The Mrs. Watanabe Chronicles - How I will make my money back

Hello, this is Mrs. Watanabe once again. I am a forex trader from Japan, and last week I lost 3,330,000 yen. But do not worry about me, I will make it all back, and then earn my desired profits of 15,000,000 yen. However, this time I am doing it the right way. So what went wrong last time? I have taken some time to analyze my mistakes, and make sure I do not repeat them. Here are the mistakes I made and how I will fix them.

My biggest mistake was poor risk management - I bit off more than I could chew, I got greedy, etc. Here are the numbers - I use a data-driven analysis in my trading, as you can see from the spreadsheets and charts in my photo. Or did you only notice my good looks? I am pretty, but do not think I am dumb, okay? I had started off with 5,850,000 yen in my account. My first position was to buy $500,000 for 136 yen. At that position, I needed to stay above 1,350,000 yen in total account value in order to not reach the dreaded margin call. The lowest exchange rate my position could withstand was 127 per 1 USD. That was not such a big risk to take and was manageable. But then I made the big mistake of increasing my risk exposure.

After the exchange rate started to go down (my desired direction was up), I added another $500,000 at 134. That resulted in an average buying price of 135 and my position was now $1,000,000. As you already saw in my last post, I ended up reaching the forced stop loss level of 131.70 and lost half of my money. This was my big mistake. It is called trading with too much leverage. The forex markets are volatile, which gives both an opportunity, but also presents risks. We have to make sure that we can withstand the volatility. In order to do that, we need to take the following steps (you guessed, I had not taken the required steps before my big loss week. These steps are new for me, and I will take them from now on):

Step 1: Always know what it the level of my forced stop loss execution. In the case of my first trade that level was 127 yen. After I increased my position the level became 131.70, as I had taken too much leverage. 

Step 2: Do not take on positions with a forced stop loss level closer than 500 pips from the current market level. That is too big of a position. NEVER DO THAT.

Step 3: Set TP and SL for each position - TP, which stands for take profit, is the closing price, at which I collect my profit. SL, which stands for stop loss, is the level at which I give up on the position. Coming from step 2, this SL actually makes sure that I never get forced into a stop loss execution by the broker. With step 3, I do not need to worry about steps 1 and 2 anymore, but actually steps 1 and 2 lay the foundations of step3, so I will leave them in here.

So yes, you guessed right, I am back in the market. After my big loss I was left with 2,670,000 yen. And actually, I am not technically back in the market. I have a buy limit set with the following parameters:

Buy $100,000 USD/JPY at 133 yen (order active for one week). 

The current market rate is 133.35. 

Here is the analysis of my new trade with the 3 steps analysis:

Step 1: At this position size I could withstand a fall down to around 109 yen per USD

Step 2: 109 yen is 2400 pips away from my order level, so I am well within the over 500 pips rule

Step 3: My TP is 135 and my SL is 132. This gives me a risk/reward ratio of 2:1. I have read somewhere that it makes no sense to trade unless the risk/reward ratio is not at least double, as we need to limit our losses and let our winners run. They say that even the best traders have less than 60% winning percentage, so they need to make more on their winners to compensate for their losses.

So in case my order gets executed within 1 week, I stand to make or lose the following amounts:

At $100,000 position, each 1 yen move is equal to 100,000 yen. So in case it reaches my TP, I will make 200,000 yen. In case it reaches my SL, I will lose 100,000. Also, do not forget that I will make 800 yen for each day I hold my position - these add up!

I know, I know. The numbers above are not as exciting as the previous numbers - 10 times less profit possible than before as my position size is 10 times smaller. In this way it will take me forever to gain back the 3,330,000 yen I lost. And that is assuming that I make a lot of winning trades! But bear with me here. This is a journey, and it is possible that I increase my positions sizing if I see good opportunities and also as I gain my confidence. Currently I expect rangebound trading between 130 and 135 yen, so that is why I play small. 

And please do not ask me if I told my husband, okay?

Mrs. Watanabe is currently down and licking her wounds, but she will rise again.

To be continued...