Anatomy of a Trade And a Trading Lesson

By | August 14, 2015

After all, the game of speculation isn’t all mathematics or set rules, however rigid the main laws may be. Even in my tape reading something enters that is more than mere arithmetic. There is what I call the behavior of a stock, actions that enable you to judge whether or not it is going to proceed in accordance with the precedents that your observation has noted. If a stock doesn’t act right don’t touch it; because, being unable to tell precisely what is wrong, you cannot tell which way it is going. No diagnosis, no prognosis. No prognosis, no profit.

I was twenty when I made my first ten thousand, and I lost that. But I knew how and why because I traded out of season all the time; because when I couldn’t play according to my system, which was based on study and experience, I went in and gambled. I hoped to win, instead of knowing that I ought to win on form. Jesse Livermore in Reminiscences of a Stock Operator

These two quotes contain very powerful messages that took time and several reads of the book to completely sink into my mind. They were the main inspiration  when I made it one of my trading rules to limit the number of trades taken per day.

One of the best things one can do as a trader is to set loss limits per unit of time (day, week, month) – protecting his capital should be his number one priority. I’ve touched on this subject before. Although I believe that a percentage loss limit is common among advanced traders, I think the situation might be different as to the number of trades limit.

Avoiding trading when the market doesn’t act right according to your system is an important component of trading success. It not only prevents you from spending time and money on suboptimal trades, but it also contributes to your peace of mind as a trader. I’m going to exemplify below the thinking process behind my latest trade:

This is how the USD/CAD charts (4h and 1h) looked like Thursday 13.08.15 at the end of the New York session:



Being in a clear uptrend, at least as far as the h4 time frame was concerned, the pair was at the time consolidating in what looked like a bull flag (continuation chart pattern). With a clean break of a resistance (red line) on h1 which offered technical levels for trade entry (blue arrow) and setting stop loss (under red line) and with the Oil prices falling to six year lows, I considered this to be an attractive long position.

Early during the London session on Friday, the price action looked constructive, presenting a pyramiding level (blue arrow) which permitted entering a larger trade size, having raised the initial stop loss to the level where I entered the previous trade.

USDCAD pyramid

Then, instead of continuing the bullish run, the pair soon turned, and remained choppy for the rest of the day:

USDCAD choppy price action

After the trade hit the SL and seeing that the price was not acting the way I expected it to act when I opened the trade, I stopped paying attention to the market. Although looking at the charts in retrospect, it might seem that it was the only logical thing to do, in real time trading it’s easy to get carried away. Without rules when to step away from your trading desk, even if you play small, over-trading and death of a thousand cuts are just around the corner. But if you have rules in place and follow them, I think everyone will realize that there are better and more profitable things to do than to chase an unfriendly market.