Learning To Sit On Your Hands

It was a pretty epic run. 1,420 pips to be precise. That how much we made on our 3 USDCAD longs over the last 2 weeks. Seems like we're ending 2015 on a high note. Many of our Premium Subscribers were also part of this, so we're equally happy for them.

 Our USDCAD trade complex consisted of 3 long positions all of which hit their respective take profit sell limit orders for a very impressive result.

Our USDCAD trade complex consisted of 3 long positions all of which hit their respective take profit sell limit orders for a very impressive result.

Our USDCAD trade complex, as we like to call it, was a result of impeccable price and time precision, and sound risk management. The objectives that were initially set forth when we opened our first position early in December have since been met. All trades on USDCAD have been squared and we're flat through the weekends.

On the technical side, we went long USDCAD last Friday at 1.3362. Our second long was added this past Wednesday at 1.3535. By then, our first long was already up almost 200 pips. On the charts, a key motivating factor for us to be on the long side was a clear pre-breakout formation in prices. The passage of higher lows and higher highs in an uptrend channel meant that bulls were in control.
— Business Of Finance, 13 December 2015

Before we continue, it is important that you understand all of the trading content we put out on these pages are real trades on a real account that we trade ourselves. We're using real capital and trading live prices. You can find out more about our trading system here. You can also view our entire trading journal here. In publishing such articles, we want to help traders from all walks of life better understand how successful traders approach the markets, and translate ideas into actions.

Early last week, we publicly shared that we were long USDCAD on 2 trades. We didn't reveal our price target for USDCAD but now that the trades have been closed via their respective take profit sell limit orders, we can reveal our price target of 1.4000. This target was achieved with 2 pips to spare; Friday's high on USDCAD was 1.4002 around an hour before the U.S. open. Quite a close shave, and adds yet more glitter to the stardom.



Once again, subscribers to our Premium Signals Service were kept updated in real time on all of our positions and had exclusive first hand insight to our trading activity as it unfolded. Many of them were long USDCAD with us and made a few hundred pips at least. Some made over a thousand, so congrats to them.

Sitting tight

Profits aside, there is a much more valuable lesson to learn from this episode, in our minds. The lesson of sitting tight on your hands and not doing what you're not supposed to do. Trusting your analytical skills and trader instincts and having conviction in your trades.

Ever heard of the adage of "death by a thousand cuts"?  There are plenty of examples of how traders are able to wipeout entire accounts through small but frequent losses. The 2% rule of never risking more than 2% of your capital on a single trade is tried and tested. It's hard (but not impossible) to decimate an account if you stick strictly to this rule.

What isn't so much talked about is on winners. There are traders with terrible win ratios, something as extreme as 80% of their trades be up as losers. However, these traders still turn a profit each quarter and year, and do it consistently. How it that possible?

Winners matter

Your profitability is ultimately determined by your win rate (ratio of profitable vs. unprofitable trades), and your profit factor (risk to reward ratio). A trader can lose 8 out of 10 times but still make money because his average winner is 5 times the size of this average loser; for every $8 he actually loses, he makes $10.

Our point here is that traders need to focus on their winners as much as they try to manage risk (focusing on unprofitable trades). Limiting losses is an important element in successful long term trading, but the profitable trades are ultimately what's going to make your money. 

This is a very underlooked aspect in the business of trading. You always want to maximize the size of your winners whenever circumstances permit.

Riding the trend

And on this USDCAD trade complex, we did just that. Not only were we able to hold on to our first long position at 1.3362 (inside the initial pre-breakout structure, right before the entire rally), we managed to add a total of 2 additional longs on corrective pullbacks into our subsequent "short term pullback buying zones" as depicted in the chart we've included below.

 Our USDCAD trade complex with 3 independent longs is depicted here. The first long was within our main pre-breakout structure and formed the technical basis for the subsequent 2 longs. The second trade was enter after prices did a second test of our "short term pullback buying zone", while the third and last long was at a minor technical level. All 3 trades had a take profit sell limit order at 1.4000, and they were filled at market on Friday after some weak Canadian economic data. These 3 trades netted us approximately 1,420 pips in total.

Our USDCAD trade complex with 3 independent longs is depicted here. The first long was within our main pre-breakout structure and formed the technical basis for the subsequent 2 longs. The second trade was enter after prices did a second test of our "short term pullback buying zone", while the third and last long was at a minor technical level. All 3 trades had a take profit sell limit order at 1.4000, and they were filled at market on Friday after some weak Canadian economic data. These 3 trades netted us approximately 1,420 pips in total.

As much as we tried to time our 2 secondary entires, price accuracy wasn't a priority for us because we we convinced that the bull run has much more left of it on the table. Focusing too much on the micro will inadvertently distract you from the macro, which is exactly what this trade complex was set out to accomplish - ride on strong fundamental divergences. We've spoken about the technicals and fundamentals in our last post so we're not repeating them here.

Adding additional positions onto a base position is known as pyramiding and is an advanced technique use by traders who wish to increase directional exposure when the market has moved in their favor. The best thing about this USDCAD trade complex is that drawdown was very minimal, partially thanks to our entries which were almost at the lows of each corrective pullback.

The combination of riding a very strong and almost linear trend (selection skills are required to do this well) and proper pyramiding led to the eventual 1,400 pip gain. It wasn't just one factor bit a series of properly executed strokes that led to this successful trade conplex.

Risk and profit management

We ran slightly wider stops in the beginning because we weren't too sure if USDCAD was prime to stage a strong bull run. That was the case for our first long inside the main pre-breakout structure when price action was still choppy.

As the run started to develop and bulls gained dominance, we trailed our stops closer beneath key technical levels to lock in gains and to set the stage up for new positions to be added. It is not wise to start pyramiding when you don't know your gross and net exposure in terms of pips and dollars.

Trailing your stops properly isn't a simple thing to do. Trail it too tight and you'll probably get shaken out; this will end the ride of most traders as re-entering at a worse pride after being stopped out is mentally challenging, and most will start to make mistakes at this juncture. It's a balance (part art part science) between locking in a comfortable amount of gains, and giving the market enough breathing space to venture (respecting price action).

On price objectives, we originally placed our target slightly above 1.3900. That was before Wednesday's FOMC event, which in hindsight sparked a move higher in the greenback. We ultimately raised our target to the big level (psychological and technical) of 1.4000 because the market was telling us it had the inpetus to push above 1.3900. Thankfully, the markets vindicated our judgement and the rest was history.

Conclusion

This will probably be our last entry into our trading journal for some time. We've ended 2015 on a relatively high note and are glad that we're able to help others along the way as we make our trades and commentary public all for free.

There're lessons to be learned in every trade. Successful or not is besides the point. A smart trader advances by remembering and learning these lessons. These are the ones who will gradually see positive progress in their trading because they take time and effort to improve. 

Again, if you wish to profit along side us and receive many more of such trades on a daily basis with no lag, join us as a Premium Subscribers by clicking the button below. We await you aboard.