How Many Times Have You Exited a Position Early?

Do you have a problem with exiting your positions too early? I always have.  It’s one aspect of my trading that concerns me because I’m never sure if closing it early was the smart thing to do.  Let me give you an example which just happened to occur today.  I went long on the EUR/CAD before the European session open.  I went to bed and woke up to see the position up 80 pips.  I had a 100 pip stop loss and a 200 pip target.  I was a bit surprised to see it up this much so quickly.  I thought about it for a minute and decided to close the position and take the profit.  Why violate my pip target? Based on my experience with the ebb and flow of the currency market, I figured there was a good chance that the price will not continue in my direction and retrace, wiping out any profit I had. I’ve seen this happen so many times.   Today, this didn’t happen.  The EUR/CAD continued going up and would have easily hit my 200 pip profit target.  This frustrates me more than losing.  Here are a couple of ways I’ve handled a position that goes in my favor by a substantial amount:

1. Close it out based on feel or maybe fear.  I’ll do this even if I have a target set on the position.  My rationale for closing it is that either I’m satisfied with the amount of profit or I’m fearful that if I don’t, the pair will turn against me and wipe out my profit.  
2. Close a portion of my position based on feel or fear and leave the other portion open to run if the pair continues in my favor. From my experience, when I do this, more times than not, the remaining portion gets stopped out and I lose the profit.  Almost always, when I close a portion of my position for profit, I’ll set the stop to breakeven on the remaining portion so I won’t lose any money.
3. It runs to completion and my target price is hit.  This almost always occurs when I don’t have time to monitor the position.   The target price usually gets hit very quickly.  I typically obtain my highest reward to risk in this scenario. 

In scenario #1, I feel good about the trade if I close it out and then it does exactly what I thought it would, turn against me.  I don’t feel so good if the pair continues in my favor after I’ve closed it and would have hit my target.

My feelings in scenario #2 and very similar to those in scenario #1.

In scenario #3, I feel great about the results of the trade.

So which is better, any of the three scenarios or flat out losing money on a trade? I think not losing money is best but the first two scenarios can sometimes lead to losing money.  If I’m not getting a decent reward/risk because I’m exiting a position too early, when I do hit that losing streak (trust me, it will happen), my losses could be much greater than my gains.  How many times have you closed a position early when it at a negative and not going in your favor? I can count the times on one hand. 

I’d love some feedback on what your experiences are and if you can relate to my possible problem.  It hasn’t affected my profit the last month and a half though.  I’m up over 13% this month alone but like I said, this could be short-lived if I don’t address this now.    

Popularity: 12% [?]

March Begins On The Upside

Since I had such a terrible forex trading month in February, I've had to do some thinking over the last week to re-evaluate my trading.  What kind of things have I been thinking about? Let me give you a quick brain dump right now.

1. My comfort level with the GBP/USD is getting increasingly better and better.  Obviously no one can predict what direction a currency is bound to head but I feel like I've been able to determine the correct movement of the GBP/USD to a certain extent.  Now I just need to find out how to profit more from this.  Maybe I need to be more instinctual in my trading and go with the feeling. 
2. On the other hand, I am totally uncomfortable with my stop loss levels.  I received one comment about my poor choice of a 1:1 reward/risk when I trade the GBP/USD.  His answer was simply to use a 15 pip stop and 30 pip target which would give me a 2:1 reward/risk.  Unfortunately I think this is much easier said than done.  I've had enough experience over the past 18 months to know that a 15 pip stop with the GBP/USD is suicide.  You need to pick a less volatile currency pair if you want to use a 15 pip stop, like the AUD/USD.  My problem is that I have a full-time job and I don't have the luxury of trading the European session.  Therefore I cannot incorporate a more complex stop loss strategy.  I don't know what the answer to all of this is.  I'm fully aware that in order for my h-system to be profitable in the long run, it needs to win more than lose.
3. Due to visitor comments on this site, I'm more intrigued with the possibility of opening an account with FXDD.  Doing this would allow me to use expert advisors with Metatrader.   I previously turned the h-system into an expert advisor so the only additional work that would have to take place would be if I incorporated a different stop strategy. 
4. Part of the reason my performance from last month looks so bad is because I hastily used the h-system on the GBP/CHF and GBP/JPY.   I lost my focus.
5. March has started off better, I'm currently up 114 pips.
6. I'm not going to pressure myself as much to add another system using other currency pairs.  I'll continue to search for a new system because I enjoy the challenge but my focus should remain on the GBP/USD.  As I state in #1, if I can continue to increase my comfort level with the GBP/USD as much as possible, this may be the answer to success. 

