Online Forex Trading - What mistake did I make in this trade?

Question

Hello Everyone,

I made a trade on GBP/USD today on 1 hr chart..However I am just about to be stopped out..

The details of the trade are present on

http://the-forex-trading.blogspot.com

Can you please tell what is wrong in my technical analysis?

Thanks

Answer 1

I think I'm understanding you correctly that you are short, right? You did this essentially at the lows today, correct?

RSI and MACD are both showing positive divergence, and had already begun to turn up before that steep decline.

You are reacting, not anticipating. For example, the .618 Fib level is the place to go short, not reference three days later after a 150 pip decline.

A 200 MA is a refernce point, not a support or resistance level.

MACD and RSI are both Momentum indicators. They cannot be used to confirm each other. Pick one, but do not call this two reasons. They both show the same thing in different ways.

You will learn also to never, ever trade on a hard drop like that. I had to develop my own rule, that I've never seen anywhere else "Never trade on long bars." These are exhaustion bars, or at the very least, places the market will pause. Wait until the market resumes after one of these shakeouts. Trade the retracement in the direction of the trend, and you lower your risk considerably.

In this case, if you would have entered short off of the first bounce, with a stop outside the top of this small rally (stop above your second yellow horizontal line -- .50 Fib?), you would have taken a very small hit, probably one-third of what you are now looking at losing. But instead, when you trade a long bar, where do you put your stop, except a mile away. Huge risk! Why accept that kind of risk. Look for low risk trades, not huge risk.

Out of all of the signals you've given, you don't seem to recognize that these are the points at which the trade is intiated. If you're going to use a 200MA as a trading signal, then trade there, not 60 pips later. Or trade it the second time it bounced off of it and failed there.

If you are going to draw a Fib line, and it bounces off, then trade! That IS the trade. Or trade the next retracement and breakdown of support. Where does it say to wait several hours?

The other problem is that you picked the strongest pair of the bunch to go short.

It's like trading with the trend. You're only short in Downtrends. But what is the trend here? Depends on the timeframe, doesn't it?

Same thing when picking the pair to trade. Short the weak ones, not the strong ones.

Yet another problem is that you traded a news event, without recognizing that each cause or effect produces different results. Britain came out with some disappointing news last night, causing a 100 pip decline by morning. If you're going to trade the news, in the direction of the news, then you should trade at the "time" of the news, not several hours later after a 100 pip decline.

If you look back at all of the news releases, whether currencies or stock market, 90% of them are a simple blip on the screen, affecting nothing except in the very short term, incredibly insignificant, then the market resumes whatever it was doing. If you're going to jump into the middle of a situation, you better know the rules of the situation, what the signs of the situation being over are, and what the severity of the cause of the situation was.

The little squiggly lines only help us evaluate and interpret all of this, and do not stand alone in a void. You seem to have little understanding of what is behind those squiggly lines, and the stark horizontal ones, or what to do when.

Answer 2

Dredude gave a really great answer. The problem you are facing is not an issue of what you did wrong, but an issue of your interpretation of technical analysis. From reading your blog, your view on technical analysis is: "If A, B & C occur, then prices MUST do this". In other words, you took the MACD, RSI, Double Top, 61.8% Fib levels as indicators that price action must do this. That is incorrect.

Signals from tech analysis are not guaranteed. Even multiple signals confirming each other are not guaranteed. Technical analysis is really just a "best guess". Don't get me wrong, I'm pro-tech analysis, but I do realize that it is just that - a best guess.

All trading is is just probabilities - what is the probability that price action will do what the indicators are saying it SHOULD do, not WILL do.

What you did wrong was assume that the pair MUST do this based on the criteria you outlined. One this you must remember, the market doesn't care about you and will do what it's going to do, not what you THINK or WANT it to do. The bottom line is that all the indicators can be pointing to a sell signal, but all that the indicators are doing is saying that the probability of prices falling is higher, not that it will.

When you placed that trade, all that was occurring was that the indicators were pointing to about a 85% - 90% probability that the GBP would fall. But do you notice there is a 10% - 15% probability it will not. That's why you have stop loss orders. Even if a trade has a 99.99% probability to move a certain direction, there is still that 0.01% probability it will not. The sooner you realize that, the better off you'll be.

Every trader (the pros realize this already) must come to the realization that ANY trade can go in opposite direction of what they forecast REGARDLESS of what the indicators are saying. I've seen it time and time again where the indicators are saying price action should be doing this, but price action does the opposite.

Your tech analysis could use refinement (as mine can also), but what really needs to change is your mindset regarding tech analysis. It is not the holy grail or the be all end all. It is just a tool. No indicator is a sure bet. All the indicator is doing is pointing out certain data/criteria evolving in the market. Whether that data/criteria will lead to price action doing something is to be determined

I'll give you a non trading example. Let's say you like this girl and you ask her out on a date and she says "yes". To take that as "wow, she likes me and wants to be my girlfriend and marry me someday" is a huge leap from accepting a date from you. The only thing her "yes" means (unless she tells you otherwise) is that she is open to spending some time with you and that you don't repulse her. It may be the beginning of a long term relationship, but you won't know that until time passes and things progress.

The same thing with tech analysis. For example, momentum divergence from the trend doesn't mean that price will change direction, it just means that the POSSIBILITY of price changing direction exists. In your case, you are taking such an indication as price WILL change direction.

That's where your mistake lies. In tech analysis, nothing is set in concrete. It should be viewed as a set of guidelines as opposed as a set of concrete rules. What should be a set of rules is your trading plan.

Hope this helps.

Answer 3

I'm new to Forex as well, so I am not sure. Did you work out your risk to reward ratio first? What was your entry point based on (Fib levels, support/resistance. Confirmation by MACD/CCI levels)? I am no expert, but I would say if you are about to be stopped out, you called it wrong. Sometimes trades just go against us. Even the pros, I am sure.
Anyway, I found a really great website with some great free webinars on it if you're interested. It's at raghee.com. It is run by a young woman who seems to know what she is doing. She has been trading for a long time. All the best!

Answer 4

Are you using the 1 hr chart in conjunction wth the 3o mins and the 4hr. Basically the 3 timeframe method. The further one out gives you a bigger picture of what is going on. The lesser one to fine tune the trade. It might help you with your analysis. The 3 time frame method is outline by Dr Alexander Elder excellent book, "Come into my trading room." @ http://www.geocities.com/lcming/Forexbooks

Answer 5

DANGER FOREX DANGER

Were you using margin in Forex?
If so, your money is in extreme danger

DANGER FOREX DANGER