From INVINCIBLE to I WANT TO QUIT TRADING!

INVINCIBLE

So continuing from my last post, in October 2022 I got back into Forex trading. I had one good trade, for a profit of 60,000 yen in less than a week. Hit and run, make money, easy going. Not bad. So how much will I make next time? The sky was the limit. This way of thinking sounds ridiculous to me at the moment, but back at that point in time I felt invincible. Why? Because I had the perfect strategy. All I needed to do was decide which direction to bet on, and then if my order is filled, and as the market moves in my favor, close my position for a profit. Alternatively, if it goes the other way, keep adding to my position DCA style, and eventually I will be able to close my position at a profit as price retraces as it eventually does. Historical data backed up this strategy fully. I just had to make sure not to use more leverage than I could afford in order to avoid margin calls. Stop losses? No, thanks, stop losses are for wusses. I am invincible. Instead of stop losses, I improve my average price and then get out of trouble at breakeven on retracements. In theory this is a great strategy. In practice? Well, let's see what happened.

In November 2022 I was stalking USD/JPY long. I wanted to do a carry trade, and I had my first order to buy at 146. The second order was at 145, and then I wanted to get out at 150 for a nice profit. My 146 order was filled on Nov.3 and then the price moved up and down in a tight range for a week. I stayed in it. Then Nov.10 came. It was CPI day. The CPI (Consumer Prices Index) is a measure of inflation in the USA. Every month the number is released, showing by what percentage consumer prices went up that month. The market has an expected consensus number, and if the actual number is higher, the USD goes up, and if it is lower, it goes down after the data is released. I was ready to add to my position if the USD went down, I had a plan to trade with orders waiting. But I was not ready for what happened.

THE REALITY OF TRADING

The CPI was released at 22:30 on Nov.10. I can't remember the exact number, but it was lower than expected. Anyways, what is more important than the actual number was the market reaction. Somehow the market interpreted the data as meaning that the FED will not be raising interest rates so much, and USD/JPY dived quickly. It hit my second order at 145, and I was actually excited. The data was not so bad, and the market was obviously overreacting. I better take this opportunity to buy a bunch. The lower it gets, better for me, as it will recover eventually. It was my bedtime, so I put in two more orders before going to bed - 2 lots at 144, 2 more lots at 143, and 4 lots at 142. I was not really expecting the price to reach 142, but just in case, I put the last order there, making my position size 10 lots. It was my maximum position size. After that I would not add any more and just manage it. Risk management, before everything.

Not to bore you with any more details of the market action on that day, but let me just say that the unexpected happened. It was the worst possible scenario, a perfect storm against my position. My 145 order was hit as the CPI was announced at 22:30. Just 12 minutes later, at 22:42, my 144 order was hit. Then at 23:35 my 143 order was hit, and at 23:45 my 142 order was hit. For just 75 minutes, I was already at maximum position size of 142! Of course, I was sleeping at that time, but when I woke up, I saw the shocking reality. I was in the red, and it didn't feel great. Welcome to the reality of forex trading. Cold sweat, fear of losing everything, feeling stupid, not knowing what to do. Calm down. But it is hard to calm down when your loss is bigger than what you can handle. I didn't want to quit trading yet, but that day was getting closer.

MANAGE THE LOSSES AROUND 140

So I immediately started to manage my position. First, I put an order to exit 4 lots at 142. Luckily, it got filled, so I was down to 6 lots now. Still in the red, but at least the position size was manageable. I continued playing though, looking to get a better average price. I put a buy order at 141 for 4 lots, and waited. It would have been okay if the price stayed around 141, but unfortunately the selling continued, and my last order was filled. I was in my maximum position of 10 lots. And then the price continued diving under 140 in the following days. I was losing money bigly. What should I do now?

To be fair to myself from that time, I did have sell orders to get out at breakeven. I was not that reckless. I did have a plan. The problem was that I was not prepared mentally for such a big loss. I realized that the loss was bigger than what I could handle when I had trouble sleeping. I had nightmares of losing a lot of money. When you can't sleep, you know that your trade position is too big. But then I pulled myself back together and continued managing my position. I put in another lot to buy at 138.50, which got filled on Nov.15. It was actually a good price, but the price kept going down, so anticipating lower prices still, I chickened out and put in a sell order at 138.50 right away. I got out in less than one hour at breakeven and was back to my 10 lot size. And then the waiting began. Waiting for price to go back to 141 so that I can get out of the last 4 lots at breakeven. Eventually we recovered to 141 on Nov.21. Now I was back to 6 lots, and remember, I had not lost any money yet officially. All my losses were unrealized, and I had actually gained from the carry trade. So, as long as I was able to close my position at breakeven or better, I could have made a profit on this trade. With the price still over 140, things did not look so bad. But then the selling in the USD/JPY resumed. And the pain came back.

