The sinking feeling when averaging downs go south

Some familiar feelings when the market goes firmly in the opposite direction.

This method of trading is known as averaging down and, believe it or not, it is a method used by thousands of traders. In fact, it is a strategy that I used for years. 

I remember the last day that I used it. I was trading the S&P Futures. At that time I always placed my orders in thirds. I bought the first third of my contracts. The market immediately moved against me and I was losing money. Fear reared its ugly head but I refused to acknowledge it. I responded by buying another third of my position. The market continued to fall and I continued to lose. It was getting harder and harder to stay calm and keep panic from sabotaging my strategy. My palms were wet with sweat, but I stuck to my plan and I arrogantly bought my final third. My losses kept getting greater and greater. I was getting sick.

On this particular day, the bears were clearly in charge and the market continued to fall relentlessly. My losses were increasing every second, but I just held on and waited for the reversal that I was sure was coming. I would not give in to fear and I would stick to my original plan, no matter what. After all, I was a professional and I knew how to analyze the market, right? I just needed to give the market time and it would validate me. Just hold the position and wait. This was no longer a trade, this was a war. 

I waited for the market to shift and turn my way. I stared at the profit and loss box on the trading dome for what seemed like an eternity and I watched my losses increase as I sweated and my stomach flipped. My original arrogance gave way to fear and panic. I had not considered being wrong and I had no plan for dealing with the fear I was experiencing. I was immobilized. I felt like a pedestrian standing on a street corner watching an automobile headed straight for me, but I could not move to get out of the way. I was a sitting duck.

On that day, the market did not reverse and eventually my losses were so huge that the truth hit me and hit me hard. I could not deny it any longer. I was wrong! I had been a bull in a bear market and I could not buy my way out of my error. By adding to a losing position, I had only increased my losses and dug myself into a deeper hole. Those are the days you want to forget.

-- Winning the Day Trading Game, Thomas L Busby, pg 66 

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Moving Stop Loss

I came up with an entry plan.
I came up with a stop loss.
I came up with a target price.

My entry was matched.
My target price was hit at the end of the day.

I lost money.

Why??
I was too kiasu that I moved my SL to a tighter margin too early, a SL that's lower than the initial plan, but not a level that will make me break even.

Lesson learnt? Don't move your SL unless it's to break even level (protect profit), or to put a trailing stop. What good it has to change a SL from 50pips to 30pips? If I could afford 50pips, why reduce? If I think 50pips was a reasonable margin, why change?

It reads, fear.

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My Reply to Trading Buddy

"thanks for the sharing
it's tempting and itchy watch pairs drop as we thought, but not quite exactly as we planned
but i'm glad to take it as a free lesson also

not only when we lose money that got lessons to learn, but it's the same when we're not making money (or loss); why missed, why i choose not to trade, why others make money and me not:

1. i missed because it was more momentous than i predicted earlier
2. i chose not to trade because it might mess up my plan - imagine in a military operation, when everyone is on position, waiting for a target to go near to a certain location and then the sniper will pull the trigger followed by other units' actions. but now the sniper saw the target was walking sooo slowly, and so easy to hit the target, so he releases a shot.... whatever the outcome is, it would make the operation plan invalid.
3. others make money and i don't because it's not my strategy. Germany could thrash England 4-1 because they played team game, quick in counter attack, strong physique. If Brazil use the same tactic to play against England, maybe different result because their playing styles are different. Use their own tactic maybe they'll win 1-0, but it is still a win.

at least this time market's movement didn't make me confuse :D if it moved according to what i initially planned, but i still got swung out, then i'll have to stare at the wall for a few moments first to gain clearer mind...haha"

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GBPUSD#8 - Stopped Out

I entered this trade as planned. Shorted it when it closed outside the cloud again. But a quick and sharp reversal happened soon after that.

When I got stopped out, it was actually a nice reversal pattern formed, but didn't go for it as I thought I should not react so impulsively.

One thing about the entry was, the Chikou did not break and close below the cloud. So it wasn't a very safe entry in fact.

