Haptic: six monthly trade lessons

I’ve always hated risk, as I understood the word to mean. In high school I was intuitively fascinated by Probability, but did not score very well. At uni I loved probability in coursework, but was weak(lazy) on getting the actual maths behind it right. Everyone feels though that they understand what they mean when they say that something is “risky”. But in truth we are irrational creatures driven mostly by emotions generated in our glands and amygdala, and most of our so called so called risk assessments are nothing more than gut reactions.

I started studying the trading of currencies in the foreign exchange market about 18 months ago, and I read as many books as I could on the topic. Then I found some online courses and did those. I flicked from online guru to online guru. Mostly the ones who were genuinely successful traders in their own right (you can spot it immediately after a while) all had one or two valuable insights to share. They all preached the value of psychological discipline. I knew I was a very disciplined person (hahaha), and I thought I just needed a great system, and my natural discipline would do the rest. I learned to backtest different trading strategies, and I created, tested and discarded many different ideas for trading systems, some hopelessly complex, others naively simple. I demo traded for a few months, and quickly learned that I couldn’t force myself to take it seriously.

Another common theme in the educational materials emerged- Grit. Grit happens to also be the title of one of my favourite books, and the “Grit scale” is used to help filter candidates to the elite Westpoint Academy. But even if my discipline wasn’t perfect, I still knew I had grit, and actually I still do.

I knew I needed to trade with real money, as everyone said adjusting to the emotional roller coaster of real money was very difficult. I also knew I would probably be a horrible trader to begin with. So in September 2019 I opened my first trading account at the lowest leverage setting available of 10 times, with the princely sum of $100. I knew this was smart. I need to prove the system first, to know 100% through and through that it worked. Only then would I scale up. I wanted near total seperation between the emotional journey of watching money come and go, and learning to trade competently. I would trade for 12 months with nothing more than $100, because I was in it for the long game and I was determined to succeed.

I opened my first ever trade, a sell on ZAR/JPY. I didn’t even know that ZAR was the ticker for the south african rand. I didn’t realise that the spread was expensive and might make the trade not really worth it. I didn’t know that the pair was highly volatile and might whiplash me out of the trade for a loss, and only then go in my chosen direction. I close the trade for a profit of 0.02%.

I opened a buy order on the british pound against the US dollar, and made a profit of half a percent. I felt good. I knew what I was doing. Emboldened I uncovered in my trading platform that you could also trade commodities. Blind freddy could see that Brent Crude Oil was going to depreciate against the US dollar, so I opened a sell on that. One problem, my account was too small to be trading contracts- I was going to have to break my own self imposed strict risk limits of 2% per trade. To make this trade I was going to have to risk 8%. Everything up till then had been bubbling attempts at competence, but this was the first day that my greed took an axe to my discipline. I opened the trade.

Oil went down and I made an 8% gain. My account was rocketing up, and clearly I had this trading thing nailed. I closed a few more trades out for a profit, and that was the last of the good times. I traded pairs that were just travelling sideways, telling myself there were surely going up. It was like looking up at the sky and saying it did look possibly just a little bit red. It was 5, 6 ,7 losses in a row. I knew they were only cents, but it was agonising. I wouldn’t care too much if I dropped 10 cents on the ground, but for some reason when I lost that money in a trade it felt like the market was stealing from me. The screen was always red. I had no confidence in my system, in myself, I was in drawdowns that went for 2 to 3 months (I did have the grit to stick them out), and still then they would hit my stop losses for the final humiliation. By January 2020, I wasn’t completely back to where I started, but I was sitting only a measly gain of 3%, a far cry from the confident early 10% I had incompetently rocketed up to.

Then I set about the business of learning to trade, of not giving up, of making better decisions, of diversifying my risk correctly, of avoiding exotic currency pairs, and of sitting through drawdowns knowing that the decision I had made was correct, I had merely to wait it out. Over the last three months I have crawled and ground my way back inch by inch, and as of writing my account sits in profit of %10.6, with six months to go until my yearly milestone in September when I was reassess and write up my experience in full. Nowadays I see stock indexes plummeting and I know it would be very easy money to hit sell on those using a wide stop and make profit- but my account is too small for those contract sizes, my leverage is too low, and so I remain disciplined and small and just let opportunity pass me by. That’s another thing I’m learning, there are so many opportunities, more than could possibly be take advantage of. So it doesn’t matter when they slide by. 12 months from now I will probably buy a long term position in both the AUD and the ASX index, and ride them up from the depths- or not- it doesn’t matter, so long as I follow my risk limits and position sizing.

I am aiming to get to 20% at the full year. But I will not alter my trading to get there. I will not rush. I will not change my trading style, listen to any expert, indulge in macroeconomic or fundamental analysis, I will just trade my system.

Thanks for reading!

-Mark

50 pm

Continued: I’ve made alot of mistakes in the past 6 months, I’m going to break them down here and in following posts to try to learn from them.

MISTAKE #1 EUR/JPY Sell

This is pretty close to what I was looking at back in october 2019 when I made this trade. Note that the trend is strong and easy to discern, but critically it has been accelerating away from its 20MA for almost 10 weeks with very little pause or retracement. This kind of thing is ripe for retracement, and of course that is exactly what happened:



I bought in (when the weekly candle in question was still red) at the first solid green vertical line, and was stopped out at the second. I made two mistakes here. One is, although I did pick the trend correctly, I bought in when it was very overextended and ready for retracement. The other is, I simply whacked a 500 pip stop loss on it, a nice round number, thinking that would be enough. If I had set my SL at the nearest SR line, I would have chosen a 740 pip stop loss instead, and this would have allowed me to ride out the drawdown.

