Getting Back On Track

After my tilting AUDUSD trade (discussed in my October posts), I spent November getting back on track to my proper trading routine. It's working so far and this post is really just a recap of one of my best trades recently.

Before jumping into the recap of this particular trade, here's a quick refresher of my trading strategy. I've been refining my system to focus on trend and trend failure momentum.

This means I set a take profit of 2x ADR and a stop loss of 1x ADR. While this doesn't follow the conventional reward to risk ratio, I think it's fine because expectancy is positive when you factor in the win rate. This is what really matters: reward to risk ratio is not a standalone metric; rather, it's an input to calculating your expectancy.

Now, you may ask, "Why do you only target 2x ADR rather than 3x or 4x?" I'll touch upon this later in the post.

Below is a screenshot of the counter-trend setup I identified on the USDJPY pair.

USDJPY Daily

As you can see, price was in an uptrend until late November. Once price broke below the upward trendline and horizontal support, it signalled me to enter a short position.

USDJPY 1-Hour

For strong signals, I need to bet bigger, so I've developed a systematic way to do so. By incorporating the Darvas box theory within intraday ranges, I'm able to identify and scale in when intraday momentum picks up.

As you can see based on the arrows, I scaled into this pair two more times after my initial entry. The beauty of using intraday ranges is that they serve another purpose.

If I have a short directional bias and price starts going against me, I can prematurely exit with a much smaller loss when price crosses above the next-lowest intraday range box.

With regard to why I only target 2x ADR, it goes back to something I heard in a Lance Breitstein podcast interview. When Lance talked about finding and taking easy money trades, he gave a hypothetical example.

I'm largely paraphrasing, but he said: If your strategy requires you to take on 7 or 8 losing trades in a row before a winning trade comes, you can still have positive expectancy, but there's a psychological toll in absorbing those losses.

As a result, his interviews have shaped my trading strategies, so that I focus on the trend and take the probabilistically favorable direction in my own momentum plays.

Scaling into profitable trades enables me to maximize my payoff when a signal works and prematurely exit when intraday ranges indicate price is going against me.

I anticipate December will be a slow month, but I will continue to follow this system when a signal presents itself. Last month, Lance also did an interview with Trillium Trading, which is an incredible listen.

Although I have already listened to this podcast interview, I need to re-listen to it in the near future before I make a follow-up post.