I think I've got a recurring issue

Beginner Questions
1

Hi all!

Twice this week I feel like I’ve made the same “mistake”, and I’m not really sure if its a mistake or not, and I’m getting quite confused about it. Its been happening as I go long on the NZD/JPY pair. First I should mention that for the past month or so I’ve been practicing a strategy from Kathy Liens “Little Book Of Currency Trading”. I’ve read the book nearly 10 times, and I’ve written my whole trading plan and trading system around trying to get it nailed down. This strategy is called a “Double Bollinger Band” strategy and its almost laughably simple but obviously like everything the detail are tricky. Bascially there is an extra band at 1 Standard deviation, instead of just have a band at 2 standard deviations.

The inner two bands next to the 20SMA are considered “noise” or “ranging” behaviour, and the outer two bands are considered the buy or sell zones. You buy or sell after the first daily candle closes inside the buy or sell zone. It looks basically like this:

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So the reason I’m giving this exposition is because this srategy in Kathys own words, can have a negative risk/reward ratio, but to compensate for that it has a very high win/loss ratio. So she says, I’m three weeks into testing in demo, and it does seem true so far.

So to my dilemma. I’ve been setting my stops 30-45 pips usually away from the entry point depending on what makes sense. But often the day goes by even into the busier london and new york sessions, and my NZD/JPY is sitting there not moving, but just drifting against me slowly, until am down maybe 15 pips, maybe 20 pips.

After maybe a day and a half of this kind of thing, I just find I can’t take it anymore, and the next time my trade drifts closer to break even, I sell a little portion of it down, because I am becoming less confident in my trade idea. I sometimes slowly tighten my SL too. As my confidence goes down in my initial idea, I am trying I guess to lower my risk while somehow managing to stay in the trade somewhat.

This has happened twice now and I have responded in the same way. Even now, I am in the position of having my NZD/JPY pair siting positive 20 pips, but I have already sold off over half of it over the preceeding two days, so again I will probably ultimately profit, but not by much.

Is this dumb? Am I being rational, or do I just lack balls? I feel like there should be a place to say “the longer it takes my trade idea to be proven right, the less likely I am to be right” which I guess is the antithesis of “I am 100% right till my SL is hit and then I am 100% wrong and I stick to my guns until then”.

Kathy says in the book that you should try to only ever “manage your winners” and not get caught up in managing your losers. Its in the context of setting your SL correctly and sticking to it. I don’t know if this applies to me here or not. I don’t know if I am facing my own personal emotional issues, or battling a legitimate issue caused by a strategy with a high win% and an inverse RR ration.

I think this behaviour might be motivated by me loathing the notion of giving money back to the market, and just feeling like if I micro manage my risk when an open trade is against me it might help somehow pare it back. But I really don’t know.

Thanks for reading!

p.s. I’d like to give a quick S/O to some of the people lately who have answered my many questions @tommor @tradinggod @Rickster99 just to name a few. I feel very fortunate to have access to a community like this.

2

We are programmed by evolution to be more frightened of a loss than we are motivated by a gain of equal amount.

This is shown in some of our sayings
"A bird in the hand is worth two in the bush"
“Nobody ever went broke taking a small profit”

This is something we all fight with all the time and whilst it may have been helpful 20,000 years ago when we were hunter gatherers, it is Not appropriate in modern life.

To find out more about the psychological falacies which drive us to make poor decisions

Perhaps start here - from a Nobel prize winner in this very subject (Behavioural economics)

3

A time-based exit strategy is normal, so you’re not being dumb. :stuck_out_tongue: Alot of professionals do it. What you need to do though is come up with some rules so you’re not getting emotional about your decisions. However, the more rules you use, the more complicated and fragile your trading becomes. This is something that you’ll need to design and backtest.

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4

Sounds like an aggressive trend-following strategy. You’ll be joining a trend that has strong recent momentum, perhaps from a reversal, but which has not yet established consistency.

All trend-following strategies have low win rates. The key is to make the losers small but capitalise on the winners. Early entry trend-following strategies will be especially prone to failures as many will never develop into consistent trends. Maybe consider later entry using a filter to confirm trend?

Why is your SL at 35-40 pips from entry? ATR20 on this pair is currently 0.464. Is your stop far enough out to avoid intra-day noise or will you be happy to simply re-set a new entry if it gets hit?

You need a back-up plan for what to do tomorrow if today’s entry signal does not trigger.

You need to have patience to ride a position which came form a good entry. But a position isn’t just defined and gauged on the pattern snapshot at the time of entry. You could develop a range of TA features concerning the entry so that you can see if these are starting to deteriorate as the position ages. you might find at some point even though your stop has not been touched your TA just doesn’t justify being long in this market at this time. If you wouldn’t buy here, why would anyone else?

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5

PS: NZD-based charts are mostly bullish and strengthening, JPY-based charts are about 50-50 and possibly weakening, so being long on this pair accords with currency relative strengths.

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6

Haha thank you! I have actually read this book. Perhaps its time for me to read it again.

7

Do you say this because you read through the quote list each day and just have a feel for it? Or do you have some kind of more rigorous way of determining the relative strength of each currency. I know we have the dollar index, but I have often wished or wondered if there could be some kind of informal one for each currency that I could look at. Like I wish there was a chart that had Daily/weekly NZD against an aggregate of US/EUR/JPY/CHF kind of thing. Not trying to be lazy, just wondered if such a tool existed.

