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Recap: AUD/JPY Short at 80.11

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Last updated 2/16/2010 7:30 PM EST (GMT -5) 0 Comments - Add your comment

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Bradley W. Gareiss

Technical Analyst, GFT

It is important to learn from each trade.  Every win or loss can provide important information that can help provide insight into future trades.  The AUD/JPY trade that failed last night is a great example of a trade to learn from. 

First, the easy lesson is that stops are vital.  If you trade without a stop, you are asking for disaster.  A small controlled loss can easily spiral into an account crushing loss.  And remember, if you lose 50% of your account, you then need to increase your account by 100% to get back to the starting point.  This is why it is so important to protect against big losses.  This should go without saying, but I felt it was worth mentioning.

Second, there are always more rules to add.  Typically, if a trade gets within one pip of winning (like this one), I move my stop to break even.  This is a no brainer.  The reason is that in my opinion the trade loses its edge after entering and hitting our target (38.2% of CD).  If the pair comes within one pip of the target, that is close enough for me to consider that the trade's edge is gone if the pair moves back up to the entry.  Therefore, I would have moved the stop to the entry if I had been able to update the trade.

However, when I got into the office yesterday, the pair had moved up from one pip within the target to the entry.  However, it had also shot right back down off the entry.  Keep in mind that my rules normally would have stopped me out, so this was an uncommon scenario for me.  I decided to keep the trade going because we were moving to the target.  I also didn't move the stop because the pair began to rise back up to the entry right as I was about to post the update. 

The above paragraph may seem illogical.  I kept the trade going because I felt we were too close to the target, but I didn't move the stop because we were too close to the entry.  Like most traders, I found it hard to stay rational.  However, the rational decision would have been to move the stop to break even.  In this case the worst result would be break even (which should have been the case anyway), and the best result would have been a win. 

I bring this point up to show how challenging it can be to be rational when you have a position.  There may be some people out there who can think just as rationally while in the market as when they are out of it, but the overwhelming majority will be impacted by having a position.  This is why I have "rules" that I follow.  They prevent me from acting illogically.  I have many rules, but I had never been in this exact position before.  In hindsight, it seems obvious what I should have done, so it will be easy to make the decision next time this situation arises.  I encourage you to learn from new situations, and figure our your decisions ahead of time by objectiving making a set of rules for trading.

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The information, including Commentary and Trade Ideas, provided on FX360.com should not be relied upon as a substitute for extensive independent research which should be performed before making your investment decisions. Global Forex Trading and FX360 .com is merely providing this information for your general information. The information and opinions presented do not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision and should tailor the trade size and leverage of their trading to their personal risk appetite. Any projections or views of the market provided by FX360.com may not prove to be accurate.

The views of the authors and analysts are not necessarily those of Global Forex Trading, its owners, officers, agents or other employees. FX360.com and the currency research team will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained on FX360.com. Global Forex Trading and the currency research team do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.

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