Today was one of those days where I let my ego get the best of me. My analysis concluded that the overall trend against the GBP/USD was bear, it was also aided by the better than expected unemployment number. So, my initial trades began with buying the dollar against the pound. Even though the pound was going against me, I knew that my analysis was correct. However, I would be lying if I say I wasn’t nervous as the negative number grew bigger and bigger.
The problem with trading and holding onto a negative trade is that you have to act quickly, or you end up falling in love with a trade that will ultimately destroy your capital. The reason why a trader will stubbornly hold onto a negative trade is because they know the market will reverse, they just don’t know when. When your analysis concludes the overall trend, and that the negative trade is only a temporary retracement, a trader won’t close their position because they have hopes their negative trade will soon turn positive. If you close a negative trade then and there, it’s a negative trade. However, if you hold and go through hell you still have a chance of ending on a positive balance also saving you commission. Furthermore, a trader won’t close their trades because they have the mentality, “If I was going to close I should’ve closed earlier, I’m in too deep to close now.”, which is always a constant struggle.
For me, I was stuck in a trade that continued to go higher and higher. I knew the pound would reverse, I just didn’t know my threshold and how deep I was willing to go. One strategy I used in this predicament was forming hydras: instead of placing one big position on a trade, split it up. Place an initial small short position trade, then keep adding trades as the market reaches new highs. Your goal is to hopefully catch the top of the trend as the market reverse, which means you try to get in the most efficient placement. However, it is important to close the beginning trades and add new trades as the market keeps going against you. This protects your capital from big losses, just incase your analysis was wrong and the price goes to the moon, and it gives your margin room to work with.
Below is the actual chart and positions I took in today’s trade. The red arrows are the short positions I initiated. And as the price continued to go higher and higher, I closed the first short trades, and just stacked it attempting to catch the top.
Ultimately I was about -$50, way beyond my comfort zone, but my analysis prevailed and I was able to catch all the profits on the way down.
You can see in the image below that I had a position of 16K on GBP/USD. That doesn’t mean it was one single position. It was a series of trades I stacked.
My backup plan? If the the upward channel broke the previous high of the previous channel, I would find a position to go long GBP/USD. Luckily, it never went beyond the previous high and reversed.
This counter trend strategy is extremely stressful and dangerous if you don’t know what you’re doing. It requires quick thinking and good position management. You must have a concrete analysis to perform this trade.