10/16/2014: Great Day of Trading Despite a Mistake... The Debate That Raged Within

I am thrilled to be able to say I was up 56.4 pips today (Thursday)!  As someone who has struggled mightily with my trading, I now feel that I am starting to turn the corner and become a consistent, disciplined, and profitable trader.  It feels GREAT to have made my goal for the week.  

I took three trades today (Thursday morning New York session).  All were to the short side.  I took a +19.7, a +6.1, and a +30.6.  I could talk for ages about all three of these trades, but this post will focus on the first trade of the morning.

I had tried to trade the Aussie session from around 6:30 - 9:00 on Wednesday night and it was flat as a table (by GBP/AUD standards).  One of Wade's great pieces of advice about the Smart Money Profile (SMP) software is to pay close attention to where the market is at in the volume curve.  Usually the market is pretty wide awake during that Aussie session.  However, while I was watching, the volume on the hour stayed almost exclusively dark blue.... ice cold.  This really helped me stay out of the market.  Sure there were some pips to be had as the market rolled back and forth in a 30 pip range, but I stayed true to my trading plan, exercised some discipline and stayed out of the market.

This morning I got online at around 5:05 am pacific time.  The first thing out of my mouth was, "Ohhh Nooo!"  Why?  I saw the market had run up over 200 pips!  I was ticked off.  On Wednesday morning I had seen an excellent entry, but didn't pull the trigger on a trade that would have paid at least 50 pips.  On Wednesday evening, there was nothing to trade.  Now I come in on Thursday morning and the market has already made it's move?  What??

I realized had a decision to make.  Was I going to be an idiot and stay upset, or was I going to exhibit some emotional intelligence and get ready for the next move?  Thankfully I chose the latter.  I pulled out Wade's awesome Trading Questions and started evaluating the market.  Here's what I noticed (see screen shot below):

1. As the market continued to run up, price on the buy side went above 1.8400 to open up a bunch of retail trader longs.  The market makers then snapped it short by about 18 pips to stop out all the longs that opened up at the double zeros.  Then they took the sell side up to about 1.8408 to open up a bunch of longs again.  Then the market makers snapped the market short all the way down to 1.8357.  If the 18 pip stop taking didn't get you, the 51 pip smash definitely knocked you out.
2. At this point, my intuition told me that I should be looking for a retracement so I could get in short.  I was conflicted because the market had pushed up for several hours and I felt like I was trading against the overall trend.  However, I trusted my instinct and looked to see if we would get a retracement back close to the market maker activity dot from 5:45 at 1.8389.  I wasn't sure if price would go there, or go all the way back up to the blue liquidity line at 1.8402.
3. Price hit 1.83988 on the 6:20 candle and turned - basically right at the average price.  However, because I wasn't sure where price was going to turn, I was nervous to get in right away when price started to turn down off the average price dot.  

• I finally got in going short at 1.8380 - not great entry, but not terrible.  It was pins and needles for the first 7 minutes because price actually went back up.  It got as high as 1.8391.  However, because price had not really cleared the average price dot, I did not have any confirmation that I was wrong in the trade.  I am proud to say I did not allow the fact that I was uncomfortable with price get me out when the overall story had not yet changed.  After a few white knuckle minutes, price pushed down nicely for me and quickly reached 1.8350.  
• As so often happens around power numbers, price then backed off.  This is where the debate started raging in my head.  Once we hit the power number, things seemed to be happening at warp speed.  Although not terrible, I did not exhibit the best decision making here.  Here were my options as I saw them:

