Decay

Let's start this post off with a recent win. After all, I've had fewer of these this year. I wouldn't necessarily say I "lost" my edge, but it has taken me a bit of time to focus on the right things. This win is based on one of the newer setups that I've been watching for.

This occurred over on the GBPCHF pair on the long side. Price broke above a resistance level and held above it, which formed my Breakout Continuation signal.

GBPCHF 1-Hour

I've said this before and I think it's worth saying it again. Breakout continuations usually don't work for me. However, I was able to bring my win rate up once I started targeting breakout continuations only when there is a reversal underway. What this means is that price sold and then levelled off. I would then be buying on the uptick. This is opposed to buying when the pair breaks up to fresh new highs. This setup is one that I am still testing, but it currently suggests that it's working. We'll gain confidence in it once I have more data.

Now there's another issue I'd like to touch on, which is decay. I'm calling it "decay," but I don't necessarily know if it's the correct term for it. Decay is something that I heard about in leveraged ETFs. However, I consider what I'm about to say to be a different concept entirely.

Decay or signal decay is this idea that a setup becomes less reliable if it is taking more time to play out. This is something that I've always struggled with. If a setup takes too long to play out, do you risk pre-maturely closing the trade and then having the move take off? Or, do you ride it out even though, probabilistically speaking, the odds of a false signal increases.

NZDCAD 1-Hour

Here's the same Breakout Continuation setup I spotted over on NZDCAD. It fits my criteria. Price attempted to trade lower and then stalled. It broke out above the range and then pulled back for a retest. I scratched this trade shortly after I entered for two reasons. The first is "decay" since the signal quality deteriorated since I didn't see a strong push to the upside. The second reason is that we're nearing the end of the week and I didn't want to hold this trade through the weekend. Of course, what happens next week is anybody's guess. Probabilistically, I do think there's more upside potential. Does this mean I should've stayed in this trade despite the lack of momentum after my signal developed? It's hard to say.

AUDUSD 1-Hour

Different signal, same idea. I don't have a great name for this signal, but I refer to it as a LVL-Hold or holding a level. These tend to work best when price drifts higher towards a key level. In this situation, price exhausts on the third touch. I entered short. However, price failed to break lower. In fact, it hits the previous relative low and then stalls. Is this considered decay? I'd think so since the quality of this signal has declined. However, price made a strong bearish move after another uptick. Here's my debate - do I hold through all of this or do I scratch the trade? I ended up scratching the trade. The downside potential was 92 pips with a price target of 0.729 if I held.

I think this is something that requires further observation and testing. Specifically, I'd need to compare my expectancy scratching a trade on a decayed signal versus holding it through. I would also need a criteria to determine when I should scratch the trade versus simply reducing size. These are two additional decisions I have yet to figure out.