Stops & Luck
Getting stopped out: Is it a lack of skill or luck? On Wednesday, I was criticized after issuing the long GBPUSD Premium call at 1.2950 one hour before PM Theresa May unveiled her Brexit plan. Her speech and initial reaction triggered a rally to 1.3070. One day later, en-mass resignations in UK cabinet drove down cable to 1.2724. The chart below is one of the charts used to back my rationale. There's more below...
Bad ExperienceWednesday's long was issued with a final target at 1.33 and stop at 1.2760. The stop was hit. Some accused me of taking a “gambling” trade as I issued the long before such an important announcement. Yet, the rationale I laid out for the trade was based on several charts and technical factors. Some say "why issue a stop at 1.2760 when you were so sure it would reach as high as 1.33”. The answer; I was focused on 1.2760 as a key support, therefore I based my reward-risk relationship on that, which led me to print a 1.33 target. Yes, I still see cable at 1.33, and 1.35 and eventually 1.45 most likely before March. “But Ashraf, that's a 13% rally. What's your downside?” Well, feel free to enter the Premium charts and find out my expected low for cable. By the way, I did issue a new long in GBPUSD yesterday at 1.2800 so we're in good shape. Actually, several clients tell me they lowered the stop, others did not even use one.
Better ExperienceBut there are examples of more “lucky stories”. Our short USDJPY trade from late last month had a stop at 114.25. The pair tested 113.90-114.20 earlier this month -- while I refused to raise the stop—before tumbling to 112.70s.
Bottom LineIf you are disciplined about entering with stops and final targets, make sure to have a key levels of support and resistance in mind and set your risk parameters accordingly (stops & targets). You can even work backwards if you have to (set your pips target from the support/stop). The other key matter: Feel free to move stops by 20 or 30 pips as FX is increasingly displaying deeper swings (courtesy of algos)/ And to those who say “I cannot afford to move my stops by 20 or 30 pips”, I say to you: Reduce your size, lower your leverage ratio, or both because the +$5.5 trillion a day FX market does not care where your stop is, neither do many of the brokers.
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