As I already explained in my previous posts, I had a big loss in a big trade gone wrong starting in the end of 2022 and ending in the first half of 2023. Over 300,000 yen loss, to be exact. Throughout the trade I had been underwater for close to 1,000,000 yen at the lowest point, had lost sleep due to a too big position size, and worst of all, the trade had later gone in my favor, but only after I had exited. I might as well say it here - had I just held my initial 10 lots purchased on Nov.10, 2022, to the current date, without doing anything, I would have made a big fat profit. The current market price is higher than my average execution price on that date and the carry income for 1 year and 5 months would have been a monster. But I did not hold. I traded.
SO WHAT WENT WRONG?
Mistake 1: Too big trade size
I found myself at a trade size of 10 lots, which I was not emotionally prepared for. Simply put, as the trade was going against me, I could not stomach the losses. I did not sell, but I also did not add when I should have done in advantageous lower levels. I was paralyzed. Therefore, as time went on, I reduced my trade size to 5 lots, only to be increased further in case of a bigger market drop. That smaller market size was easier to manage, especially as I was establishing my new trading system. I corrected that mistake.
Mistake 2: Random entry and exit points
I started this trade with orders at round numbers. I was not following Fibonacci, pivot points, MAs, nothing of the sort. Naturally, I panicked as soon as price was going against me, as I had no faith in my system. I had to change this, and I started developing a new system. I corrected that mistake by introducing systemic entry and exit points based on market action.
Mistake 3: Lack of impartiality
I was married to my position. I was long USD/JPY and when the price action was going against me, I felt bad for being wrong. This is the cardinal sin of trading. Trading is about playing both sides of the trade, especially in forex. One needs to be agnostic - long one day and short the next. So I had to develop an impartial trading system with systematized entry and exit points, and manage my trade size appropriately.
I could write even more about my trading mistakes, but that would not add any extra value. Now I have my system, and I follow my system religiously. So I will take some time to explain the evolution of my system, how it was formed, and how it reached its current state.
SYSTEM EVOLUTION WHILE MANAGING THE LOSING TRADE
Naturally, I started developing my system while managing the USD/JPY long trade that had gone against me. At that time I was playing only the long side. As mentioned, initially I was buying and selling at round numbers. Then I started to implement moving averages, such as the 100 DMA and 200 DMA - buy or sell at the DMA level on that day. I also tried Fibonacci retracements. I will spare you the details of explaining these terms here. Suffice it to say that these are predetermined levels used by other traders, and thus at least I knew that there will be similar orders at those levels, so it would be a good idea for me to also use the same levels.
In May 2023, I had a sell order for my last lot of USD/JPY at the 200 DMA. My sell order got filled, and I was flat. At that time I thought there will be many sellers at that level, so the price will come back down, and I will be able to buy again. What happened instead was that the price powered through that level, and kept going higher. Obviously it is not always true that DMAs can stop the market action. Since the price never came back, I never got an opportunity to get back into my USD/JPY long trade. The level was 137.50. We were soon above 140, then 145, and now over 151. I would have made a lot of money, had I just stayed in. But that is not the point here.
In terms of trading, I did the right thing to have a predetermined selling point at a DMA. I was out of that trade, and that was okay. What I needed next was another way to trade, other pairs to trade, just anything, since I was not going to buy back into USD/JPY unless it went under the 200 DMA. So I started looking around.
PIVOT POINTS
Pivot points are price levels, which are calculated based on the preceding period's price action. If they are monthly pivot points, they are calculated based on the previous month's high and low price. There is the middle pivot point, then there are resistance levels 1, 2, 3, and so forth above it and below it are support levels 1, 2, 3, and so forth. I decided to use these pivot points as entry and exit points for my trades. But which pairs to trade? And which side to trade? Should I just put an order on the pivot points on both sides of the market price and see which one gets hit first? There were obviously some details that needed to be figured out first before I could trade with pivot points systematically.
I honestly cannot recall when my current pivot points trading strategy was formulated. Looking at my Google Sheet, the first pivot points table I have is from September 2023, but I recall using the pivot points in August, even July. At first I was arbitrarily choosing the pairs to trade, and used the pivot points to pick my entry and exit points. For example, the Japanese yen was weak in August, especially against the EUR and CHF, so I went short both of them using pivot points. I also exited at pivot points. These were good profitable trades. But obviously I needed to systematize further.
SYSTEMATIZE IT AS MUCH AS POSSIBLE
https://www.actionforex.com/markets/pivot-points/
The website above has pivot points for a total of 28 major currency pairs. I get the monthly pivot data, and then based on the current price, I calculate which are the three most overstretched pairs, ripe for a reversal. Then I put an order above or below the market level against the current market direction, and if the level is hit, I am in the game.
I will give an example, which should make things easier to understand. Below is the list of the pairs I follow with current data as of Mar.24, 2024. The data from rows S3 to R3 is the monthly pivots data. This is the basic ingredient. The PP row is key in determining which pair to trade. Row C shows the current price. If C is bigger than PP, then the first currency in the pair gets a +1, and the second one get a -1. If C is smaller than PP, then the first currency gets a -1, and the second one gets a +1. At the end all the points each currency got are summed up and for each pair the difference is taken. The ones with the biggest positive or negative number come out highlighted in red. Currently we have 3 signals, and these are short USD/CHF, short EUR/CHF, and short EUR/NZD. So next step is to put an order at the pivot level immediately above the current market price. For USD/CHF that would be sell at R2, then exit at R1.