So bad entry, and an incorrect setting for SL. Lastly I think there may have been an even worse third mistake. On the monthly I think I didn’t respect the support zone:

  1. Don’t buy into overextended runs
  2. Set your stop loss off the chart and not off round number guesses
  3. Don’t buy in right as something approaches a major SR level

Wow, having analysed it, I really did a bad job with this trade, even worse than I thought! So much room for improvement.

MISTAKE #2 SGD/JPY SELL

I bought in at the 1st solid green vertical line and was stopped out at the second.

It appears that I set a 270 pip SL for this trade. I checked that a few times and it seems to be true. I bought in at the bottom left crosshair and was stopped out at the top right crosshair below:

I understand that I set the SL based off the nearest SR point, but still 270 is very low as a SL for my chosen style of trading. If I had chosen a wider SL like 500 pips I would have been able to ride out that drawdown. In terms of my entry, It wasn’t too bad, I had clearly waited for the retracement (which turned out to be a bit more of a reversal). I’m not sure what else to say about this. Zooming out on the weekly, was a strong trend really underway? Not sure. The Stop loss was definitely set incorrectly, so lesson learned there, but I wonder if I could have also chosen a pair which was trending a bit more smoothly?

I like your attitude to the market, you can see that you pay attention to details, but as for risk, I can say that it is always present, in any case involving money, so do not take it as a danger, especially with your potential…

1 Like

I am past the six month mark now. My first six months I stumbled my way to a 10% return. I decided after this to make my life more difficult, so I asked 4 mates if they wanted to “invest” in the very high risk speculation of me trading. I hasten to add that the amount I asked them for was very small. But still it was bigger than I had previously been trading, as it took my account size to $500, and the money was mostly other peoples! I did this very intentionally as I wanted to make myself as stressed and pressured as possible. It worked, but after a few weeks I adjusted to the larger account size. I plan to continue this incremental increase method as I continue onwards with my trading career. Here I continue journaling my main mistakes:

AUD/NZD short

As an Australian citizen who tends to read a fair amount of bearish news on his on economy, I believe I have developed an inbuilt against the Aussie, an that this bias may be hurting my trading. So looking at the weekly on the 7th April 2020 I thought I saw a downward trend for this pair. I glossed over something that would turn out to be my undoing though, which was that the pair was in the middle of an Aussie rally. I ignored this and said the following type of statements to myself:

-This is just making it a better entry point.
-This retracement is probably 90% complete.
-With a wide stop loss like mine, even if it goes against me a bit first, it will go my way shortly after.
Screen Shot 2020-05-17 at 8.19.23 am

Even as I was telling myself things like this, the pair was going against me, and fast as you can see on that final weekly candle. But I was over confident and I didn’t care. I set a SL in the order of 800 pips and went for it.

Fast forward to the 15th April, and I was feeling somewhat less confident, being deeply in drawdown as the huge AUD rally gathered steam:

Screen Shot 2020-05-17 at 8.25.56 am

Now I was saying things to myself like:

-I wonder if I should hedge this position?
-I hope the financing costs of holding this are not too high
-Its going to take a long term to get back to me entry point even if it turns around.

So feeling clever and desperate I opened up a “half hedge” in Oanda, which meant in this case going long the AUDNZD by half the amount of units that I originally went short. I was a bit worried it might simply take that as an instruction to halve the position, but I brushed aside that concern, and I clicked a few buttons, I got the confirm dialogue…. and accidentally closed out half the position for a loss. Rather than open up a hedge, half the trade had simply been cancelled out due to me going the other way like that. So much for my clever idea.

A few weeks later on the 15th May, I quietly closed out the remaining half of the position before it hit my stop loss. Ironically, fat fingering my way through a failed hedge position had actually saved my from taking a bigger loss.

————————————————————————————————————————

Lessons

  1. No hedging when in Drawdown. If I’m thinking about hedging, it might be a red flag to get out.
  2. Buying in the direction of the weekly trend, when the Daily is moving rapidly against me is a very bad idea. If I catch myself saying any of the above justifications at the top of this post, this should also be a red flag to not enter the trade. Here they are again so I never forget:

Talking myself into bad ideas sounds like this:

-This is just making it a better entry point.
-This retracement is probably 90% complete.
-With a wide stop loss like mine, even if it goes against me a bit first, it will go my way shortly after!

So, after getting burned once, I successfully picked the bottom of the Brent Crude market. I bought in long at $22, and when it got to $23 I moved my initial stop loss to BE and bought another contract. I continued pyramiding this way until I had built up a position size of 8 contracts… I began scaling out at around $33, and finished scaling out somewhere around $35. I am happy to say that this took my account from being around break even, to up 11.1%. I’ve taken these profits and withdrawn them, paying out my speculative mates and now I’ll be spending some time back at the drawing board considering what I might do in the future.

This thread really only carries my mistakes, but it glosses over the fact that I’ve had a pretty good first 8 months of trading, ending up positive by about 22%. My identity as a trader is still evolving, and my strategies are still a bit half baked at times, sometimes great and sometimes not.

One powerful lesson I have learned is experiencing how effective pyramiding can be. I think I am the kind of person who might be emotionally able to withstand half building a pyramid only to see it get knocked over and end up back at BE, which I’m sure would happen at times if I was to incorporate that into my strategy.

I’ve finished most of the Chat with Traders podcasts, and am now moving on to the better system trader podcast.

Congratulations for your results man, I’m really happy for it, What broker are you using?