• Option A: Move my stop so that if price backs all the way up to 1.8380, I get out with a zero.  In actuality, this was my original trading plan and I had already moved my stop to 1.8380.  I had no risk of losing anything of significance and the potential upside to staying in the trade was huge.  My target when I got in the trade was the yellow liquidity line all the way down at 1.8280 - so I had a legitimate shot at a 100 pip trade!  Obviously the market is going to breathe during a 100+ pip run, so the fact that it took a breath at the power number was not a surprise.  If I'm ever going to learn to pull 50's, 75's, and even 100+ pip trades, I have to learn to stay in the trade and be willing to take the chance that the trade doesn't pay me at all.
• Option B:  Get out right when price started to hesitate after hitting 1.8350 and book 30 pips.  There certainly is nothing wrong with booking 30 pips!  My goal for the week was 35-50 pips and, after a slow week, I could have reached the low end of my goal with that one trade.
• Option C:  Options A and B were both pretty good.  Unfortunately, I went with option C:  Let the market breathe back and once the price action makes me uncomfortable, allow the market makers to bully me out of the trade.  Yes, this is the exact behavior I managed to avoid at the start of the trade.  
• Now, don't get me wrong, I was pretty happy with my 19.7 pips.  However, it turned out to be dumb because the market only breathed back about 1 more pip before it took off again (doff of the cap to the market makers for their skill at getting people out of trades).  
• Now you may say that hindsight is always 20/10 in the market and you'd be right.  The real reason it was dumb was because I gave up the upside AND gave back 10 pips for no reason.  If I'm not going to have the stomach to stay in the trade, then as soon as price starts stalling, especially around a power number or another sticky point like average price, then I should just get out of the trade.

So, other than sheer panic, why did I actually get out?  Here's what I was thinking in the moment.  I knew that when the market makers tapped 1.8350, there was a chance the market could breathe back significantly.  Knowing that the target for the trade was over 100 pips short from the start of the move, I felt there was a good chance the market might breathe back much more than 10 pips.   I thought it very possibly could breathe all the way back to 1.8375.  

Now, remember, my entry was 1.8380.  If price did retrace back to 1.8375, there was a great chance it could stop me out and I really didn't want to end up with a zero or 5 pips.  Thanks to both Shane and Wade's teachings, I am constantly asking myself, "At what price will I know that I was wrong about the trade?"  In this situation, I would not have confirmation about being wrong until price would have gone north of the original average price of 1.8389.  This means I would have been forced to have my stop up over 1.8390 in order to truly know that I was wrong about the move.  There was no way I was willing to see a +30 in the trade and take a negative 10-15 pips.  

So in my mind, it didn't make sense to risk letting the trade back up to 1.8375 because I wouldn't even know that I was wrong yet.  I also wasn't about to set my stop up over 1.8390 and take a big negative.  As I look back now, this tells me that the best option for that trade would have been to take the 30 pips.  Now, if I would have had truly pristine entry up around 1.8388, then I would have had the ability to let it breathe back to find out if I was wrong without taking more than a 5 pip negative. 

I hope and expect it will soon be a common situation where I am up a significant amount of pips and then have to decide whether to stay in a trade or get out.  Right now, it's tough to imagine being up 20-40 pips and being OK with giving it all back.  As such, I believe I may err on the side of caution and book those profits (hopefully without giving back 10+ like today).  While I definitely want to pull bigger trades, I am also highly fearful of losing those pips because it is not yet commonplace for me to be up 30+ pips in a trade.   As I gain more experience with SMP, I believe I will start encountering this situation more frequently.  As such, I hope over time it will become easier to stay in the trade because I will have the confidence that I will be up 30 again soon.  

Well, it sure is awesome to have made my goal, made 56 pips, AND learned a valuable lesson all in one morning session.  What a great day!  I'm planning to watch the market tomorrow, but I'm not pulling up my rate indicator.  Heck, if I'm tired enough, I might just sleep in like a wild man until 6am (welcome to the west coast student trader's lifestyle!).  On a serious note, I hope your trading is going well.  If you are struggling, please reach out to one of the instructors.  These guys know their stuff, but they can only help you if you are open and honest with them.   Also, please feel free to connect with me any time at pipaddict73@gmail.com.

All the best!