What is Optimal?

My use of EdgeWonk has been quite productive. It made me realize quite a few things such as the number of trades I'm taking but also their optimization. In today's post, I'll touch on the reflection of a few trades and my definition of "optimal".


I initially classified this AUDUSD trade as optimal, but now I'm having second thoughts. After selling the initial wave and locking in a good return, I thought that it would be a good idea to re-enter. Specifically, I saw that price stalled at the 0.6422 level. I entered instead of waiting for any kind of confirmation signal.

AUDUSD 1-Hour

I originally classified this trade as "optimal for the following reasons:

  1. Price hit the 0.6475 highs and then stalled. It finally broke the neckline and made an initial move lower.
  2. I'm essentially entering on the pullback as price made this doji-like candle, signalling a slowdown in buying volume.
Instead of waiting for a bearish bar, which would lower my reward to risk ratio, I decided to enter. Is this an optimal entry? More so, could I have anticipated further upside? Probabilistically speaking, was the downside potential greater than the upside? The more I think about this trade, the more I wonder if my decision to enter was a favorable one.

To play devil's advocate, here's what the counter-argument would be. Or at least, what I consider them to be.

  1. I was attempting to sell into an uptrend.
  2. Price stalled at the 0.6422 level, but that doesn't necessarily mean there's selling volume. What I could've done was look at a lower timeframe if I really wanted to enter.

Unfortunately, for me, AUDUSD wasn't the only questionable trade. I saw a potential swing trading opportunity over on USDSGD. I typically don't like to swing trade as I consider myself more of a contrarian. The "but" here is the signal that I saw.

USDSGD 1-Hour

I published this idea over on TradingView before taking the trade myself. I didn't plot in the arrows, but you can probably guess how it went wrong for me. Before we go any further, here is my trade entry thought process:

  1. We're seeing a trend change as price is making higher highs and higher lows.
  2. At the current pullback, it looked as if price held supported at the 1.42 mark. You can make out the bullish bar with the long lower wick that crossed below this level.
  3. I entered into a long position on the premise that buying pressure would be present below the 1.42 level.
Was this a personality mistake? I ask this question because I know I don't like to swing trade like this. My interpretation has always been that the fact I'm entering AFTER price has already rallied.

Price rallied from the 1.414 level up to 1.423 so I'm essentially buying after everyone else. There must be a really good reason for price to surge further higher. Despite the fact that I don't like taking these trades, I ended up doing so. Underlying reason? Probably the fear of missing out on a good move, especially given that I considered the trend was on my side.

In conclusion, this was a personality mistake. I do not have a good track record trying to swing trade this type of continuation. It's simply not my style despite whatever signal is being generated. If I really wanted to take this trade, I could've reduced my risk from 1% to 0.5% even.

On the other hand, here's an idea that I published on TradingView that I didn't end up taking. The contrarian in me really favored the fakeout signal here, but I ended up not taking this trade due to the price action over on the lower timeframe.

USDCAD 1-Hour

There are two key levels here - 1.4151 and 1.4120. The latter level was a smaller imbalance level where I probably gave more importance than I should've. 1.4151 was the critical level where price breached, but then immediately reversed.

This is the type of signal that I really like. Price had already made an insane rally, but then failed to close even higher. We're seeing weakness in buying pressure, which can be expected given the rally that was already made. Probabilistically, this turning point had a really high reward to risk ratio.

Part of me is kicking myself for not entering, but another part of me is reassuring myself that it's perfectly okay. I didn't like the price action over on the lower timeframe so I decided not to enter. It's better to sit out rather than enter with a lower certainty. The important thing to remember is that I had a plan and I stuck to it. My plan was to wait for a better formation on the lower timeframe, which didn't occur. While I missed an opportunity, I stuck to my plan. After all, that's more important. Right?