Interpreting Decay

I took and scratched this USDJPY trade earlier this month. I did this because momentum appeared to be dying off. More specifically, decay, which I define as a signal taking longer than anticipated to play out or is at risk of not playing out.

 

On March 3rd, I shorted this over-extension move on USDJPY. This can be identified by the following down arrow.

USDJPY 1-Hour

Price breached below the 115.5 level. As price drifted back up to this level and held below, this is where I entered my short position.

The price action that followed wasn't great. See below for what happened.

USDJPY 1-Hour

Rather than seeing strong downside momentum, price just stalled. Given the loss of momentum, I decided to scratch the trade with a tiny profit. It's essentially breakeven.

Next thing I know, the following happened.

USDJPY 1-Hour

Price tanked. So, this begs the question - do you commit to the original signal and hold the trade or scratch it when price stalls? When the price stall occurs, this is my definition of signal decay.

The more I think about this, the more I lean towards the latter. I don't plot my levels in a conventional way. I plot them so that a level breach signals momentum is picking up. If I don't observe this, then the level that price crossed should be deemed insignificant. As for this particular USDJPY trade, well, it's possible to classify it as simply bad luck.

Believe it or not, I did run this question by Brian Lee during a Discord session talk and the answer was quite helpful. In summary, I shouldn't need to concretely follow one of the two scenarios I proposed. I should be able to analyze it over time with back and forward testing. I should be able to see how often this signal plays out to its full extent. Based on the stats that I currently journal, I expect to have running stats on the win rate and payoff.