First things first. I was looking to buy pullbacks into the trend in a number of markets- AUD, the ASX200, and the Emini S&P500 etc. I saw markets breaking to new highs on strong momentum, I saw markets shrugging off countless bearish news headlines which implied genuine strength, and I saw this price action coupled with good underlying breadth. Thus, when presented with 2-3 day pullback into the Daily trend, you bet I was looking for the retrace trade and pullback trades. I spelled this all out here: http://swingtradersedge.blogspot.com/2011/05/dont-fight-trend.html and http://swingtradersedge.blogspot.com/2011/05/asx200spi-bullish-pattern-developing.html
I focus here on AUD but similar events happened in the Eminis and the ASX200. AUD went from 1.10 to 1.08 and I looked for the bottom. I looked for hammers, flags etc to get into the trend. All I was thinking was bullish bullish bullish despite the 60min trend being firmly down. We bounced and failed. 1.07 was the next stop and still I looked for that bullish turn. This level lasted for a couple of hours before once more we cracked lower to a low of 1.055. All the while I was looking for that low and we had fallen almost 500 points! Thus my bullish bias had actually kept me from following the short term trend and making significant money on the downside. And by the time AUD hit 1.055, I had completely given up and suddenly thoughts of an AUD top entered my mind. No doubt that was the low and I was not prepared to make that long trade anymore. I didn't lose any money here other than perceived opportunity costs. I was not so fortunate in the Eminis where I stepped in only to be viciously stopped out.
There are a few things to gauge from this. The simple fact is that when markets become exceptionally volatile (which they certainly have over the last week), they make large moves. Large moves to traders appear like incredible opportunity and naturally, we get angry at ourselves when our results don't reflect this opportunity. We begin to regret our actions and express our frustration via "should have" and the like. As humans, we inherently try to make sense of the world. However, the key thing to understand is that markets are highly unpredictable and ambiguous. Really anything can happen and no edge or strategy or setup will work every time. Thus, missing a 500 point move down in AUD is not necessarily a bad thing if this is not in accordance with your trading plan. And I have realized it wasn't. There wasn't a clear topping pattern, there wasn't a process of distribution, the Daily had made a new momentum high and I don't fade these type of moves. In strong bullish trends, I look to buy the retrace. I have made the retrace trades countless times throughout this bull market and they have been highly profitable. It is not going to work all the time and thus I shouldn't be getting upset.
One of my favourite quotes by Brett Steenbarger so eloquently sums what I am trying to say here: "Given the limits of what we know and what is ultimately knowable, not all movement is opportunity. The key to trading success is finding the patience to capitalise on those things you do know and the wisdom to except what is uncertain".
In regards to market bias, no doubt this clouds ones ability to see other setups or price action that is the antithesis of what is expected. Indeed, whilst I was busy anticipating my AUD and Emini long setup, I completely missed a breakdown trade in EUR which was a very valid setup in my trading plan. I don't often put on pair trades and a short EUR position didn't fit with my bullish AUD outlook. I doubted whether the breakdown was genuine and thus I passed. The irony is that I was given the EUR signal before anything else! Now this is poor trading and this was the genuine mistake throughout this all. This was an opportunity and I failed to follow through. Not following the gameplan is the undoing of most traders I believe.
And once again this brings us back to Brett's point. If we can develop a plan through research or experience, then this is the genuine key to success. If we can accept that the market can do anything, if we accept that we are not going to catch every major move in every market, then there is nothing to fear. The best we can do as traders is devise a methodology based on exhaustive research and experience- and follow it!
In sum, I am sure there are many elements here that strike a chord with most traders out there. We have a natural tendency to kick and question ourselves after the move has happened. We think we can catch every move. However, really the question we should be asking ourselves is did that trade fit with the trading plan? Be honest. If it did, what plans and procedures can we take to condition this setup. How can we control our emotional biases when trading going forth? For me, instead of beating myself up I need to condition the EUR pattern once more. Writing this down helps. I also need to print the trade out and go over it again and again. I need to go over all my breakdown trades in the past. Most importantly, I need to associate following the plan as a good thing and the key to success.
EUR 60mins:
