The most important skill that you need as a trader is how to manage a losing position. It will happen often that the trade will go against you in the start. Instead of losing your nerve you should learn the skill of managing your trade and making it a winner. In this post, I will discuss in detail my latest trade that initially went negative right from the start. Stochastic on H4 timeframe was overbought while it was oversold on D1 timeframe. I missjudged and thought that price will go up. Normally I only open a trade when the stochastic is overbought or oversold both on H4 and D1 timeframe. But this time I made a terrible mistake. It was a wrong buy signal from another pro trader that made me close my short position and open a long position. So, I opened a long position at 1.6104. Price went down and reached 1.6030. The position went in a loss of 74 pips. Now the Stochastic is oversold on both H4 and D1 timeframe.
I looked at the H30 timeframe. There is a pinbar and it looked as if the price has reached the bottom at 1.6030. So I again opened another long position at 1.6048. Take a look at the following screenshot that was taken after I had opened the second long position at 1.6048.
Before the US open the price went up till 1.6076 and then it started going down after the US open and hit 1.5994. Both my positions are now in a total loss of around 160 pips. But I am confident about my system and looking at the Stochastic on H4 and D1, I was sure that the price will move up by 150-200 pips and I will be able to recover the loss. Take a look at the following screenshot that I took when both the positions were in a loss!
As you can see a bullish pinbar is confirming my analysis. Also observe the bullish divergence pattern appearing on the H4 timeframe. With experience I know that when a divergence pattern appears on GBPUSD H4 timeframe, it means a move of 150-300 pips.I mostly trade without a stop loss. Initially I had placed the stop loss at 1.6028 but then I had removed it. The price moved up as I had predicted and reached 1.6179 and I was able to close both the positions making a nice return of 28% in just 2 days.
You can see in the above screenshot three long bullish candles with almost no wicks. When a candle is long and has no shadows, it shows strong momentum in the market. If the candle is long and bullish with no wicks, it shows strong upward momentum and if the candle is long and bearish with no wicks, it shows a strong downtrend momentum in the market. Time to close the trade as a hidden bearish divergence pattern is now clear on H4 timeframe so I closed the trade at 1.61502.
Lessons From The Trade
1. Never trade on the recommendation of others. Always do your own analysis and then stick with it. My analysis told me the market was bearish. But when another pro trader signaled me to go long, I had closed my short position and opened a long position. This is something very important, always do your own analysis and have confidence in your analysis if you want a long term success as a trader.
2. Always have a contingency plan if the trade goes against you. This is what I do when the position goes against me. I always enter initially with a first position size that can survive a loss of 200 pips. Why do I don’t use a stop loss often is that price action can move totally unpredictably. Placing a stop loss often gets you in trouble. What you need is to learn the skill of how to manage your trade. If your analysis is correct, you will always end with a winner. So the most important lesson in trading is doing the analysis correctly. With experience I have learned to predict the market direction. If the first position goes in profit, I do nothing. I let the trade run and close when the market reaches the top or the bottom. However, this is important. If the trade goes wrong, I wait for the price to reach the bottom and then again open a second position with the same position size as the first.
3. Focus on only one pair. I only trade GBPUSD. But since EURUSD is highly correlated with GBPUSD, I often look at EURUSD charts as well and take clues from it about the market direction. GBPUSD and EURUSD pairs move in waves meaning they go up 100-300 pips and then move down 100-300 pips. On GBPUSD, when the stochastic moves from overbought to oversold or vice versa it means a move of 100-300 pips. Focusing on one pair will help you firm up your analysis and when the market has moved up, you can pretty much predict that it will now move down and vice versa. Please feel free to ask any questions below.