The long overdue post: defining my trading strategy

Phase 1: Discovering Forex


To be honest, I just wanted to make money. Back then, brokers ran rampant offering no deposit bonuses left and right. As I was still a student at the time, I capitalized on the fact that I didn't need to deposit my own money.

I signed up for these no deposit offers, some with brokers that no longer exist. These deposit bonuses ranged from $50 to $100. Armed with the knowledge of Babypips, I thought I knew what I was doing. Long story short, I blew every single one of these accounts just as these brokers intended. Trading FX was almost like gambling in a casino. The game itself attracted you, no matter how much money you bled. Luckily, it was the house's money I was losing.


Phase 2: The Hunt Begins


Struggling to trade profitably, I realized that I needed something. What exactly did I need? A profitable strategy, of course. Looking back at my old self - boy, was I stupid. During this period, I lurked on Forex Factory trying out a wide range of strategies that were being posted. I dare say I tried everything. Reflecting on this phase, it's probably better I made a list.

Random crap I attempted:
  • Indicator-Based Systems
    • Oscillator based mean reversion trading. I can still vaguely recall inserting a bunch of MACD, Stochastic, RSI, and Parabolic SAR indicators on my charts.
    • Long-term trend trading with moving average cross-overs and fans.
    • Scalping short-term momentum identified through moving averages.
  • Hedging Systems
    • Trading three currency pairs to create a circular hedge.
    • Martingale hedge by reversing bigger positions in opposite directions.
  • Price-Action Systems
    • Trading specific candlestick patterns such as three white knights and three black crows.
    • Trading reversals with dojis.
    • Trading supply and demand after watching Sam Seiden and Online Trading Academy demonstrate it on YouTube.
    • Trading support and resistance - this is the strategy that I've been molding for the longest time. I currently have a system that I use with S/R levels.

As you can see, I experienced just about everything. Nothing worked for me and it took a long time for me to realize why.

Phase 3: Success! Just an Illusion.


Through inheritance, I funded a $5K trading account with ICMarkets. Given the 400:1 leverage at the time, I thought I had finally made it. I was making hundreds of dollars per trade and almost every trade was profitable. I thought I had done it, but I was really fooling myself.

During this time, the European Central Bank's QE efforts were in full force. If you look at an EURUSD chart, you can probably narrow down the timeframe of this phase. I thought I was absolutely invincible. Every NFP release sent the EURUSD pair lower and I was having the time of my life shorting this pair over and over again.

This was routine until I started taking on bigger positions. I began entering standard lots thinking there was no way I could lose (gambler's mindset). This worked until it didn't. Having completely wiped out this account, I am thankful. Thankfully, it taught me a valuable lesson about the discipline required in this game.

Phase 4: Resetting, Resetting, and Resetting


Probably my most shameful and delusional phase. As soon as I saved up $3K, I decided to try again.  I created a new ICMarkets account to "start fresh". This didn't work out so well. I would make money on some trades and lose on others. Without a solid strategy or just the general discipline, you can picture a downward sloping graph.

At this point, I still haven't accepted fault. I opened an account with Oanda to start fresh once again. I wasted so much time on this phase and I didn't realize it until now.

Phase 5: Intervention


Sometime between last year and this year, I decided enough is enough. As I started ramping up listening to Chat With Traders podcast episodes, I came to the realization that I needed a regiment of strategy development, trading psychology, and discipline.

I believe I'm currently still at this stage. I've noticed significant improvements in my trading - both entries and lack of entries. I wouldn't say I made it yet, but I'm getting there. The next section will summarize my current regiment.

Modelling My Trading After Poker


This will be either the most logical or ridiculous passage you'll read. I have an interest in poker. And, I've kept it discrete from trading for the longest time. They are simply two of my interests, no more and no less.

While I struggled in trading, I actually performed better playing poker - both SNGs on PokerStars and live cash games at my local casinos. The more I thought about it, the more I saw the commonalities between poker and trading. I thought to myself, why not just model my trading after poker?