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GBPUSD #4 - First Try of Using Open Order

In 4H chart, after price action bounced up after hitting cloud bottom, I was always looking out for a reversal sign (note: again, was I biased??). I identified several possibilities of resistance:

1. 2/3 retracement, approx. 1.4608
2. Top of cloud, approx. 1.4630
3. 80% retracement, approx 1.4661
4. EMA200 on 4H chart

While observing price action around the first few options, there were no clear sign of weakness (although it always showed a few fake moves). Finally I thought it should not break the EMA200, and even it does, won't be by a big margin, else it would be break the small white x. So, I placed an open short order around EMA200.

When I wake up, there wasn't anything in my "Open Position" window. But that was just because my order had been matched, and SL triggered T_T

Lesson learnt? Hm...I don't think it's so wise for a beginner like me to put an open order just like that? Not until I can forecast the market rather better.

By the way, I didn't fail to notice a nice reversal sign on 4H chart, a Dark Cloud Cover was formed! But due to technical problems, I couldn't place an order -.-

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GBPUSD#3 - Winning but Not Satisfying Trade

As planned in the very beginning of last week, was expecting GBPUSD to form a Big White R, S waves before T extension. Also, forecast GBPUSD to go up slightly before continuing it's rally down.

However, it happened quite the opposite - dropped a bit at the beginning of the week before a bullish run up.

As labeled in the 1H chart above, I entered the trade after the Dark Cloud Cover reversal pattern, predicting it might be the end of S wave and start of T.

It went down as predicted, and of course I was glad.



I woke up the next morning with rather satisfying (for me level) 60-odd pips. But as now shown on the chart, it was a strong bull run for 2 days. Though I didn't get my SL triggered, but I exited the trade with less than 20 pips of profit. Of course any profit can't be bad, but as a review, I think I should have exited from the trade when 4H chart showed the downward action was disrupted when the candle break the bottom of the cloud but closed as a white candle way inside the cloud. It was a sign of weak bear.

Lesson learnt.


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GBPUSD#1 - Missed Rally

I was watching this pair very closely when the before the big rally down. Literally keep an eye on it, as if all ready to be called into action if needed. But then came the real battle, what happened was I stayed sideline as a spectator throughout, even though there were many signals and perhaps a few opportunities presented.


Looking at the 1H chart above, first, the red trendline was broken, a trendline that has held for more than a week. When the trendline was being broken, the Chikou Span was dipping into the thick cloud, giving me the thought that it might be a strong resistance. Another thing was, there was the EMA50 (pink dotted) below the price, could be another resistance.

That also coincided with EMA200 (green line) in the 1H chart below. In the 1H chart, Chikou had broken the thick cloud as well. A clear and usually true bearish signal. The price indeed hit some resistance around H1 EMA200, which was probably another opportunity to enter, but I held back the urge, thinking it would bounce up to around cloud bottom. I actually placed an order to short at cloud bottom by then, but it was being done.

I'm not ruing the missed opportunity, but rather, a post-mortem. Should I have entered? Was I being too conservative or it was actually a right move to stay out? Or I was simply didn't study the signals enough, that's why I didn't have the confidence?

Reasons to enter:
1. Wave movement clear
2. Trendline broken
3. Chikou broke thick cloud
4. Price came out of thick cloud
5. Tenkan-Kijun crossed
6. Chikou broke its own Chikou support line (note: I realised after a reasonably long period of sideway movement, this Chikou support line or whatever it's called is a very good support/resistance range, once violated, the consequence is hefty)



I was grateful also, perhaps it was because it wasn't in a trade that I could objectively watch and observe the market movement, without too much emotional disturbance.

A blog post is not sufficient to record everything I've learn this night. But I'm glad I witnessed such an eventful night, which saw EURUSD and AUDUSD moved in similar behaviour, and DJI also closed below 10000. I'm looking forward to next week.

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EURUSD#3

Another back-dated post, on what happened on 3 June 2010.

I label the current EURUSD chart as the following, on 3 June night, it's about the second candle after the yellow B:


Knowing it's very likely to be a white L1 wave down, I want to look for an opportunity to enter the ride.

Both 1H and 30m charts have price action and Chikou Span moving above the very thin cloud. It has been a steady trend down from the Yellow B point, the possibility of price piercing through the cloud was higher than the cloud bouncing the price back up. Furthermore, in 4H chart the Chikou span was also already below price, a sign or bearishness.





