AUD/CAD Trade

AUDCAD 4H

I mentioned a potential short setup in AUDCAD here. Well it did setup nicely in a huge bearish engulfing candle, I took the trade and made a small profit. I shorted the break of the bearish engulfing, took half profits at the previous swing low and shifted my stop to breakeven. Unfortunately this stop was taken out so I only ended up with a small profit. I want to blog about this trade because there are a couple of things I've learned recently that can be illustrated excellently using it.

1. Taking partial profits and moving stops to breakeven can be really liberating. Well at least for me, because I simply cannot stand watching profits turn into losses. Isn't this trade such a wonderful example? Look at how prices nearly touched the low of the previous swing and rebounded back up. If I hadn't taken partial profits there, my position would only be near breakeven now and that is a really sucky feeling. Worse still, prices could continue to shoot up and my profits would have turned into losses. I like the assurance of a winning trade and hence this method works for me. Yes I might miss a few big runners and price might stop me out at breakeven before turning again, but the idea is to have many small winning trades and once in a while a big trending winner will bring a windfall.


2. There is a common misconception about reward-risk and I only realized it recently. The common teaching is to only take trades with 2:1 or 3:1 reward risk. As such many traders give up perfectly nice setups because they fail to fulfill this criteria. After reading James16 and ForexSchoolOnline, I realized that there is a huge misunderstanding about this. Yes obviously high reward risk trades are good, but what if you know that a setup has a 80% chance of hitting a particular level? Do you forgo it just because the RR is only 1:1? Many traders mistakenly do so and miss out on potential profits. The thing is, if we're very picky and only select A+ setups, we shouldn't be too concerned about a high RR requirement. If a trade has a 70-80% chance of hitting an initial profit target, we know there is a high chance of being able to bank in partial profits and move our stop to breakeven. We already have a sure winner! This is exactly what happened with my AUDCAD trade. Yes the bearish engulfing was very huge, my reward risk sucked, but because it happened at a very strong resistance level I was confident that prices would at least hit the previous swing low. It did and I managed the trade exactly like I planned to. In this case I got unlucky because the rebound was strong, but if the swing low was taken out I would still have half my position to ride the trend.

I think those two points are very important and real gems from the stuff I've been reading recently. So, what if we get an A+ setup with 2:1 or 3:1 RR? Well, those are freaking MUST TAKE trades!!!! In fact, an experienced trader should increase his size and perhaps risk 3-5% of his account on such trades. I'm serious, 1-2% rules are for beginners so they won't blow up, but if you have been trading for 10-20 years and you very confidently know that a setup has a 80-90% chance of success, I don't see what is wrong with risking more on it. Even if it goes wrong, a 3-5% risk will not damage the account much, and experienced traders usually are able to cut their losses fast using discretion so they don't lose the full risk amount.