The month of June it would seem is just around the corner and my wife is busily counting down the days to our upcoming holiday. For me, however, last year’s vacation seems like only yesterday – a fun filled road trip which started in Las Vegas and finished up in Anaheim with, of course, a semi-obligatory visit to Disneyland. I confess I had mixed feelings about going to Disneyland, but when you have a six-year-old in tow it’s almost mandatory when one is in that neck of the woods so, noblesse oblige, daddy took the family to visit the “happiest place on earth”. And indeed, much to my surprise and delight, we all had a wonderful time (myself included) – despite having to learn a very hard lesson regarding Forex trading: protecting your capital is paramount – don’t put it at risk by taking signals blindly and failing to use proper money management.
Having been no stranger to visiting Disneyland, I was fully aware of oodles of downtime I was going to have to endure waiting on lines, followed by waiting on more lines, followed by waiting on even more lines. Not to worry, with my smart phone in hand and my trading apps at the ready, I was all set for a delightful day with the family without having to miss a beat on the trading front. Gleefully signals were received while waiting for the submarine ride and positions entered. Regretfully, by the time we got to the “It’s A Small World” Pavilion my positions ran away in the opposite direction, breaking through all resistance which resulted in my largest single trading loss in Forex. Much to my dismay, I single-handedly managed to blow up the smaller of my two trading accounts, and it only took two trades! Was this an example of poor money management? You bet! But before I continue, let me make the following disclaimer: I really don’t give financial or trading advice, I’m merely sharing my experiences in the hope that other, perhaps less seasoned traders, may draw some encouragement from these exploits and help to improve their own trading endeavors.
At any rate, had I been in my office and paying attention to my charts, I probably still would have taken the trades, but for sure I would have taken a smaller position and likely bailed much, much sooner. The takeaway for me was this: from that point on I would only open new trades when I was in my office, focused, and comfortable with some level of chart analysis. And I learned to regard signals as trading ideas, rather than orders. Ultimately I am 100% responsible for the success or failure of my trading account. Mind you, I still watch my trading activity from my phone when I’m away from my desk, but for sure if signals are received when I’m out and about, I’ve learned to just let them go. A Forex trading account is a serious business and needs to be run as a serious business. When the capital is gone, you’re out of business. So what needs to happen here is that one needs to limit losses and let profitable trades run their course. I do not always set a TP on my trades, but I always have a stop loss set so as not to lose more than my maximum allowable risk on any given trade.
I believe that an initial order of a new position is where my capital is at its greatest risk. If my anticipation of price movement is incorrect or if I incorrectly set my SL, I’m going to take a loss. This is why I like to start my trades small, and, if they develop into profit, I like to scale the trade by adding additional lots to my position. I will only do this when the initial position is in the money and adding additional lots does not pile on additional risk; that is, my SL on the initial trade is moved to breakeven or a small profit level and the new lots maintain the previous level of risk.
Here is where money management comes in to play. I want to increase my position and simultaneously start locking in profits. One way to do this is to add lots on pullbacks and take profit as the price gets extended, or hits resistance, etc. I’ve learned that when price is over 200 pips above or below the 200 SMA on a one hour chart that the price is considered to be extended. Now if I entered a position near the 200 SMA and price is now 200 pips above that moving average, taking profit on some of the earlier positions is a good way to trade. Now the hard part (at least for me) is to be patient and not close my positions as price gets extended, and just let the market tell me when the move is over lest I deprive myself of some additional pips. Here is where chart analysis come into play – we’re looking for an indication of reversal such as pin bars or engulfing candles, and so on.
Now for those unfamiliar with pin bars, Krystal put together an excellent series of video lessons on the Slick Trade website which explain these in great detail. If you haven’t done so I highly recommend checking them out. When such indicators appear on the one hour, four hour or daily chart, that’s the signal that this current trend is nearing an end and it’s time to lock in the rest of the profits. Of course, price movement can catch me off guard and price may do a quick reversal for whatever reason (missed news event perhaps?), But no matter, it’s just time to take the remaining profit and move on to the next trade. What I find I do more often than not, is I second-guess the trend reversal way, way too early, missing out on additional pips. But that’s okay, remember profit is profit, and any profit is always better than a loss.
Here are some rules for money management that I try to abide by:
- Do not risk more than 2% of your account; set SL accordingly
- Set TP high (or omit altogether) let the trade run its course (or use trailing stops)
- Don’t panic when pullbacks occur; use them as opportunities to add to your position (being careful not to violate the 2% rule)
- Watch for indicators of trend reversals and use that as a signal for profit-taking
I do confess that I struggle mightily with rule number three. There’s something in me that wants to quickly abandon a trade when price is moving in a direction opposite to the direction of my position. And drawdowns. Oh how I hate drawdowns. And learning how not to panic when a position went negative was difficult. I literally forced myself to sit and watch charts for hours on end until I developed some sense of comfort of how the currency markets behave and learned the “rhythm” of each currency pair that I like to trade. And, I suppose, as a consequence of this there are certain currency pairs that I came to understand better and became fond of trading and there are those that I understand less and absolutely hate trading.
I love GBP/USD. I hate USD/CAD. For me trading USD/CAD is like playing Monopoly as the “hat” token. I hate the hat because I always lose when I’m the hat. The hat is intrinsically cursed and evil. And I don’t care for the thimble either. I lost to my daughter this week as the thimble (at my daughter’s insistence no less) who is now seven and delights in bankrupting her daddy, but I digress. Yes I know it’s emotional and somewhat irrational, but seriously, I’ve rarely placed a CAD pair trade that performed well so I just avoid it. And that’s OK, to each his own with trading. I always enjoy reading the chat room when other members are sharing little nuances of how they apply a certain strategy or analyze the chart, or how they add a certain twist to how they take a trade, a departure from the standard flavor of the strategy. We each bring our own style to this business and, in so doing, we have much that we can learn from each other.
I remember not too long ago receiving a regimen of signals that were small overnight trades, usually about 15 pips profit. These trades performed well, but I noticed that before hitting TP there was usually a large retracement that was often larger than the trade was worth. It dawned on me that the thing to do was to not just place the trade as it was called, but “take” the trade in the opposite direction (or just use a limit order instead of a stop order) and I could then get profit both ways. But then that’s my style, your mileage may vary. But that’s the great thing about this business. Everyone has their own style of trading that suits their needs.
Now as I’m writing this I just took profit on a Davinci Donchian trade. I’m currently not taking many Nadex trades, but I like to trade these signals and I actually take them in my Forex account, and typically I can get an easy 6 to10 pips or more, that is, when I remember to follow my own rules as to how I take my trades.
Now I would agree that six pips may not sound like much, but remember, there are lots of Davinci signals and the pips do add up nicely; also remember with Forex, unlike Nadex, there’s always liquidity, you don’t have to worry about getting a price, the risk is lower, and the profit is about the same (at least it is the way I trade it). And that’s one of the beauties of trading, we can each do our own thing, in our own style.
Davinci Donchian signals are just one of the benefits that members of Slick trade can take advantage of. So if you’re new to Forex or Nadex trading or just interested in learning more, you might consider becoming a member of Slick Trade. You’ll get access to strategies, educational materials, and the helpful support of other traders just like you.
Have a good week, and, as always, thanks for reading.
Next week: Trading and automation
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