8

Well if you’ve read that, this one is quite revealing and broader based

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9

There are numerous ways of gauging the relative strengths of currencies. You could use a broker’s heat-map or just look at price gain/loss over a day or a week. @Dennis3450 has developed his own formula and if you’re looking at currency strengths its a must-read.

I look at the 28 significant forex charts and simply log whether the 50EMA slopes upwards or downwards. Upwards is obviously bullish for the base currency and bearish for the counter currency, and vice versa if the slope is negative. Its quick and dirty and rarely wrong. As of yesterday’s close, I see CAD is strongest at 7-0 and GBP weakest at 0-7.

NZD/JPY is currently a 6-1 v’s 4-3 match-up, so not the strongest long but certainly biased to the long side. Plus last week it was a 3-4 v’s 6-1 match-up so the most recent development of strengths favours long NZD, short JPY.

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10

My answer to this goes like this:

-The ATR on this daily is 46.
-By the time it gets to 30, it never seems to go back to being in my favour.
-With an ATR of 46, once the trade is against me by 25 or so pips, chances are that today its more likely to be going “the other way”.
-Why not cut a failing trade at 30 and save a bit of money and time.
-30 should be enough breathing room for the trade idea to play out while still saving me coin if I turn out to be wrong.

I think that’s what is going through my brain anyway. Looks and reads like nonsense I guess but even reading it back I’m ashamed to say that it still seems like it makes sense to me.

11

Fantastic thank you! I’ve added this to my reading list.

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12

Sounds good. I have usually found that if a price gets half-way to my SL from entry, it will never recover into significant profit so, yes, why not get out. But you have to be able to stand the pain of multiple stops for one good winner, and that’s a matter of personality style as much as maths.

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13

Thats a really interesting technique thank you. Hopefully I can incorporate it into my decision making process somehow. Regardless, it seems like a great daily exercise to go through just to get my head around the state of the market.

So when you say you see CAD 7-0 strong and GBP 0-7 weak, what does that mean to you? I mean obviously you don’t just charge in and sell GBP/CAD. Interesting, GBP/CAD seems to have been in quite a sharp downtrend since early June.

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CAD 7-0 means all 7 of the 7 significant CAD-based charts have upwards-sloping 50EMA’s (daily). Or would have if they were re-based to CAD as the base currency: there are only two significant CAD-based charts, CAD/CHF and CAD/JPY so for these an upwards-sloping 50EMA is bullish for CAD but where CAD is the counter-currency, AUD/CAD onwards, obviously the reverse is true so a downwards-sloping 50EMA is bullish for CAD.

GBP 0-7 means all the 50EMA slopes are bearish for all 7 significant GBP charts.

Its a measure which is quick, objective and rarely wrong.

(Where two currencies are highly correlated, such as usually AUD/NZD, or often EUR/CHF, or sometimes CHF/JPY I would just take what that specific chart says and ignore the relative currency strengths. Correlation varies with time so its hard to be categoric.)

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15

Theres no think about it, you definitely have a recurring issue and you need to nip it in the bud as soon as possible mate.

Everything you do should be proven in your analysis. So stop moving stop losses or take profits and analyse the trades and check your profitability. Eg you’ve set your stop loss at 30-45 pips. Pick one eg 30. Then on your analysis see if you would have done better using 45 pips or ATR x 2 instead or maybe you’ll find that half ATR is enough because your analysis showed if the trade goes against you it keeps going till it hit the stop loss.

Stick to your rules so you can stay consistent. Then you’ll know what works and what doesnt. You need to analyse your trades constantly and document it so you can look back and know what you’ve done.

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16

If a strategy is on a book that everyone has access to, i can guarantee you that its a losing strategy.

17

I’ve gone back and looked at this trade in more detail. Thanks for your comment. You are right. I actually took a very small loss on this trade in the end. If I had left it open It would be currently sitting at break even.

18

Surely someone (me?) could write a pine script that just does this automatically each day? Would you be interested if I did? I could see it being useful.

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No thanks, not really worth it. I’m noting a couple of other features too from the charts and it all takes just a few minutes to do and to bring my spreadsheet up to date each evening.

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20

Here is a tip.

I have found, that trading other people’s setups usually doesn’t turn out that well.

Reading markets is a bit like reading a chess board in that there a near infinite variations in game states and possible outcomes, not all of them ‘rational’ and you can study Kasparov all you like, but when it comes down to it you have torely on your own intuitive build up knowledge and play your own game.

When someone comes up with a setup, it is generally a set of guidelines and principles that keeps them on track and/or prevents them from getting into stupid trades depending on how they read the market. I will guaranteed you, the lionshare of the ‘intelligence’ behind any setup, is not written down in black and white, but exists in the mind of the trader who devised the setup.

It takes a hell of a lot of work to get good at this, and if it was as simple as trying to copy a winning traders gameplan (without actually copying the winning traders trades verbatim), then everyone would be doing it.

Really…learn a few different tools, bollinger bands if you like them, read up all you can on they are meant to work but take it all with a pinch of salt, then get to work paper trading ideas that you notice trend to work withing the framework you are using, always taking note of what is happening on the HTF.