Improving My Execution Quality

Earlier this month, I dropped my size. Specifically, this is where I would risk only $5 per trade to see if I'm able to achieve positive expectancy by summing up the R-multiples. After doing this, I scaled back up to my regular size this week and continued to focus on my execution quality. So far, this week went well.

Before highlighting this week's trades, there is one metric to clarify. For the longest time, I've focused on trying to sustain a lower win rate by targeting a higher R-multiple per trade. For example, I only needed to sustain a win rate of 12.5% when I was gunning for 7R trades.

Now planned R-multiples will differ from the actual because the market simply won't go your way just because you said so. My planned R-multiples target one level to the next. There are a couple of factors with taking this approach.

It'll take a bit of time for price to move from one level to another level. Probabilistically speaking, it's difficult to gauge the likeliness for this to occur since price will stall between levels and make short term reversals. Reversals become more and more likely as the distance between the two levels grows. Based on my experience, I would get stopped out more often than hitting the actual target level. This was not sustainable, win-rate wise.
I'm more of a momentum trader than a trend trader. When I sense that a strong move is over, I prefer getting out rather than trying to ride a directional wave. Trading momentum will reduce my dollar profit per trade. However, it also reduces my holding cost and risk since my duration is shorter. This ties into bullet point #3.
LoneStockTrader, a trader I follow on Twitter, recently posed the following question (paraphrased) - would you rather take on a -20% loss or miss a 200% move? The more I thought about this question, I realized that my actual answer differs from my desired answer.

As I replay the market events on a weekly basis, I always look back and see all the moves that I missed. This leads to certain justifications such as "if only I had sat in front of my computer more." I think this mindset is a bit problematic because you'd need to sit in front of your computer for 24 hours a day in order to never miss out on a move. In other words, not having a life.

I'm still working on this mentality that missing a move isn't a big deal. My only goal is to consistently sit in front of the computer at set times and commit to a "session." This is similar to how I approach poker. I visit the poker room, sign in, and sit down for a session. Sometimes I'll commit to a full session of six hours. If I am doing well or if I don't feel optimal, my session will be cut short. This applies to trading as well. As long as you commit to your designated session, you are responsible for capitalizing on the opportunities found during that session.

So what is my answer? I thought my desired answer was that it's worse to miss a 200% move. However, my actual answer is taking a 20% loss. In poker, I try to minimize my deviation while taking calculated risks to make plays. This way, I'm wrong small and right big. This is really what I need to be doing for trading. I capitalize on momentum when price moves 100 pips in an hour and don't worry about the full 300 pips move that takes place only by holding for three extra days. For people that can hold a position for four days straight, kudos, you found what works for you. This clearly doesn't work for me and I think I can be okay with it.

For this week's trades, I went for lower R-multiples. Rather than setting my take profit to something like 7R away, they were around 2-3R. Let's get started.

GBPJPY Fakeout Play:

The old me would've placed a take profit at 149.66, which would be the next major level. Probabilistically, wouldn't that be less likely to hit given how far away it is?
The arrows marked my entry and exit locations. This was a clear fakeout play as price breached above the upper boundary and quickly traded below it. As price drifted back to this entry, I got in short.
My exit was set at a minor level since this was a previous inflection point where I expected price to stall again. If price breaks through, that's perfectly fine. I'm not going to be kicking myself for seemingly closing too early at a probabilistically likely target.
Another reason why I set this exit target here is that I didn't want to hold this pair over the weekend. I entered this trade on Thursday evening so a quick profit before Friday's close would've been ideal. Walk away with a nice profit and not have to worry about any weekend factors that could make me return all my profits.

AUDJPY Fakeout Play:

This same signal was present on this pair as well. The Japanese yen was relatively stronger going into Friday's session.
What I hope this shows is that I'm developing a systematic method for positioning my target to increase the probability of them hitting. Again, a smaller profit is better than carrying a trade through the weekend.

CADCHF Breakout Play:

I didn't demonstrate the best discipline for this trade. Luck was definitely a factor here for allowing me to get out without taking a loss.
The initial entry was betting on the upside. Price looked like it was going to invalidate this structural level that I had plotted. The selloff before my long entry died off rather quickly. When price tested the level again, it breached above with very little effort.

I exited this trade as the momentum just wasn't there. The price was drifting higher rather than spiking higher. This is concerning because I may be in a position that has little volume. Specifically, very little buying volume. As such, I got out as the possibility of downside became more likely. On hindsight, price did trade higher, which I don't think matters. My decision quality was sound for both the entry and exit.
The second trade is where I lost a bit of discipline and got lucky with my exit. Rather than sitting out, I decided to flip my direction bias and bet on the downside. This was not the right play because it doesn't follow any of the three setups I have developed.

Not only that, I also failed to exit as price went against me. Instead, I held onto this trade as it floated around being a loser. I set my take profit to 1 pip below my entry. Just as luck would have it, the overnight session had a bit of volatility and the pair temporarily traded lower. I was able to scratch this trade with a very small profit.

GBPNZD Fakeout Play:

Although this pair moved from level to level, I didn't fully capitalize on that. It's a much different story when you watch a move play out in real time. I spotted a very nice fakeout signal as price tried to trade above our upper boundary and then held below it. After a strong move lower, price stalled.
I wouldn't necessarily say I panicked and closed due to a fear of loss. Instead, my decision to exit was still based on what I objectively observed. Momentum died off as this pair is halting. Rather than seeing it pick up, we're seeing some longer candle tails that seem to point towards an inflow of buying pressure. Although I missed out on a much larger profit, the real time trade management was proper.
One thing I could've done differently was manually move my stop loss lower. This way, I would be protected against a sharp rise in price while having exposure should further downside be expected.

In addition to these trades, I did have a few other smaller plays. I don't think they're worth mentioning as I don't have any major reflections for them. As we are now at the end of the month, my monthly trade performance post will be coming out shortly in the next post.