It was Nov.23, and after a one week recovery above 140, the price broke under 140 once again. I had 6 lots of my initial position, and I had orders to add at 140 and 139. My risk appetite had gone down, and I was more cautious now compared to when I started, so each add was just 1 lot. Gone were the days of 2 and 4 lot orders. How things change when losses mount. In actuality, I should have become more aggressive as the price went lower. Unfortunately, it is easier said than done. In reality I could only bring myself to add 1 lot at a time. I just wanted it to be over!

But things just got worse. On Nov.23, there was some USD-negative news and the USD dropped. My 140 and 139 orders got filled. I put in one more at 138. Basically the strategy was to sell the lowest order for a 10,000 yen profit and close the one above it at break even. So my order to buy at 138 was triggered on Nov.28, and as finally the price recovered a bit on Nov.29, I was able to close 2 lots at 139 for a profit of 10,000 yen. This was my first profit for the month, which felt good. I did not waste time though and put in one more order at 138, which got filled on Nov.29, and then once again closed for a 10,000 profit at 139. I kept the other 7 lots, and was trading at the bottom orders. Never close an order at a loss, and close the lowest one at a 10,000 yen profit. And wait for price to recover higher, so that I can close the other orders at breakeven, while collecting carry while waiting. It is not that hard, is it?

MANAGE THE LOSSES BELOW 140 - HOW LOW CAN YOU GO?

On Dec.1, I had 7 lots open, and the price was over 138. I had orders to add at 138, 137, and 136. I had made 20,000 in the previous week from the volatility in the market, and I was upbeat. I believed that I could recover my unrealized losses. And then all hell broke loose. On Dec.1, the price dropped like a rock. On the same day all 3 of my orders were executed, and I was at a full position of 10 lots. Well, actually I changed the rule. I put in one more order at 135, which got filled on the next day. Then I put in one more order at 134, which also got filled. I was at 12 lots, my biggest size so far, and my unrealized losses were close to 1,000,000 yen. It was Friday, Dec.2. So how long can it go?

Luckily for me, it was NFP day. NFP is the US labor report. On the first Friday of each month, the US Labor department reports the number of jobs created or lost for the previous month. And on that day, the number was good, and my trade finally moved in my favor. I still remember myself shouting: USA, USA, USA! in relief. I am not American, but I was really happy for the USA labor market doing well as that caused the price to move in my favor. Instantly my last 2 orders were closed for another 10,000 profit. I was back to 10 lots size. It was not looking that bad anymore. On Dec.6 I was able to close the 136 order at breakeven, so now I was down to 9 lots. Then later on the same day I closed 2 more lots at 137.40 for a small loss of 2,000 yen. We were back on the way up to 140, but can we get there?

MANAGE THE LOSSES AROUND 135 - WILL I EVER GET TO BREAKEVEN?

So in December, I continued with the same strategy of adding and then selling for a small profit. On Dec.13 I had an order executed at 135.20, which I then closed at 136.30, banking 11,000 yen. You might notice that my order setting had become more precise, no longer using the round numbers. Well, I was using the round numbers initially since I didn't know a better way to choose entry points. Then as I was watching the market every day I started to learn more about moving averages, pivot points, Fibonacci levels, and such. Don't get me wrong, these concepts were not new to me. I had learned all of them when I started trading in 2010. But with time, I had given up trying to be precise, and especially in the carry trading days, I went for the round numbers. Easier to manage, and anyways there is no guarantee that the smart targets such as Fibonacci levels will ever be hit. But then as I was watching the market every day, I got the desire to fine tune things. And so I started using more precise targets. 

HAPPY BOJ DAY OR RATHER - I WANT TO QUIT TRADING!

Ah, I will never forget that day. Dec.20, 2022. Things were going so well for my trade. The USD was recovering, and consequently USD/JPY was on the way to recover to 140. I was optimistic. It was the end of the year, and it was the day of the BOJ policy announcement. Basically, it was expected to be a nonevent, as the BOJ never changed its policy. They did not care about the weak yen, so nobody was expecting anything of note from their announcement. And that is why there was a lot of turbulence after they actually did something unexpected.

"It is a surprise!": said Japanese traders on the TV news. Even Japanese traders were surprised by the BOJ announcement. No, the BOJ did not raise interest rates actually. They didn't even promise they will. What they did was raise the upper limit for the yield of the 10 year JGBs. The limit before was 0.25% and it was raised to 0.50%. The yield limit widening was not an interest rate increase, but somehow the market interpreted it as such. And the USD/JPY tanked hard. I had 2 orders before the announcement. The first one at 135.70 was hit instantly. The second one at 132.70 was hit 3 hours later. The price was above 137 before the announcement, and it almost hit 130 in the same day. Something broke in me on that day.

I was shocked beyond belief. I had never experienced such a sudden move against my position before. I lost 630,000 yen just in one day, even be it in unrealized losses. I lost hope, I lost my self esteem. I am not made for this, I have to quit. I wanted to close all of my positions and quit trading. You guessed it, I could not sleep that night. I had 9 lots opened and I was deeply in the red. I was seeing the abyss, reading predictions of how the exchange rate will drop to 120. I was contemplating closing everything right there and then. The loss would have been close to 1,000,000 yen. Wow. Get yourself together man! 

To be continued...