Happy Friday Everyone! The weekend is pretty much upon us.
This post will be my final one for the week and it should be very good for those new traders (and some old traders) who struggle with the psychology of trading the financial markets. How to deal with “failed” trades and trades reversing. The ultimate annoyance for all traders.
Let’s look at my current trade on the EURNZD FX currency pair. I have been holding a short position and bearish bias on this pair since last week. Although my bias has remained the same and I am holding a trade that is now over 2% in profit, I have actually had 2 “failed” trades on this currency pair in this time.
Question: So why am I still winning?
Answer: RISK MANAGEMENT
I will now explain what I mean by risk management and why it has turned what was a very choppy period of time into a profitable trade. Eventually. The chart below is of my initial short position entry with the analysis marked on.
My original risk management plan for this trade was simple. A conservative 40 pip stop loss equating to 1% risk of my trading capital and as always, I will move my stop loss to my entry price when the market price has moved 30 – 40pips in profit. Perfect. Now let’s look what happened.
As you can see, price initially dropped off over 50 pips so I swiftly moved my stop loss to entry price. This may seem overly cautious but from my own backtesting and trading, I would rather be stopped out for no loss and no gain and be able to try again vs being stopped out for a loss. Price then did exactly that, it reversed back past my initial entry but because I had removed any exposure, I did not lose any capital. I then waited to see what price did next to see if I could enter again and I did just that. The 2nd short trade is marked on with the 2nd black arrow and the entry criteria is on the chart. Now again, let’s look what happened.
Once again, price fell almost 100 pips this time and again, I moved my stop loss to entry to remove any exposure on the position. Then, just like before, price almost instantly reversed with some strong bullish momentum to take me back out of the position for zero loss & zero gain. Perfect.
At this point, it is hard to not get annoyed but a good trader will always ignore the emotional aspect. We haven’t lost anything, we haven’t gained anything, so keep going! The markets aren’t picking on you, they are just moving as they always do in their own unique way. And this is why I can happily write a blog post stating that although I had 2 “failed” trades, I am still winning. This is because of what happened next.
I saw a 3rd and hopefully final entry on Wednesday afternoon after yet another nice 4hr wick rejection of my Fibonacci resistance zones and price failed to make a higher high. I decided to ignore the broken trendline at this point for various reasons. I entered another short position.
As of time of writing, 9pm on Thursday evening, EURNZD is now almost 140 pips in profit and the position is running risk free thanks to my stop loss placement. Hopefully this time it does not reverse and instead continues to my profit target.
This bog post may be a bit long and word/image heavy but the main point I am trying to get across is this… make sure you have a solid risk management plan built in to your trading strategy. And stick to it! With a decent risk management plan, you can afford to fail twice and still carry on to capitalise on the market move that eventually does take place. With no losses of capital needed to get there.
This week has been very busy so I am going to be taking Friday off. See what I got up to this week on my instagram page by clicking here 🙂