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Ball and chain trading, when one trade drags on another

Today was a classic case of stop hunting. My broker was after me, he saw my stop, and the greedy bugger took it out to the pip as he knew the size of my trade was a threat to the balance of their books. Ha! Yeah right.

My trading is in a multi-trillion dollar market. The size of my trades wouldn’t move an Eskimo off a camp fire. But mistakes can hurt. Let me show you today’s example.

We have all heard about cutting our losses and sticking to stops. What it is usually in reference to is not tying up our capital and letting a small loss grow into a large one.

Today, however, another reason presented itself. If you don’t cut one trade, it can stick around to poison the next one.

Trade 1, attaching the ball and chain

After the mornings Asian session review, and the Aussie data had filtered through, I had identified two levels that would be nice places to test if the sharp move up from the Chinese PMI weekend news would have a lasting effect.

I wanted to test the strength of the immediate up trend, but as I was a buyer, I needed to find some sellers to buy from. The strength of the move on the Monday open meant none could be seen in that move. The next best place was to look for sellers holding from the US session on Friday.

I went long just below 1.04 (line #15) just below the 50% retracement and was an area where selling had kicked in to send prices lower in Friday’s US session. That trade had a 15 pip stop.

Trade 2, dragging the ball and chain

The second trade was going long off 1.0383 (line #14) looking for a polarity play with a 10 pip stop. Both trades risked 1%. Both trades were buying from sellers. Blue arrows show the entries.

AUDUSD long trades for April 2, 2012

Looking at those entries, two things are evident. Both had some reaction, the first a move of 12-15 pips, the second a strong reaction of 35 pips. Taking into account spreads, the aim was a move to 1.0415, just short of where Tokyo opened this morning.

If price moved to that level, I should pocket 4%+.

Price did. I made 0.08%.

Looking at the chart alone, the question has to be asked, how did I bugger that one up when price turned on a dime at the exact entry for the second trade.

The answer. Because I let a bad trade spoil a good one.

After the initial reaction on the first trade, stops should have been tightened below the pivot, and the trade closed as we moved back below 1.0392.

Instead some poor management and lack of attention, had my original stop remain in place, just below 1.0380. This meant, when the second trade triggered and went in my favour, I was now protecting one good trade, and one average trade that should have been closed.

Because of that, my stop was moved to the average of the two trades to ensure break even overall would be achieved. The red dot is not a pivot marker, it is where I was stopped out to the pip on both positions, all because the first trade was dragging on the second.

A break even stop-loss move on the second trade should have been just above 1.0380, resulting in the trade making it’s run with me still on it. Instead, I let one average trade ruin a good trade.

My entries were good, my stop discipline was rubbish. While my risk parameters were followed, by not cutting and running one trade, I ruined another.

The lesson. Be wrong small, so you can be right big.

Happy trading.