*A review of a recent USDCAD FX short trade that didn’t quite go to plan*
In this blog post I am going to show you the pre-trade analysis and trade management for an intraday FX short trade I entered on Monday. I believe the technical analysis was correct and it provided a good trade entry but unfortunately the direction of momentum did reverse. Thanks to my risk management rules I managed to avoid a loss of trading capital and this is what I want to show you today.
Risk management is very important when trading, I would go so far as to say it’s more important than timing your trade entries perfectly. If you do not constantly manage your exposure then it does not matter how good your win rate percentage is, you will lose in the long term.
Stop loss placement, accurate position sizing, scaling in and scaling out of positions and removing exposure from trades are all good examples of risk management techniques that I use when trading the financial markets.
TOP TIP: Use the MyFXbook position sizing calculator to accurately size your positions according to your desired risk levels https://www.myfxbook.com/en/forex-calculators/position-size
Let’s get right in to it and look at the charts for USDCAD prior to my short position entry. As always, this trade set up was posted on my TradingView profile prior to my short position entry. You can track the progress of this trade live by clicking on the link below.
Starting with the higher timeframe weekly price chart, there is a strong confluence to take a short position at this zone. Price has previously found resistance at the 1.46500 price zone back in late 2015 and it then went on to drop by over 2000 pips in the weeks and months that followed.
These higher timeframe zones do tend to provide large reversals but they can take time to get moving and do require large stop losses. I much prefer to enter on a lower timeframe to try and take advantage with greater reward:risk ratio positions.
My entry was timed on the 1hr timeframe chart and I used the rejection of a previous intraday support/resistance zone combined with the 0.618 fibonacci retracement level for my short trade entry confirmation. Multiple rejection candles closed below this zone with a nice 1hr bearish wick rejection candle closing at around 8am.
My initial profit target was set at the next intraday support zone around 1.41500. Also at this area was a bullish trending that is drawn across the higher lows of the previous predominant trend. This price level has a good potential of producing a bounce and therefore it is a good place to take profits.
With a 60 pip stop loss placed above the highs of the current candles that rejected the 0.618 fibonacci retracement level and profit target at the previous lows, this trade still had the potential to return over 5R.
After taking some time to lose the last of its daily bullish momentum, USDCAD began to roll over before selling off with strong momentum. As you can see on the 15 minute chart shown above, there was a number of “spinning top/doji” candle closures which are a good sign that the current directionally momentum is slowing. These were then followed by one large bearish momentum candle.
Price actually dropped over 110 pips in 1 hour from the highs of the daily session which is very strong. After seeing this occur, I moved my stop loss order from 1.45098 down to just below my trade entry price at 1.44498. This removed any and all risk from the trade.
Why did I do this?
Hesitating, not making clear decisions and watching and waiting are some of the worst traits a financial markets trader can have. I like to think that either my analysis is right or it is wrong and I therefore do not enter trades that are likely to not move for days or weeks on end.
When I see strong momentum move markets in favour of my trade I will remove risk. This is because it appears I was correct and therefore price should now make moves down towards my profit target levels. If price begins to reverse and make it’s way back to my entry price I would rather be out of the position for no loss and be on to the next potential trade instead of being stuck in this trade that is now choppy and going sideways in and out of small amounts of profit and loss.
From my experience, if you see a trade reverse after a 100 pip sell-off like seen in this example on USDCAD, then your analysis was not quite correct and you have not timed the entry quite right. Get out of the trade, retain trading capital and move on.
This is one of the many risk management techniques I use when trading the financial markets. If you want to learn more then please do check out my Mastering The Markets – Retail Trading Course.
What happened next?
As you can see on the chart above, price found intraday support and began to rally again. This is a sign of choppy market structure beginning to form because in normal market conditions, a strong bearish momentum move is not often met with opposing buying power right away. From there, price went on to trigger my stop loss order at it’s new position to take me out of the trade with no capital loss.
However, If I had not moved my stop loss order and not removed exposure then I would have been in a losing trade because price continued to rally through the remainder of the trading day and make daily highs over 50 pips above where my original stop loss was placed.
Managing risk is tough. It relies heavily on trader discretion and experience because if you are too aggressive then you will tend to miss out on good trades as well as bad. The idea behind the method of risk management I have explained in this blog post is to tilt the scales of success further in your favour.
You want to avoid more losing trades whilst maintaining your ability to stay in good trade positions to improve your overall long term profitability. This takes practice, know how and even then it is still likely you wont get it right 100% of the time. I still make mistakes when managing risk but much like losing trades, it is a part of this game that we play.
The financial markets are tough right now! Fundamentals are driving the markets and global risk attitudes are pushing and pulling price on a daily basis. Market volatility is high which is making longer term positions difficult because of continuous price reversals. Also, previously strong market correlations are proving to be non-existent making investment decisions tougher.
You must be resilient and change your expectations. Simple day trading and lower timeframe trading can prove to be very fruitful in these market conditions and provide you with slow and consistent capital growth. Friday’s blog post will be about day trading and I will show you the most recent lower timeframe position I entered and explain the analysis to you all.
All my technical analysis is done using the TradingView platform. You can get access via the link below.
My preferred broker of choice is IC Markets. Low spreads and trading costs really help long term profitability. A link to their site is below.
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DISCLAIMER: None of the information posted on this site is to be considered investment/financial advice. Trading is high risk and you should only trade with money you can afford to lose.