When to Make Big Bets

This post will have a bit of a poker theme to it. It was posted in light of a recent USDJPY trade that I made. While it didn't work out, I did reflect and learn about market timing.

Before we go any further, I'll post the chart and show you what exactly is going on. This chart is from TradingView as I have trades open in the same pair right now. For the sake of clarity, I'll be using TradingView.

USDJPY 15-Minute

Note: please keep in mind that you'll need to ignore the price action that was formed after the up arrow as I did not have this information to work off of. Similarly, you'll need to ignore the candlestick patterns after the down arrow since I did not have the information to the right of that.

Trade Details:
  • Sell @ 110.177
  • Close @ 111.13
Trade Analysis:
  • We've observed an insane rally in the USDJPY for the past couple of weeks. Based on my assessment of the technical and macro/socio-economical factors, I had reasons to bet on a reversal.
  • Dow futures hit limit down on the Sunday open within minutes of market open. As COVID-19 cases ramped up in the United States, I saw the likelihood of being bullish on the yen given the fact that Japan was not hit nearly as hard as some of their neighbouring countries.
  • I've considered the fact it's possible Japan never bothered to ramp up testing and official numbers reporting. However, there seems to be a lack of local reports of a significant uptick in cases. Yes, I monitored Reddit to observe this. Even until now, Japan has been viewed as an outlier.
  • Looking at the market structure, price struggled to break above the 111.33 level on March 20th. looking post-trade, we're seeing this level being tested quite a bit again. I took a 2% sell trade with expectations that the US dollar will continue to fall once the equities market open to follow the drop observed by the Dow futures.
Trade Review:
  • I don't think there was anything wrong with my analysis. I had both a macro-driver and a technical setup to work off of.
  • However, my execution was less than optimal given my overly ambitious entry with a 2% risk.
  • I should've assessed the fact that we did not have a clear signal for reversal. At the time of my entry, the only thing that was clear was price failed to break above the 111.33 level. If we observed further weakness, then sure, taking a 2% risk would make sense.
  • Position sizing wise, I could've done a few things differently:
    • Scaling into this trade by taking much smaller short positions and then building this position up.
    • Sitting out completely and wait for a better formulation. The probability of price going into free fall is highly unlikely. It's possible that we'll see a drop and then a pull back. My job would've been to enter in on this pull back.
  • On a final note, I did break my risk management best practices. The goal for this year is to dynamically size positions to take on various percentage risks of 0.5% to 2% depending on my confidence level. In this case, I could've taken a 0.5% position or even a 1% position instead of the full 2%. I was definitely ambitious.

Long story short, I strategically re-entered into this pair. I'm currently scaling into this trade with a 0.5% risk. I recently scaled in and now have two open trades as the technical structure holds up.

USDJPY 1-Hour
This is probably the chart that you are most familiar with as it's directly from my broker (CMCMarkets). I actually color code my levels over on the main platform. The darker grey lines mark intraday levels (anything below daily) while the lighter grey lines mark daily levels.

As you can tell by the two yellow arrows, I entered into a short position twice now, each at 0.5% risk with a stop loss set at 112.50. What's interesting about this chart is that USDJPY failed to break new highs for four days - March 19th, 20th, 23rd, and 24th. We're in this consolidation as no new buyers are stepping in.

I can't say with certainty that price will hold resisted, but then again no one can. All I can do is predict the probabilistically favorable outcome and trade accordingly.

In my previous post, I talked about my entry on gold. I figured I'd give a quick update as this trade is still open.

Gold 1-Hour 

I'm proud of myself for managing the trade the way I did. I had such an urge to close it out at the first sign of a profit, but I held on. It took quite a strain on my mentality to remember not to trade my P&L, but to trade the market. There's literally nothing that's signalling selling pressure so why be fearful and look to get out. By being patient, I held onto this trade and slowly brought my stop loss higher and higher, placing them just under the intraday levels plotted by the dark grey lines.

To conclude this post, I'd like to draw a parallel from poker - when to bet big. In poker, I play two types of hands - drawing hands and defending hands. Keep in mind that I'm an amateur so you'll be facepalming a lot, if you haven't done so already, from what I'm about to say.

I tend to play drawing hands in late positions when I get good pot odds. These tend to be lower cards that are connected or close to being connected. The idea here is that I want to see a flop cheaply. If I hit or land a draw, it's optimal to continue playing in order for a chance to achieve a larger payout.

On the other hand, defending hands are these very big pairs where you want to take down the pot quickly or have someone put a significant chunk in to play against you. These are the hands where you're favorable to win so you really want to maximize value. They have a lot less uncertainty than drawing hands where you'd cut your losses early.

With these two classifications, I have subsets of strategies that capitalize on drawing hands and defending hands. I won't go into the pre-flop and post-flop actions such as the betting, calling, or other dynamics. However, the parallel that I want to draw is the importance of classifying the trade that I want to take. This is something that I've thought about quite a bit with both the gold and USDJPY trades that I took. Both gold and USDJPY were like drawing hands - an opportunity to pay off big, but I'm trading a major reversal. As such, I want to get in for a low cost and see some action.

What ended up happening was I treated USDJPY much like a defending hand. I aggressively entered this trade with a 2% risk, which wasn't even off of a major level so that further reduced my probability of success. 

By drawing this parallel from poker with every trade, it conditions me to assess how much risk I should be taking - 0.5%? 1%? 2%? It's possible for me to bet big with a 2% trade, but I better be expecting a really high probability of payoff.