Taking L’s… US Oil being slippery!

Taking losses is something that no one likes doing but unfortunately, it is a part of life and a BIG part of trading the financial markets. Not one single piece of analysis you will do could be 100% guaranteed to work and if it is 100% guaranteed then you are most likely an insider trader. I will use this post to talk you through one of my most recent losing positions, why it ended as a loser and how I deal with a losing trade.

Let’s start with the trade set up and how and why I entered this short position on US Oil.

US Oil daily chart

My higher timeframe bias for oil was definitely bearish. After last years heavy bearish run in to December 2018, I was on the look out for an opportunity to get in on the next move to the downside. As I have always said, the markets never move in straight lines and after such a big move US Oil was bound to consolidate before any next drop to the downside. One of my favourite patterns to trade is the wedge continuation pattern and this is because of 2 reasons. The first is that they are very simply and easy to spot. The second is that they squeeze the market price so when the breakout eventually occurs the move is normally big and trades have high Reward:Risk ratio.

US Oil daily chart
(with short position)

US Oil was showing a nice bearish wedge set up with price now reacting and rejecting the $57 per barrel price zone and also the top of the wedge pattern. I saw 3 wick rejections on the daily timeframe which is a very strong sign of a potential reversal. With a stop loss of around 70 points and a target of the previous lows at $42.50 this swing trade short position had an excellent R:R ratio of 20:1.

I then dropped down to the 1hr timeframe to look for a more accurate entry and to make sure that I would not be caught in any lower timeframe “chop” if I entered now.

US Oil 1 hour chart
(with short position)

On the 1hr chart it is more clear to see the price reactions at the $57 zone with price being kept below. There was also a clear break of the bullish trendline on the 1hr chart with price then popping back up to retest the broken trendline and $57 region once more. This was my ideal opportunity to enter on this 1hr lower high.

This trade set up ticks many boxes for my technical trading strategy. The higher timeframe is bearish, the daily candles are showing as bearish and the bullish trend has been broken. I entered a short position at 11am on February 25th.

Let’s look at how the trade played out and then I can explain what I did wrong that resulted in a full 1R loss.

US Oil 1 hour chart
(as at today)

Initially, the trade went very well. Price snapped downwards after retesting and rejecting the $57 zone. A 1hr lower low was made and I was happy to hold this trade (point 1). In hindsight, I should have moved my stop loss to entry price to remove exposure on this position but because I was looking at the longer term picture I decided not to.

Price then almost completely reversed over the next 3 days to make a higher high above the $57 price level (point 2). At this point, I was accepting of my risk and left the position to do what it would do. On the daily timeframe, the daily candles never actually closed above the $57 per barrel region around the 1st March 2019 so this did give me confidence.

And then like deja vu, price snapped down again to the daily wedge pattern trendline where it then hovered on the Friday evening before markets closed (point 3). I like the idea of consolidation around trendlines because it normally means momentum is due soon and there is a strong probability it will break the trendline but in this case I was wrong. Price “hovered” and then slowly climbed back up to just below the $57 resistance zone. Normally, I would have been out of this trade at breakeven by now but I slipped up earlier in the position and didn’t manage my risk as well as I normally would have.

As a trader, you will go through many emotions when holding a trade position. The elation and excitement when it starts to go in your favour and then the despair when it reverses. The nervous wait when it is hovering around your entry price. These are all things you have to deal with and if i am being honest… I let the elation get the better of me on this trade. I let it build my confidence too high and this stopped me from managing my risk correctly.

As you will see on the chart above, price snapped down once more and made another lower low (point 4). Again, this gave me great elation and I was now going in to the weekend confident that price is going to drop through out the following week. Oh how I was wrong. I left the charts at around 3pm on Friday that week and price then almost completely reversed the whole days bearish move. This left Fridays daily candle closing very ugly indeed.

US Oil daily chart

This was my final error in managing this trade. After the daily closure forming a very bullish wick candle (4) I should have closed the trade or at least moved my stop loss to breakeven and eliminate risk. But I didn’t and as you can see in the chart, price then climbed through the following week to hit my stop loss 3 days later.

This post has been very long and word heavy but I want to show how I manage a trade or in this case… how NOT to manage a trade. I am still human and I am not perfect and I do make mistakes and this trade is an example of how I didn’t manage my risk correctly and missed multiple chances to avoid a failing trade.

My top tips for handling’s losses are this:

  • Don’t take it personally. Losses are a part of trading and every trader will take a loss at some point.
  • Learn from it. Write down what went wrong and see if you could have avoided it.
  • Take a break. The worst traders are those that think it wasn’t their fault and then double down or take another trade instantly to try and make up for the loss. Leave the charts for a few hours, reflect on it and come back later.

Remember, the power of Reward:Risk ratios should almost carry you through losses in to overall profitability in the long term. This is the key to trading and investing… being profitable in the long term. You should not be measuring returns in days, weeks or months but instead thing years! 3 years, 5 years and 10 years. That is the key to long term profitability.

All my trading analysis is done via the Trading View platform and I highly recommend it. It is so easy to use, has all the tools and information I need and is good value. Click on the link below to take a look at the platform.

https://tradingview.go2cloud.org/SH3bP

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