Price briefly tested kumo on the 30m chart, but it closed some pips above it, which cause the Chikou to pierced through the cloud, it sent my pulse running of course, but I told myself to watch the next candle. That was rather typical "fake move"? Not sure. Come the next candle, it broke the cloud quite convincingly (note: what does it mean "convincingly"?? was it my own subjective interpretation? psychology? biased judgment? or maybe all of the above. Surely not based on experience 'cos i have none) so I entered the trade @1.2219 (green line), SL @1.2234 (red dotted line). The reason of the tight stop loss was, it was already quite a big candle when I entered. So if it pulled back to my SL point, there's a possibility of forming a long hammer-like candle, which might mean another fake signal. (note: of course, it can swing up and down a few times but still form a big black candle in 30min!)

Anyway, once the downtrend was confirmed (big long black candle finally completed, closed way below Kumo), I continued to watch the movement (note: as an inexperienced player, that's the way I feel "secure").

I referred to the Slow Stochastic movement to decide whether I should come out of the trade. there was one white candle, one black, and another white after the big black candle, but the Stochastic was still going down steadily, so I let it ride. Until the hammer formation, which coincide with the turning of the Stochastic, so, closed the trade. My first winning trade :) cheers.

Some side notes:
When I was sitting on some floating profit, I was thinking about moving my SL or maybe put a trailing stop (as it was late at night, I didn't think it was a good idea for a noob to sleep with an open position).

Then there were some scenario:
1. Assume the ride from Yellow B to the hammer as a motive wave, the immediate Fibonacci retracement level (1/3) would be around 1.2206. I could move the SL there, but then it's just 13 pips from my entry, and with my initial SL of about 14 pips, it didn't even make a 1:1 trade! So I decided against it. (note: reviewing it now, it really retraced about 1/3 before a even bigger rally down)

2. Maintain the stop loss. Again, to have an open position wasn't cool. (note: review again, if I maintained the SL...IF...BIG IF....)

3. Close the position, call it a day. Yes, I thought it was a good learning trade, so I closed the trade a while after the hammer was formed.

My first winning trade, but I won't say it was perfect because several things could have happened and to take note:
1. If the initial price swing was bigger, I could be stopped out before it continued it's downward rally as my SL was very small.
2. Was it wise to close the trade instead of maintaining the initial stop loss? (put aside what happened after that, but simply, what was better? Close trade? Keep the trade?)

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EURUSD#2

This is a back-dated post.

I came across this chart formation the next day (3 June):



First, I noticed two antennas of the same heights formed on a 30m chart. That was coupled with the weakening Slow Stochastic on the same chart.


Meanwhile, on 1H chart, it seemed EMA200 (green line) was a resistance to the price action. So, I entered the trade @1.2289, and SL at 1.2325.

The outcome? I was again stopped out almost immediately :-(

The lessons learnt was, even though antennas were formed and price seemed to hit a EMA200 resistance, but other indicators didn't show very clear signal. The Chikou Span, for instance, was just testing the cloud in 1H chart, there was some possibility that it will bump up and down before its direction was confirmed.

A hindsighted review on this trade, it's shown that I was a few pips of SL away from catching a good ride down. Looking at the 4H chart below, perhaps I should use consider the Kumo as the resistance, and therefore allow a larger stop loss to accommodate price fluctuation around Kumo bottom. Kumo bottom is also a two-third retracement from the high on 28 May.



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First Trade EURUSD#1

Saw a triple bottom at 30m EURUSD chart, and looking for a chance to short it if it were to break the triple bottom support. Entered the trade as soon as the black candle piercing the bottom closed, with a 15-pip SL.

No surprise, I was stopped out very soon after that :P

Lessons learnt: always wait for retracement, play safe! Also, looking at Slow Stochastic, it didn't show a clear signal of turning down. Instead, it was in the middle of nowhere, and perhaps showing signs of turning up! To be honest, i didn't do enough study on this before entry. Only a brief look at chart, and the itch of getting into a trade got the better of me.

First trade, a losing one :)

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