Stop Losses Suck

After a rocky start this month, I have recouped some of my losses by continuing to focus on taking on higher quality setups. This has worked out well for the most part.

However, setting the initial stop loss and managing the trade are still two aspects I have to work on. I have two mistakes to highlight this week.

AUDCAD 4-Hour

After spotting downside potential on this pair, I took a position as price was in the process of breaking below this neckline. I don't think the entry was sub-optimal. Over on the hourly time frame, price made a weaker bounce. To me, this signalled that there is very little buying strength.

The stop loss was placed just above a set of overlapping bars. For me, I consider this to be a liquidity trap where price trades higher and then immediately fall. A safer stop loss placement would be above the upper range boundary. This is a level where we don't anticipate price to trade higher. The downside is that this would reduce my planned R-multiple. If it is too low (below 4), then this would be classified as a setup I wouldn't have taken at all.

Despite my target being set at 0.9958, I could've removed the take profit and began trailing. If I do this, then I can actively manage the trade since price blew right through this target. The take profit would still be set on initial trade entry to record a win on the off chance that I am not present to actively manage the trade.

The next trade occurred on EURUSD. Although I ignored a key price action signal in the first trade, I think I made a good move in flipping the directional bias so quickly.

EURUSD 4-Hour

This was a continuation breakout play. Over on the hourly time frame, I watched the price action and it hinted at significantly weaker selling pressure. Great. I got my entry in and targeted the next key level. As this trade played out, we're greeted with two massive dojis on the hourly time frame. Two candles back to back with very long upper tails. This should've been my "oh shit" moment. At this point, I was up 3R so I decided to do nothing at all. After a few hours, price hit my stop loss.

When I reviewed this trade after I got stopped out, I think I could've managed it better. As price wasn't near a major level, the odds of a massive reversal were less likely. However, this occurred because of the US initial unemployment claims. In this case, I would've benefited from doing a bit of scenario planning. Here are some alternatives:

1. Close the entire position. At this point, I was up 3R. I don't think closing the entire position was optimal as I had a plan to target the next major level. If I keep prematurely closing trades, I would be jeopardizing my own expectancy. My win rate would go up, but the R-multiple would fall. This jeopardizes my expectancy because now I would have to sustain a higher win rate.
   
   
2. The alternative to exiting this trade completely would be to partially close out this position. Lock in a bit of profit, let price pullback, and continue its run to the upside. If price pulls back with a weak selloff, we can definitely scale back into this trade and bring my average entry price higher. For this approach, the next step of my development would be to determine what the partial-close would be. If I could scenario plan my profitability with a position close of 50% versus 75%, this would definitely help.
   
   
3. Reverse my position. This is probably the most dangerous route, but it could also be very rewarding. If I close my position, I will lock in 3R. When I open a position in the opposite direction, I would be risking 1R for a potential payoff of another 3R. This would be if price cleanly hits my previous breakout level. The worst case payoff is 2R while the best case would be 6R.
   
   My problem with this approach is that it forces you to be more sensitive to lower time frame price action signals. These tend to be less reliable due to the fact that I would be deviating from my plan to target larger moves off of structural levels.
   
   This is also advantageous because continuation breakout plays, including this one, usually do not work for me. I could build a second step to reversing my position only for continuation breakout setups. This way, I would be able to better capitalize when they fall short. This is as opposed to either sitting these plays out completely or reducing my position size.

What I did well was reverse my directional bias when price crossed and held below the continuation breakout level.

EURUSD 1-Hour

I entered this short position after seeing how the price action played out around this level that I previously expected to hold. Although price did continue lower after my target, I don't think it was incorrect of me to close out the trade. As we are nearing the end of the trading week, I'd rather not risk a reverse move that tends to happen as others are also closing out their positions.

Takeaway from all of this is that trade management is just as important as optimizing the entry.