15.21 gmt
I follow this pair closely as it trends very well, but I rarely trade it because the spread is too wide and liquidity is thin. I’ve let many good setups go. But now we have a clear confirmation of a big double top on the daily chart and this is usually a very reliable pattern. The measured move target of this double top is 1.3860 – I hope we see that in the next week or so!
Short $5/pip EURAUD at 1.4358, SL 1.4440 (extreme), first red flag at 1.4405.
The Zen of FX Trading 
Hi zen, I am with you in terms of direction, but I thought the theory behind double top require you to put SL above the top, right? That means 1.50?
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Hi Daniel, that is not right. Theoretically the stop should be comfortably above the neckline at some s-t key level, not the top! There is no way this pair will retrace all the way back to the top, or even to 50% of the top if the double top is to be meaningful.
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The only problem with this entry is the pair… is one of those that moves so sharply that even a stop-loss of 100-120 pips can be “small”….
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Very true Johannes. That is another reason this pair is a bit tricky to trade. I am trading this from a daily perspective, so although I’ve got some SL stated, it is very much a mental stop. I know I have to give it a wide range to move, so the real risk is more than the SL I’ve stated. A bit of a gamble in that regard, but I’m counting on the clear double top, as well as EU being very weak and AU relatively strong.
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With all in consideration, what do you think can happen on this friday of NFP? The stop you defined, is a real stop in your trading station or is just a mental stop?
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Its a mental stop. Will be watching the market closely after the NFP.;-)
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Did you see that 1 minute movement of 40 pips¡? Right now it looks like AUD is way stronger than EUR 😀
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Another question. Usually you close your trades when your system flips. As far as i have following your trades, there have been some trades that have been in positive territory in a 1:1 risk-profit ratio. Then, the trade moves back and you close as per your system, which i recognize is a good practice in term of system consistency…. but, sometimes i think that your system would be more profitable if you consider that those situations when risk-profit ratio are 1:1 or closer and there are some signs of retracement you took profit. Some time long ago, when i was starting to study about forex markets, someone told me: “no ones go to bankruptcy by taking profits. don’t regret if you close an operation and the markets move forward… there will be new opportunities”.
What do you think?
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Hi Johannes, you ask good, tough questions. I’ve tried many approaches, including what you suggest. What I am trying to get to is reliable, consistent rules that work over time. In the past I did as you suggest – take profit at the first sign of retracement. Then the problem becomes – when do I re-enter if it turns to profit again? The entry risk at the new level is not that good. And anyway, the future is a matter of probability. I can’t be sure if it will continue down or turn up after a dip. The decision-making gets complicated, and this invariably leads to trading by gut-feel. Good if you’re on a roll, and disaster when the good luck ends. I’ve been there. The true goal is to have a SIMPLE set of rules, that are easy to follow (minimal discretion, avoid gut-feelings), that work in a majority of cases and lead to a consistent profit if averaged over months. This is not easy.
On another angle – my system works well if I flip blindly, but I am finding out in real life that I am often unable to close/flip in real-time. Reasons include things like sleep, unable to be at the computer all the time, very fast moving markets, etc. If I could program/automate this method it would work much better.
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Indeed. It is tough to define rules that 1) dictate exactly when to enter, and 2) when to exit, and 3) truly have a statistical edge over time, and 4) which the trader believes in so as to be able to stick with it even through periods of drawdown. Changing market conditions confound such efforts; back-testing is no guarantee of anything in the future.
I believe simplicity is key for system trading. For systems more complicated than a few lines on a piece of paper defining precisely when to enter and when to exit, one can easily descend into what is really just discretionary trading, as you recognise. I think both system and discretionary trading are viable, and both have their advantages and disadvantages, but being in no two minds about which style one is operating under is surely a key ingredient of long term success.
As far as I can gather you really operate a number of different strategies, e.g. “sell a double top”, fibo-based ideas, etc. Maybe breaking your system into the simpler component strategies, and checking the statistical win/loss features of each could help. But with simple strategy trading I also think there is a discretionary component – the trader has to be probably decide which strategy to deploy during a given period of time to be successful. Read the market conditions wrong however and …
As for the issue of taking profits before a reversal signal – as you regocnise the goal is to be consistently profitable over time, but…
“Then the problem becomes – when do I re-enter if it turns to profit again? The entry risk at the new level is not that good.”
See, I don’t think that is a “problem”. If you wouldn’t want to re-enter at the new level, conversely why would you still want to be in the market? It’s valid to not chase the market. If you don’t regard the risk as justyfing a (new) position, what is wrong having some profit to show for the previous entry, being flat, and waiting for a fresh opportunity where an entry is justified? No single trade is ever going to last or look worth the risk forever. We have to close them all at some point, and often there will be profits left on the table. But other times we’ll exit at the top / bottom. Human psychology deceives us into thinking that the bigger profit is better, but throw the psychology out and look at the mathematics, and I don’t think there is an issue.
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Thanks for this very thoughtful and thought-provoking post fxgai. You hit many nails exactly on the head – changing market conditions, the slippery slope to discretionary trading, and the need to have simple clear rules; simple = robust. I started out with a simple technical rule, and over the past few months have ‘refined’ it by increasing emphasis on Fibos, other patterns. You’ve pointed out a very valid argument for when/how to re-enter trades after taking profit. The problem for my system is that the original technical pattern is usually not present at the re-entry level and if I do enter the SL is usually still the same level as the entry which is far away. Hence my rules don’t show it as a good entry. For example, in case of the trade from an earlier entry where I am giving up 100 pips out of a profit of 200 pips, it still is a good profitable trade and I have the buffer to ride out the dip as long as my exit signal is not triggered. The difference with the re-entry is that it is a new trade and my original triggers are not present. I have not tested my rules for such ‘second entries’. But your comments motivate me to re-analyse my whole system, which I will do as soon as I find the time.
I am often tempted to publish the key insights that led to my rules, but I think the internet is not the right platform for this. I wish I could find a friend or a ‘partner’ with whom to share the details of my system and brainstorm to improve it.
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