Trade of the Month (May 17. 2010)
This month we look at a Euro Futures trade that set-up on April 29th on the 233 tick chart. We were using HVMM 2010 with a group of settings that have been working well on that market and timeframe as well as on the British Pound 144 tick chart.
Diagram 1 shows the setup. We had a long trade that setup at 9 am, exchange time (cst). The entry was at 1.3230 which for me, is an automatic adjustment to 3231. At 9:04 the price broke up thru our directional indicator and touched the entry price at 3230. Our adjustment kept us flat however, as the price began to pull off and head lower right after touching the system entry.
Ok, so.. no big deal. We’ve seen this before countless times. Since the system entry was hit, we now had a target and money management level (mm, a place where we have some profit and will take the risk off of our trade). We would now track the trade and if it were to come back up, and break thru, touching our 3231 adjusted entry, we would take the trade and go long. Instead though it headed lower and our proprietary ‘oversold/overbought’ indicator flipped over into sell mode, which triggered an early exit stop on the long trade. Here’s where the interesting questions began to take shape.
Like our adjustment on the entry, which had kept us flat so far, we also make small adjustments on our early exit stop. Typically, we’ll work around our indicators, and 0’s and 5’s if the adjustment is not too much (a few ticks, give or take). The important thing is to give the trade a chance to retrace and work itself out. Our indicators seem to work very well so we want to work around them. Diagram 2 shows an early exit at 3218 in yellow and the adjusted entry in red. Our ‘profit line’ indicator was sitting right below however, at 3216. For me, that is an automatic adjustment to 3214. Remember, I will not put a stop on 3215, I’ll always adjust below the 5.
As it so happened, the price did pull down and hit the system stop at 3218. We now have a situation where the system entry was hit, but our adjusted entry was not. Then the system stop was hit but our adjusted stop was not. If the price pulls higher, what should we do? Do we consider the system trade to be over and then look for the 2nd attempt reentry long setup? Or, do we consider the basic setup still valid since our adjusted entry was not hit nor was the adjusted stop? It was a very important question at the time. The reentry is by its nature, a smaller setup and presents a target that is closer, and thus theoretically, easier to achieve. Moreover, we had already had a winning trade (and a losing one) and only needed one more winner to achieve our ‘power of quitting’ goals.
With that in mind, I decided to go for the reentry trade. What if I went for the basic trade, which was bigger, and it failed to reach its mm level? The last thing I wanted to do was to risk another losing trade and to turn a winning session with power of quitting goals reached, into a negative balance and a need to keep trading with an uncertain outcome for the session.
Diagram 3 shows the reentry setup. As it turned out, the entry was the same 3231. It did trigger in and worked its way up to our mm level at 3238. Once it hit that level it pulled back. We locked in a 1 tick profit to guarantee our power of quitting (poq) goals and to at least cover our commission on the trade. That’s where we got stopped out and we were able to quit for a modest gain for the session.
But what if we stuck with the original basic setup? The adjusted stop was never hit and a strong argument could be made that the original long setup was still valid. As it turned out, after stopping out of the reentry (allegedly easier trade) with a 1 tick profit and poq, the market lurched forward and climbed all the way to the full target of the original setup. In other words, by sticking with the original trade, we could have posted +21 point profit instead of just a 1 point profit. Our poq goals would have been 20 points more on the session. (diagram 4).
Of course, it is easy to look back with the benefits of hindsight. Upon analyzing this trade (after the fact) I must be self-critical however, because I believe it was a mistake. I let the desire to end with poq influence the greater need to just trade the system. Was the reentry valid in this situation? I believe now, that it was not. The basic setup should have stayed live as long as the adjusted stop was not hit, or the profit line had not flipped over into sell mode, which it did not. To see a video recapping this trade, please visit this url: http://www.netpicksllc.com/HVMM/042910_ec233.htm