In the meantime, I'm trying to recover from my full-time job's hectic schedule last week.  Due to the increased volatility in all the markets worldwide, especially in Asia, the corporation I work for was affected and there was a rush to extend certain IT infrastructure levels.  This need will continue into the upcoming week so I'm hoping that I can still stay focused on Forex trading also.  

Popularity: 2% [?]

Innovative Way Of Determining Stop Loss Levels

I was reading an article last week and the author's method of determining his stop loss levels was new to me.  I had never before heard or read anyone else who does it this way and that is why I'm posting this information.  I'm not saying I'm going to adopt this method in my trading but it is certainly refreshing to get a different perspective.

The author, Derek Frey, uses the fibonacci sequence, specifically 8, 13, 21, 34, 55, and 89 as stop levels.  For example, let's say you are shorting the USD/JPY and you use normally use the previous high as your stop level plus five pips, in this case, 121.66.  What the author does instead is to find the next closest Fibonacci number, which is 89, and would set his stop loss at 121.89.  This is all open to trader discretion and depending on market conditions such as volatility, one could also use the second closest Fibonacci level in this case, which is 8, setting their stop at 122.08.

The entire article titled, "Using Stop Loss Orders to Determine When to Enter a Trader" is worth the read and can be found in the March 2007 issue of PitNews eMagazine.  Unfortunately I can't post the pdf here because that got me in trouble with Currency Trader Magazine a while back.  You can obtain the entire issue for free by going to http://www.pitnews.com.

Popularity: 2% [?]

Logical Stop Placement

Since I have deemed this week, "Money Management Week", I felt like I should mention a new Investopedia article titled, "A Logical Method of Stop Placement." I'm not overly impressed by the article but you might find it more useful than I did.   The author gives a brief overview of 5 different types of stop methods:

1. Hard stop – placing a stop a predefined number of pips away from the entry price
2. ATR % stop – stop calculated by taking a percentage of the current ATR
3. Multiple day high/low – placing stops at predetermined day's low or high
4. Closes above/below price levels – placing stops above or below specific price levels (ie: double zeros)
5. Indicator stop – stopping out a position based on the value of a certain indicator (RSI, ROC, CCI, etc)

You can read the article in its entirety.

Popularity: 3% [?]

Reevaluating My System

After almost 2 weeks of trading my plainly named system, the "H-system", I've received mixed results.   Results looked great after week #1 but since then, I've suffered 3 straight losses on Monday, Tuesday, and today.  So far, this system has 5 wins and 5 losses but I'm still up 109 pips or $1090.  

I said earlier that I may need to reevaluate my stop loss strategy which I am now doing.  The last 2 losing trades could of easily have been wins instead of losses.  To address this issue, I've decided to tweak my system a bit.  I've widened my stop loss and have moved it to the next level of support and resistance.  Whereas before, I was setting my stops at the 2nd level of support/resistance, I am now moving it to the 3rd level of support/resistance.  This will on average increase my stop loss by 6-10 pips per lot and therefore increase my risk.  I will only be using the 3rd level of support/resistance for the early morning European session where these spikes are happening.  If the US session opens and I'm managing an open position, I will move the stop loss back to the 2nd level of support/resistance.  If a trade is initiated during the US session, I will continue using the 2nd level of support/resistance.   

