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Forex Trading Insights Mar. 9th – What Do You Do With Bad Trades?
This week I’m going to discuss something that has probably happened to many of you before and something that just happened to me a couple days ago.
The Two Trades
The NZDUSD had just dropped three days in a row, shedding 300pips in the process with each candle selling off fiercely and price breaking and close below the daily 20ema for the first time all year (actually since Dec. 2011). I blogged about this in my price action forex setups on Mar. 7th two days ago. In this post I mentioned how price had just formed an inside bar and I was anticipating a pullback to the .8245/50 level and the daily 20ema. Below is the chart from that post.
Anticipating this pullback, and that I might possibly asleep when it does so, I put in an order to short at .8254 with a stop at .8296 and a target of .8145 giving me a 2.33 R:R reward to risk play. Now below is a chart of what price did the next day.
As anticipated, price pulled back to the 20ema, although it went a little past my entry and a little further than I had expected. Price went up all the way to .8279, but here is where things got interesting.
When I opened my charts and looked at what had happened, I took a glance at the 1hr chart as the daily candle had pushed up quite strong and was on the highs at the time I was looking at this – all suggestive of strong buying throughout the day. This is what I saw on the 1hr chart when I started to analyze the price action.
Now my first thought was price is being heavily bought up, as it has just climbed for 10hrs in a row. I started to say to myself, “10hrs, its been bought up for 10hrs straight?” I actually did post that to myself as a question, even though the reality was in front of me. Funny how the mind works. Anyways, I had a tough decision at that point as my trade got triggered and literally went straight into the negative, progressively getting worse as time goes on – not my favorite situation.
I decided to let my trade play and if it hits my stop, se la vie that I needed to remain disciplined more than anything else. Then a price action trigger came into play that changed things for me. See the chart below.
Now after having some doubts, a pinbar formed which gave me a little relief my trade my actually worked out, and that I just got in too early. I checked on the daily charts and noticed the high of the pinbar was literally a few pips above the 20ema. This was the original strategy of why I was getting in, a pullback to the 20ema which I even wrote about in my blog as an opportunity to sell. So here was what I was looking for.
Problem was, I already was in the trade and realized I had a poor entry, or non-optimal. I generally have the rule ‘never add to a losing position’ so this mantra was definitely playing in my head. I really had a tough choice here of following an important rule which has saved me more than anything else. So here I was deciding if I stuck to my rules and maintained the discipline, or took a new trade on a pullback from the pinbar and attempted to profit from the trigger and play I really was looking for.
I then started to do the math and realized if I took a pullback, say to the high of the bull candle before the pinbar, I could get away with a 16 pip stop and have a target of say .8224 (anticipating a pullback to the 1hr 20ema which would be rising since it was in an short term uptrend). This gave me a 4:1 reward to risk play which was definitely worth it.
On top of it, if price did sell off from this pinbar, and went to that target, I would also be in the positive for my original position by about 30pips. The math on the second trade didn’t pan out for me exiting at the .8224 level, but on the first it was strong.
In the end, I took the second trade, reasoning it was the entry I really wanted, and so if I was wrong on that, then I was really wrong to begin with and deserved to lose twice, but if I was right, then trusting my original analysis would pay off. Below is what happened over the next 2hrs before I was faced with another decision.
The Pinbar rejection had worked exactly has I anticipated, and price although sold off tentatively on the next candle, gave me my entry and then followed up with some stronger selling on the 3rd bear candle. But I had a decision. My original trade was now in a small profit, about 14pips, and I had to contemplate something that I always do in these situations. My original entry, although part of the main plan, was not an ideal entry, and in fact was what I would call a premature or poor entry.
Anytime I find myself in a position that I do not like, or find out was a bad play, I generally try and get out of it as soon as I can.
Because I can accept the risk for a trade I did perfectly and executed exactly as I had envisioned it, but I am less likely and excited about accepting the risk and loss for a trade I did not like, nor felt like was a precise entry. So do I bail on this one, and leave the pinbar pullback trade on, which I feel really good about? Or do I stay in and see if I can get some more profit out of it?
Ultimately, I chose the former, as I hate losing on trades that were poor entries and never feel good about losing on those. But when I lose on a textbook trade that just didn’t pan out, I feel ok about it as I had to take that trade, and did everything right.
In the words of the great Jean Luc-Picard (for you Trek fans), ‘There will be times, where you make no mistakes, do everything right, and still lose. That is not a weakness on your part, that is life.‘ I took this statement to heart when I first heard it, but I can definitely relate it to trading.
We psychologically are more likely to accept a loss on something we did everything right, then on a trade where we did many things wrong.
So, I bailed on the trade for a small profit. Here is how the trade progressed.
Yes, I would have profited more if I kept the original position in, but honestly, I felt ok about it as again, I hate being in positions that I didn’t like the entry from the start and would rather just be out of them then take the loss on them.
My guess is many times you have been in this position, where you took a trade, then don’t feel good about the entry, it goes against you, and you have to make a decision. Then, another setups comes shortly after where you really like the entry, but maybe are concerned about taking the trade because you are already negative, and your confidence about your original analysis may be lacking in that moment.
First off, trust your original instincts on the trade. By doing so, this will build confidence in your ability to call good setups in the future, while not trusting it will leave doubt in your mind the next time a similar setup comes along. Secondly, don’t be afraid to be wrong, make bad entries, and let them go. Mistakes are a part of this game. If you believe in the learning process and that you can trade successfully, then your brain will actually wire itself in such a way you adapt and grow from these experiences.
Third, watch your psychology after being in a losing position and notice how doubt could be influencing your decision making with the choices you face in real time. It is highly likely you will have to make new choices while one trade is currently in the negative. Don’t let this one trade define you and your abilities as a trader. Be willing to be wrong, but get back in the saddle again. By facing a mistake and still willing to make another decision (and possibly mistake), you’ll eventually build a confidence in your ability to win even after a loss or bad trade.
So hopefully this all makes sense, is something that you can relate to, and use in your personal trading.
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