Thursday, August 11, 2011

EURCHF - swing trade example

A big challenge for me while in a trade is knowing when to hold 'em, and when to fold 'em.  Sure, if you have your set targets and stops in place, it should be easy, right?  But how often have you tightened up your stop, just to lock in a little profit or reduce your risk exposure...only to have it hit your stop the penny, and then resume going back in the right direction?

Swing trading as an exercise to let go
So one of the "exercises" I'm working on is to learn how to let a trade ride, until it tells me to get out.  Let the trade shake, rattle, and roll all it wants, that is, until a key level breaks, a reversal pattern shows up, or it hits my stop and/or profit target.  For me, swing trading helps me to let go of the second by second "details" that's required in day trading.

Why forex?
Back in the early '90s, I spent a little time trading the Swiss Franc futures when they were quite active on the CME, so I have an affinity for the Franc.  I've barely kept an eye on the Forex charts on and off for a few years, but it's only recently that I've had the time to revisit the currencies.  But more importantly, by trading the forex, I'm separating those trades from my equity trades, so there's greater mental segregation.

Some general observations on forex vs. stocks
  • In general, Fib levels and trend lines still work well (just the way they always have)
  • The 15 min charts are a good compromise to filter out noise
  • Some elements of the Trader-X methods work (Fibs & candlesticks), but I've had to make some adjustments
  • Unlike stocks, there's one indicator I use which is the fast stochastics (8, 3, 3).
  • You can trade very big size
The trade
The EURCHF came up on the daily charts as having broken some critical trendlines.  I was stopped out of a couple earlier trade earlier with small losses, but this one more than made up for it.  Here's what the daily charts looks like:

 Entered on 8/4/11 based on the following conditions:
  • On daily chart, there was a breakdown below the lower trendline (see chart above)
  • On 15 min chart, descending trendline acted as resistance, price failed at this level
  • 5ema crossed below 100ma
  • Stochastics hooked over
  • Red candle formed
  • Stop was above the high of the trigger bar
EURCHF - 15m - at time of entry on 8/4/2011
Exited on 8/11/11 based on the following conditions
  • Prior day high was broken
  • Descending trendline of highs over past 4 days was broken
  • The .618 retracement of the last swing on 60 min chart was broken
  • 5ema crossed over the 100ema on 15 min chart earlier in the day (potential trend reversal)
  • Multiple high swing highs and lows were in place
EURCHF- 60 min 8/11/2011 partial day
EURCHF - 15 min 8/11/2011 partial day
What I could have done better
  • When it hit near parity 1.00 (panic low) on 8/9, I should have considered scaling out partial
  • My stop should have been closer to the point of breakout (I wanted to give it a lot of room, perhaps it was too much)
  • Even better, my gut was telling me an hour before getting stopped out that a reversal is taking place, and that I should be long. But I didn't want to do a stop and reverse for the purposes of this exercise.
Each mini-contract required a little less than $300, and at the peak, I was up over $1300 per contract, and I eventually closed out a little less than half of that.  A reminder to me that there is HUGE leverage in forex, and you really need to focus on risk.

It's interesting to go through an exercise such as this, since it's different in many ways from the usual day trade, and obviously quite different when compared to long term investments.  I am at the stage of trying to experience various types of trading styles and conditions in order to grow as a trader, so from that perspective, mission accomplished.  I've also realized that if necessary, I can be disciplined to hold a position over various bumpy rides for a week. 

But from this exercise, I realize that there's still A LOT more I need to learn about myself before I can become a consistently profitable trader.

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