So I've increased my exposure a bit and I'll just have to wait and see how it turns out. 

Popularity: 4% [?]

Stop Hunting Strategy

Stop hunting is the art of flushing the losing players out of the market and is very common in the FX market.  Large speculative players such as investment banks, hedge funds and money center banks are largely responsible.  Many FX traders claim that brokers are responsible also, creating price spikes that are short-lived and aimed at taking your money.  You can read more about this by another blogger at http://www.forexforays.com/2006/05/so-whats-stop-hunting-exactly.html

For this reason, you should seriously consider placing your stops at "less crowded and more unusual locations." (Boris Schlossberg) 

In a recent article by Schlossberg, he mentions a strategy to take advantage of stop hunting.  It requires a price chart and 1 indicator.  For example, if the price of the EUR/USD is approaching 1.2800 downward, mark lines 15 pips on each side of 1.2800 at 1.2815 and 1.2785.   This 30 pip area is known as the "trade zone."  1.2800 is used as the stop hunting level since these round numbers are where speculators will try to target stops.  The idea here is to quickly ride the momentum for a quick profit.  If you determine with your indicator of choice which direction momentum is going or which direction the trend is going, you would want to trade in this direction.  For this example, let's say that momentum is down and the price is below a moving average.  You would short the EUR/USD at 1.2815 with at least 2 lots with a stop at 1.2830 and an initial target of 1.2800.  If the price continues down and hits 1.2800, close 1 lot.  Set the target of the second lot at 1.2785.  At this point, you have already made 15 pips so your risk now is 0.  If the price continues down to 1.2785, you have made 30 pips on the second lot and 15 pips on the first for a total profit of 45 pips.  If the price did not continue down to 1.2785 and instead retreated back above 1.2815, you would have neither gained nor lost.  

I'm using the above example because it is actually happening as I write this.  The EUR/USD closed at 1.2837 at 7 am this morning on a 15 minute chart.  The 7:45 am candle would have given you an an entry at 1.2815.  By 9:00 am, your first lot would have closed at a 15 pip profit.  Since then the price has made it to within 8 pips of your second target but is now retreating back to the 1.2815 level.  Most likely, you will be stopped out on your second lot for a total P/L of 0.

You can read the full article at http://www.investopedia.com/articles/forex/06/StopHunting.asp  

Popularity: 7% [?]

The Breakeven Stop Loss

I am interested in the subject of Breakeven Stop Losses because when a trade goes my way, I typically will move the stop loss to breakeven so that there is no longer any risk to me.  Typically what I find happens is that my stop loss gets hit and I don't win anything and don't lose anything.  Is this a good thing?  Not at all. 

There may be a pretty good reason why this happens to me.  I think it is because I'm selecting an arbitrary pip target.  For example, after an open position goes 20 pips in my favor, I move the stop loss to break even.  Since I used technical analysis to enter the position, to determine my limit and initial stop loss, I should also use technical analysis to determine my break even.  I'm not doing this.  In addition, I'm only trading 1 lot at a time.  Typically traders will use breakeven stops in conjunction with an exit of some portion of their multi-lot position.  So if I had entered a position with 2 lots, I may close 1 position at a 20 pips target and then moved the last lot to breakeven.  That way I would at least make 20 pips on the trade if the price moves against my last position and stops out at breakeven.  I should also mention that I recently read somewhere (I forget) that you are destined to lose if you only trade 1 lot at a time.  I may look into this more and make it a future post.  The problem is if you have limited initial capital to trade, you may not have an option to trade multiple lots.  Most would say then don't trade at all and wait until you have enough capital to trade in multiple lots.  

I don't know if this is the problem or not so I decided to get out there and search for some opinions of other traders regarding a breakeven stop.  Here are some of the things I've found. 

