When Trade Intervention Costs You – An Example

By | April 13, 2016

When Trade Intervention Costs You – An Example
Do you always wait for your trades to hit the stop loss or close them early if they don’t act right ? That’s one dilemma traders face and unfortunately there’s no one size fits all formula available. Some snake-oil salesmen and pretend traders would want you to believe that if a trade doesn’t work out the way it was supposed to, it’s always beneficial to close it before it reaches the stop loss. It’s not difficult to bring up cherry-picked examples to support this thesis. The end goal being, they want to appear smart and prescient even when they’re losing.

In actual trading though, shit happens. You might close a trade just before it takes off and had you not intervened, you would’ve stayed along for the ride. Below is an example of such a trade:

USD/JPY trade

The reason for entering this trade was the double-bottom and the subsequent break of the 108.46 resistance level. For a while, it seemed everything was fine, but by the NY session close, the lack of follow through was evident and the potential for reversal appeared high. So what did I do ? I manually closed the trade at 108.44, believing I will ‘save’ 14 pips out of the total 30 pips stop loss that looked almost certain to be triggered. What was the low of this down move ? 108.439 !! Closing a long position within a 1/10 of a pip from the low. How about that ?

Right after I closed the trade, the price started moving in my original direction. At first sight, the timing might seem uncanny. But if you put things in perspective, this being one trade out of thousands, it won’t look so improbable anymore.

A case like this, when the price suddenly moves back in your favor, presents yet another dilemma: do you re-enter or not ? Again, there’s no hard and fast rule. In this particular situation, considering the time of the day (end of NY session), I decided not to. I thought that the price will continue its downtrend or, at best, remain in a range. I was proved wrong.