The cardinal sins in trading are always mental and their name is hope

‘Never turn a profit into a loss.  Never change your stop. Never turn a day trade into a strategic position’. These and other market clichés point to the perennial danger of letting a desire for greater profits corrupt your trade discipline.  A trader can always find a new rationale for sustaining a losing position: tomorrow’s statistic will provide a base; the stop-level was barely breached; the pair rebounded; the next support will surely hold;  the moon is in the seventh house--a rather dated joke but with the point that the reasons  for keeping a losing position take more from emotion than from any reliable trade intelligence. All belie the key point that it is almost always smarter to close an existing position at a modest profit or with a small loss than to invest emotional capital in a market turn, no matter how secure your new trade logic seems. Pause, reassess and if conditions warrant, open a new position.

In early 2007 Eur/Yen has been in a strong uptrend for more than a year driven higher by the 2%+ interest differential between European and Japanese rates.  When the cross broke above the trend channel for the second time in early April 2007 I went long at 157.50, with a stop at 156.25.  As the cross moved higher in the second quarter I moved my stop finally placing it at 160.95  in late May.  My take profit at 165.00  was reached in mid-June.  But instead of executing I abandoned the order. I decided that the ECB’s rate policy, which had steadily increased rates from 2.00% at the end of 2005  and had just hiked again on June 13th  to 4.00% would push the cross even higher. The trend seemed unstoppable. The Eur/Yen did move higher reaching 168.96 on July 13th but then it fell sharply, crashing through my now defunct take profit at 165.00 on July 26th. Then on August 1st, in volatile action, it broke through my stop at 160.95, which I did not execute, to 160.44. The rebound that day was sharp closing at 162.46. I felt relieved that I had held the position. As the stop at 160.95 was now just below the top of the trend channel (161.25) and the penetration of the top border of the channel on the 1st (and my stop at 160.95) had been brief and the recovery had been both rapid and substantial I decided that these two conditions had formed a new strong technical base just above 161.00. I left the stop at 160.95, confident that my long position was now supported by technical and fundamental considerations and that the plunge had been normal profit taking in an otherwise strong uptrend.  

EUR/JPY trading sin

Since this is a cautionary tale we know that my assumption was almost immediately disproved. The cross did move higher touching 165.40 on August 8th. I did not take profit, now operating on my new technical and fundamental assumptions. On the 9th it dropped three and a half figures (open 165.03, close 161.57). On the 10th it moved up about 50 points ending at 162.10. On Monday the 13th the descent began in earnest, closing at 160.88. Still, I did not execute my stop at 160.95.  But on the 14th, 15th and 16th the cross cascaded lower shedding ten figures from the open on the 14th (160.72) to the low on the 16th (150.01) closing at 153.34.  As the market crashed on the 16th I executed my original stop at 156.25.

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