• Joe Duffy from futuresource.com does not use breakeven stops because he states that typically it creates too tight of a stop loss.  His experience tells him to move the stop as the trade becomes profitable but not all the way to breakeven. 
• Davide123 a senior member from the Forex Factory Forum states:  "You see, tight stops of the magnitude being discussed here make no
  sense to me in a market with such a wide trading range. I don't think
  you can make consistent profits, and therefore a living out of trading
  fx, unless you rearrange the way you think about the whole business and
  give your trades enough space by putting your stops at strategic places
  and leaving them alone to get hit if that happens to be the case. The
  trick, IMO, is to cut down on the number of times you think you have to
  win, and increase your tolerance for the frequency of losses (within an
  acceptable level drawdown, of course)."
• Tradenexus.com states that a breakeven stop should be placed once the price crosses a "transition point" which was part of the Turtles trading technique.
• A lot of what I read about breakeven stops are related to multi-lot strategies.  IE: When you have reached your first profit target, close out half the position and move the remaining to breakeven.

I think the point here is that I'm trading not to lose instead of trading to win.  As previously stated, trading 1 lot also makes it very difficult if not impossible to have any exit strategy other than closing your position once your target is hit.

Popularity: 5% [?]

Don’t Move Your Stops

Here is a quick lesson from Sam Shenker about moving stops which I’m sure we have all been guilty of.

As a trader one of the lessons I learned the hard way is to never move my stops against the position. One of the most common mistakes made by the novice traders is to move the stop against the position once the trade start going against him or her. As the trade keeps going against the trader and once again approaches the stop, what do most of traders do, they move the stop again, thus increasing an unrealized loss, but unrealized loss is still a loss and a real one at that. In order to become successful, a trader must learn that the initial stop most of the time is a correct stop, because if the stop is triggered it usually means that the trader is on the wrong side of the market and by moving the stop he or she only increases the loss. The reason why traders move stops is hope that the market turns around and goes in the direction of the trade, but hope has no place in the market, protective stops do. Remember:  NEVER MOVE THE STOP AGAINST THE POSITION, BECAUSE BY MOVING STOPS AGAINST YOUR POSITION YOU ONLY INCREASE THE SIZE OF YOUR LOSS.

Popularity: 6% [?]

Risk Reward and Trading for a living

These were comments posted by Greg and Blackday, both of them more experienced traders.  In addition, it should give us motivation to strive towards our goal.  Blackday has been trading full-time for 8 years now! (Thanks Guys)

Blackday: "The turning point at which trading became successful for me began when I placed my stop and target an equal distance spread from the spot price. I bought the risers and sold the sinkers … I have never once looked back."

Greg: "I’m familiar with the stop loss/target stategy you use. What you also do with your decision-making is consider risk to reward ratio very carefully. Agree?"

Blackday: "In reality, risk and reward are equal measures for it is a wizard that would be able to tell you with absolute certainty where the market will end up. By placing a target and stop loss an equal distance away, we are then left with the decision on our preferred direction.

Let us all for one moment forget about why the market is moving today and instead concentrate on where the market is heading. How can we find this out? First we must look at the historical price action on our choosen time frame right up to the current spot price, for it is here that we find the strongest clue for our entry. Then we must pick up the trend and run with it. For clarity, remove all chart studies and indicators from the screen save Fibonacci levels and trendlines, keep watching price action. Make your entry and note the price formation as it takes shape (higher highs + lower lows for longs, lower lows + lower highs for shorts), look to previous tops and bottoms and use them as intermediate targets if they appear before your own target level and use them to adjust your stop loss.

Now we can switch our attention to why the market is moving and continue to monitor if matters have changed. Read the the news as it flows (I use AFX, 4Cast and UBS for this purpose), concentrating on limiting a possible loss until such time as you are comfortable with what it could bring ie: stop to break even. There we have it – a fighting chance – a jolly good one at that."

Popularity: 2% [?]