free account (UK law says gambling is tax-free, and because spreadbetter's don't bet on the actual instrument itself it's classed as a bet.....there's a more eloquent, and probably more accurate, description elsewhere but it is of little importance right now, especially in light of the fact that it is impossible to be taxed on 'losings'). Anyway, within my account I have funds of £2575 and the way a trade is made is that I can select an amount per point (or pip, or cent or whatever) and as long as I meet the margin requirements I can buy or sell to my hearts content.....did I mention it was a highly leveraged account!?
So by way of example if I want to go long GBP/USD I can place a 'bet' at £1 per pip and if the pair moves in my favour 20 pips I 'win' £20 (minus the spread, typically 1-2 pips). So far so good.
My strategy is a very simple one (and perhaps I will write about the 'Hero's Journey' of trading strategies another day), on a very basic level I look for a trend to start and buy the first pullback. That's it.
For today's post I will show you how to enter a good trade, make some good money on it, then totally destroy all that good work in a matter of minutes. Lesson 1 of many - entry is the easy bit, trade management and exit are the buggers.
I mainly use a 1 hour chart and a 15 (or 5) minute chart for Forex trades. I'll talk about my stock set-ups another time.
So the entry on GBP/USD yesterday (3rd July 2013) was at 1.5221 on my spread betting platform, it may differ slightly from a more 'direct' source. Cough.
The bigger picture was the chart below, a daily chart, price had bounced twice off the uptrend line and was fast approaching it again (more on this later), I recognized it might be a bear flag but the strength seen on the hourly chart convinced me to go long now!
The reasons, as can be seen on the 1 Hour chart below, were 4 fold:
1) Break of a multi week downtrend line
2) Penetration of a loosely placed resistance line with touches going back many weeks, if not months
3) A pull back on the 15 & 5 minute charts that offered a low risk entry
4) The realization that the shorts, that had been successful for many weeks, were now being forced to cover.
5 minute chart
Pretty text-book stuff so far eh? I even feel proud reviewing it. However this is where it starts to unravel.
Firstly, my first buy was for £1 per pip, so were the second and third buys. First mistake. Adding equal amounts, particularly when I didn't have enough cushion to start with, is a fatal error because it means you are most leveraged right at the top of the move.
I know all this 'theory' like the back of my hand, but this game is about 'practice' (like in the medicine, not like in demo accounts). Knowing and doing in trading are two separate things and the challenge, at least to me, is to apply that knowledge consistently.
At this point I was in the money on all three buys. Success in trading can ever so easily lead to cockiness and the trading gods will punish you every single time. Again, I know that in theory but....
At this point, with very decent profits (somewhere around 7-10% of my fund) I decided to look at the daily chart again and decided it 'must' now go back to the top of that channel (see first chart). Of course....
So now I had taken a short term system, made some money, got greedy, saw an opportunity for more-more-more and then looked around for other angles to validate my 'new plan'! Great idea. Again I know the theory....yawn.
Another lesson worth applying (and not just knowing) is that the best traders focus on how much they might lose, not how much they 'might-but-probably-won't' make. Tip: If you ever start calculating wild profits for yourself based on what you'd like to happen, like I did, SELL STRAIGHT AWAY!
So, we come to the big bad stupid *&*$^£@* humdinger that is almost too unbelievable to be true. I leave the trade on overnight, nothing much (usually) happens overnight but a disaster-insurance type stop wouldn't have been a bad idea....but anyway nothing happened overnight, so far so good. It pulls back in the morning and my 'profits' slowly trickle away but not to worry, it WILL bounce at the support level (former resistance) near my original entry...and then carry on up for days making me about 60% on my account. Easy.
The trouble was that, and this is addressed in every forex book on the planet, I didn't think to check the forex calendar (http://www.forexfactory.com/calendar.php) for any economic announcements that might have an impact on my trade. Knew I should, just didn't. Never been stung by it before. People worry too much. (In truth the thought never even crossed my mind).
At 12:00 some toe-rag called Mark Carney decides to make a little announcement......or 3. We had the Asset Purchase Facility announced, along with the Official Bank Rate and a surprise MPC Rate Statement for good measure. This was the result.
Price smashed through all 3 of my buys in an instant, through the support where it WAS going to bounce and through the low of the previous day. Of course, I was 'busy' watching crap on You Tube and when I casually switched my view to my account at around 12:14 I noticed a 20% hole in my account.
Lessons:
Where do I start?
- My 1st buy was fine, a strong reversal after a long downtrend, resistance broken and tested, shorts trapped.
- 2nd add in consolidation looking for 2nd leg up, not a bad idea considering the cushion of some profits but should have added 1/2 or 1/4 of the original position, if at all.
- 3rd add pretty much at same level, getting greedy now, increasing total risk, stupid idea no matter what!
- Pyramiding – a legitimate strategy but add much higher (especially a 3rd buy) and be ready to cut the adds at break-even or use a limited stop at the very least on the additional purchases.
- THE BIG ONE! The main point is that I did not THINK to look at the fx calendar and I was caught with a relatively heavy position during an MPC announcement! Dick. Check the feckin' calendar!
- Profits – when I start calculating wild profits SELL! It has NEVER hit my extrapolated windfall target, ever!
- I took a short term system that I know to work and extrapolated my profits and in the process changed my original plan into a long term swing trade. However, theres's nothing wrong with swinging a portion AFTER profits have been made and realized.
- You can read all the books and take all the courses in the world but in the trenches is where your education really starts....and it can be expensive.
- Overall cost of today's lesson £500+.
Interestingly, ironically, price has now stopped at the daily uptrend line on the first chart above but this is the grind you down with hope routine. Drip Drip. So my £2575 account now has (at the time of writing) a £514 hole in it. 20%. I'm going to give it a last chance and give it the smallest amount of wiggle room and get out when my loss is £575.....that will then leave a nice round number in my account. See, you can rationalize anything if you put your mind to it.
Even if this trade magically turns around and does work out it's still shockingly bad trade & risk management!
On the bright side, do you think I might check the calendar next time?
Till then. Nos Da.