As I reflect on my gameplay, poker has given me a new perspective to trading:
  1. Not every hand has to work out, know when to get out - I recognize that when I play poker, I'm not expected to win every hand that I play. In fact, I fold whenever I find that I have no outs left.
  2. Analyze the decision independent of the outcome - The beauty of poker is that you can go into a hand as the favorite and still come out a loser. On the other hand (pun not intended), you can be in a hand as a huge underdog and take the win. It can be very tilting to be that favorite and still lose. With the help of Annie Duke's book, Thinking in Bets: Making Smarter Decisions When You Don't Have All The Facts, I've learned to focus on analyzing my decisions independent of the outcome. A good decision can lead to an unfavorable outcome. Just like how a terrible decision can lead to a great outcome.
  3. Flop rates and overtrading - Admittedly, I went through a period of time when I placed so much emphasis on the most recent candle and entered more trades than I should have due to the fear of missing out. What helped me overcome my tendency to overtrade was an analysis of my flop rates on PokerStars. Also known as flop percentage, it's essentially a percentage of how many hands you see a flop with out of those dealt. What I've noticed is that I tend to have a decently low flop rate of under 20%. In some tournaments, I would have a flop rate of under 10% and I would still make it in the money. This taught me quite a few lessons.
    1. It's not just about the cards, but the conditions must be right for you to make the play. I consider the implications of playing a certain hand in an early position versus a late position. I determine the implications of acting first versus acting last with my hand. I'm currently still incorporating this process into my trading. Just because the technical setups are present, I often force myself to consider other factors before taking the trades.
    2. Chip preservation is important. This sounds stupidly obvious when you say it out loud, but you know what they say? Common sense isn't so common. The idea is that you simply cannot make plays if you don't have any chips left. Raises and all-ins just won't be as effective with a smaller stack as opposed to a bigger stack. The same rules governing chip preservation apply to trading as well.
    3. It's not about how you play, but how you adapt your playing style to others. There are days when I'm up against some very aggressive players. Other times, the table is very tight. If I only focused on my own gameplay, I would have struggled. However, I successfully adapted my playing style to that of the table. Just like with poker, it's not about running your strategy in isolation, but rather how you adapt to the market.
With this in mind, I'd like to finish up this post with a quick summary of my trading. See the next section.

My Fake-Out Strategy


This strategy sounds simple enough, but it took me a long time to figure out why it works for me. To start off, I have a day job. There's just no way I can look at my charts non-stop for hours at a time. As much as I wish to do just that, trading is currently something I do part time.

Steps of Analysis:
  1. Start with the weekly (W) and daily (D) timeframes and plot major support and resistance levels. I don't trade off these levels anymore as I'm terrible at predicting reversals. If I were to wait for a confirmation signal, I would be sacrificing the reward to risk ratio. Instead, I wait for price to break through these levels and I monitor accordingly.
  2. I specifically look for price reversing back over/under these levels and, essentially, faking out. Why do I do this instead of trading a break-out? The reason is because is because break-out trading violates the "buy low, sell high" premise. If price breaks a significant level and makes new highs, you are essentially riding the end of this price wave. On the other hand, fake outs are a good indication that a pair is reversing due to a lack of buying or selling momentum.
  3. Once price breaks out of a major level, I simply set a buy or sell stop (in the direction of the fake out). Given my time commitment, this allows me to take a very set-and-forget approach to trading.
Here's a chart explaining my fake out strategy. I actually took this trade a few days ago and recently closed it out.



In addition to the annotation on my chart, I'll explain it quickly one more time. I plotted a resistance level at the 108.634 mark. As price broke above this level, I placed a sell stop to essentially ride the trend if price ends up breaking back below it. This is a bit clearer on the 4-hour timeframe (below).



These signals don't come quite often, so it's important to capitalize on them when they do. It also allows me to do quicker scans of the market each night and set stops as I see fit.

As I progress through my trading, I will be making follow up posts with regards to my strategy and psychological developments.