Yesterday I closed out the majority of my EURUSD trade that I initiated in late April. It was almost 3 months of a wild up and down ride with excessive risk that finally made me realize a few important things. Stops don't really work on very short time frames, the prices tend to enter support and resistance zones, and the trick is keeping your initial trade small. Note, I said initial trade.
My entire trade consisted of three individual trade with Trade #1 consisting of 661 units @ 1.1137, Trade #2 with 200 units @ 1.1197, and Trade #3 with 100 units @ 1.1234. Trade #1 and #2 have been closed at 1.1140 yesterday with Trade #3 still short, and the current EURUSD price is 1.1132.
Always trade with the carry trade in your favor, it's a no brainer.
I sold EURUSD on April 25, 2019 because I believed that Europe was going to weaken because of Brexit and that the USD would remain strong in the face of rising markets. I believed that the US Federal Reserve would not cut or threaten to cut interest rates. I sold 661 units at 1.1137 and promptly watch my trade go against me. I didn't have any stops because stop hunting is common in Forex. I did carefully review the support and resistance areas on the chart and foolish me believed that the EURUSD was going to break through the resistance zone around 1.1150'sh. Next stop would be 1.100 or lower. Instead, it went up to over 1.1200 and settled there.
Woohoo! 1.1200 was another resistance zone so smart me decided to sell a bit more EURUSD here. I went short another 200 units @ 1.1197 and watched some gains come in. This of course began to evaporate as the Euro strengthened and went higher.
Now I was questioning my original premise about the Euro weakening and the USD being strong. Still, there was no big news or bombshells coming out of Washington so I decided to put on my last short, 100 units @ 1.1234. Then Chairman Powell comes out and says some noise about keeping rates cuts on the table and the EURUSD trade goes against me hard. It peaks out at 1.1400 level. All my trades were heavily underwater.
I had seen a price swing from from 1.1137 to 1.1400 between April 25th to June 25th, or roughly 263 pips. That was a A LOT of risk to have without a stop AND sticking to my guns. Incredibly dangerous thing to do from a pyshcology point of view as well. Sticking to your guns has lead to many a trader's ruin.
The End Game
After the peak in June, the EURUSD gradually weakened and my losses started recovering. The market started pricing in rate cuts and looking at the shape of the Euro. News came out that their would be more quantitive easing on the Euro side and Trump kept rattling trade war with China. It turned out it was bad news for the Euro and ok news for the Dollar. Considering the Carry Trade, I made some good money being short the Euro over this time. In fact the biggest part of my profit came from the interest I gained holding USD long and EUR short. I made over $3.00 on that.
I closed out Trade #1 because I believe things have changed with the USD. Interest rate cuts are being priced in and suspect things will get confusing going forward. Trade #1 turned out to be a slight loss, a scratch if you will. Trade #2 gave me a good little profit, and Trade #3 is still out there with profit. Trade #3 is me leaving a fishing line in the water to see if anything else bites.
What I learned
What did I learn from all this? A few things. I should've started with 100 units first, then the 200 units, and then the 661 units. I had my trade upside down. Ideally I should've used a total of 1,000 units and probably divided them up into 250 units a piece and watched for the prices to rise to the top of their resistance zones before initiated another short.
The reality is that I should expect a 250 pip or more swing from my initial trade entry and in contrast to my idea above, I should keep the first trade really small. Always trade with the carry trade in your favor, it's a no brainer. It helps offset the long time frame you're holding an asset and it lets you take a scratch or two if necessary. I also learned that support areas are really stubborn. There has be an act of the Federal Reserve to break them, which when Chairman Powell started flapping about maybe a rate cut, the 1.12 resistance was broken with ease.
Whew. Good times, right?
I ended up closing my last short @ 1.1170 and made a good close to another 60+ pips. Now I'll wait to stalk the EURUSD market again once the Fed speaks about Interest Rates. I might even look at USDCHF because it has a decent carry trade if I go long.