Stress testing in real time with real money

The market has a fee it likes to charge you to show you where your trade system is weak. This week, my bill came to 52 pips times three contracts, or $156.

A little background for this week’s classroom:

I have a trade system for day trading forex that includes four studies.

On the actual price chart (candlesticks) are two studies:

1) Donchian Channel (for situational awareness)
2) 21 EMA (for situational awareness)

On lower studies are two studies:

1) RSI (for situational awareness in executing entries and exits)
2) Super-secret proprietary indicator (SSPI) used for triggers.

A quick note on SSPI. It is a momentum oscillator, trend identification histogram developed by myself.

Here’s how the trade sets up:

Daily trend defines the major trend, and its strength the probability of continuation. Smaller time frames indicate if a countertrend is underway or if the trend is firing on all cylinders.

Trades are entered on the 5-min chart using the SSPI. For example, if daily, 60, 30, 15 all show a downtrend, wait for a counter rally in the 5-min to begin petering out before entering.

The way trades were closed for a loss was when the 5-min closed and the SSPI showed me to be on the wrong side of the trade.

On Jan 27, I got long the NZD/USD (Kiwi) pair. The daily trend was down, but a strong counter rally was underway in the 60, 30, and 15. The 5 showed the counter rally was taking a breather — perfect time to enter long. I knew a Fed announcement was coming so I was monitoring the situation. The announcement came, and nothing. Fed keeps rates at 0.25%. Okay, now let’s get back to our regularly scheduled counter trend rally. Next thing I see is RED. Big RED candles and heart palpitations commence.

My SSPI was designed to keep me out of whipsaws so I needed to wait for a 5 min close to trigger me to close for a loss. Meanwhile, losses are piling up in triple time. I wanted to throw my system out and close for a 60 pip loss, but I’ve been down that road too many times, where I close a trade at the absolute worst price before it moves in my direction. So I wait. I ask myself, what the hell is going on here? (confusion not a good sign), It’s got to stop this f#$%ing free fall, right? (hope, another bad sign). Finally, my system tells me to go to guns and close the trade. It’s over. Using RSI and 1-minute charts I wait for retracement from solid red so I’m not the greatest fool. It comes. Execute. I’m out. 52 pips. Holy hell, what just happened?

Some well-meaning readers may suggest I create a rule to remain flat in currencies during Fed announcements, but I don’t believe in rules. Rules are a way to surrender your responsibility to some ink on a piece of paper that glares at you as it rests near your monitor. And anyways, you’ve been breaking rules your whole life. What makes you think you won’t find a way around your new rules? As far as I’m concerned, they’re useless.

No, I’m not gonna make a stupid rule. I’m gonna stop trading today. Trading when you’re confused, upset, angry, disappointed or generally pissed-off is random trading, and we don’t like to do that anymore than we like eating glass.

Two days later I look at the charts with my studies again. You’d be surprised what you see when you don’t have the stress of a trade on. Right before my eyes, the RSI warned me that there was an oversold condition underway, way before my trigger. So easy as pie, I have a new stop loss exit procedure:

Exit a trade for a loss when SSPI indicates your on the wrong side of the trade, or if RSI moves to an oversold/bought condition against you, whichever comes first.

Tuition well spent.

not that it matters, but after the fateful exit, the Kiwi fell another 100+ pips in the next ten minutes, and closed the week about 125 pips below my exit.