Lesson in Risk Management> AUDJPY Hourly Failed Breakout

1 авг. 2015 г.

Hi FX Risk Takers,

This is the conclusion of the AUDJPY Hourly Breakout Trading Plan.

Recap:
Price broke below 90.30 and was trading at 90.10s, I posted that the Plan can be executed.
We recall the following:

Stop Loss
Initially we can place the Stop Loss above 90.50.
If price manages to trade towards 90.00 after entry, we can consider shifting the stop loss to either 90.25 or breakeven.

Taking Profit
The main profit target is at 89.50, where price found buying twice.
However, we can consider taking a small partial profit (say about 20%) when price reaches 90.00

Risk
There is the risk of fundamental data releases, which can drive prices to behave "abnormally".

So What happened?
Price traded from 90.10s to as low as 89.90.
At 2015-07-31 12:30, the US Employment Cost Index was released, which was below expectations.
This data drove prices higher through the roof. It fact, it took just 8 minutes, after the news release, to breach the Stop Loss of 90.50.

Hence, the fundamental data release has driven prices to behave "abnormally", as mentioned in the Risk section of the plan.
The breakout has effectively failed to follow through and the plan is no longer valid.

Lesson in Risk Management
While the Market did not reach the main profit target, there's a important lesson in Risk Management as described:

I highlighted that when prices reached 90.00 we can consider shifting the stop losses and taking partial profit.
These are defensive moves to reduce the risk of loss.

Let's tell a tale of 3 traders, who entered the same short trade at 90.10, but managed the position differently, to see who had the best ending>

Trader X, being aggressively bearish, did a entered Short at 90.10, set the stop loss at 90.50 and did not shift stop loss nor take partial profit.
X knows that tightening stops may result in exiting the position prematurely, due to market noise and miss out potentially on a good chunk of profit.
This approach produced the worst out come as he took a price loss of -0.40 (Entry 90.10 - Stop Loss 90.50).

Trader Y, recognizing that 90.00 has being reached, shifted the stop loss to 90.25.
However seeing that the price action is quite bearish he/she chose not to take partial profit, hoping that 100% of the position can be closed out at 89.50.
Y's result is better than Trader X, even though it is still negative, at -0.15 (Entry 90.10 - Stop Loss 90.25).

Trader Z, understands that protecting risk capital has the highest priority over making big money.
Z also knows that it is impossible to constantly Sell at the very top and Buy back at the very bottom.
Therefore when prices reaches 90.00 he zealously tightened the stop to break even at 90.10.
Also he closed 20% of the short position at 90.00.
This produced the best outcome in this scenario, at +0.02 (20% x (90.10-90.00)) + (80% x (90.10-90.10))).

The moral of story is to ask yourself, which type of Trader(X,Y or Z) you are right now and figure out which Trader you'd like to be.

To end, I'd quote Paul Tudor Jones, who said the following>
"If everyone spent 90 percent of their time on that(Managing Risk), not 90 percent of the time on pie-in-the-sky ideas on how much money they're going to make, then they will be incredibly successful investors."

Reference:
Paul Tudor Jones Trader Documentary> youtube.com/watch?v=G56Hv5pfqXM (Risk Management Quote at 33:45)

Best Regards,
- BreakOutArtist