Breaking Rules

Discussion in 'Trading' started by overload, Jan 28, 2004.

  1. Only one thing better than reading trading rules and that is showing what happens when you break them (by not applying them).

    In this case I started (not serious) trading around 8:30AM this morning playing EUR/USD back and forth for 1 to 4 point profits/losses per trade - no big deal...

    Well, at 11:15AM I was short 10 lots (1,000,000 units) EUR/USD (actually in between reading/writing email *rolling eyes* - remember, not serious trading...) casually waiting for it to go into my favor 2 to 4 points ($200 to $400).

    My attention was fully off the trade and when I glanced back my P/L indicator read 22 points profit ($2,200). The rest of my screen was blurred by a LONG red lightening bolt type candle on the chart - being the contrarian I am my mind immedietely went into disbelief.

    I broke a few rules at this point as I reached over, grabbed the mouse, pointed and clilcked CLOSE position.

    As soon as I closed, I opened an equal (10 lot) long position expecting an immediate reversal. Of course NONE of this was done thinking - just knee jerk reaction (Oh yeah, rule 2728282?: Never trade in reaction!)

    HA! Instead of a reversal I was met with the price continuing to fall more than another 100 points - I cut my (uncalculated) damage to only $10,000 - 100 points down <-- save the tongue lashing, guys - I had a reason for doing this... just can remember what it was...

    OK, now for the good stuff. Rules I broke:
    1. Expect/calculate/estimate the unexpected/uncalculatable/unestimatable!

    2. When you trade, pay attention.

    3. It's OK to look at the news regarding an instrument you're trading (in this case I would have seen the pending Fed interest rate announcement - yes, those type news bulletins effect currency price.

    4. When a BIG move (like that) comes in one HUGE red bolt candle, another is bound to follow (and another? 5 MASSIVE ones in all this time): so, DON'T close your trade to take profit (on the first one)!

    5. Use the 50% stop paper profit loss rule! That is, when you are in profit, count back to you (in this case I was registering 22 points profit) then measure 1/2 way back (11 points in this case) as your stop loss on your PAPER profit. Had I done this, I would not have been able to follow the price DOWN fast enough to calculate where 1/2 way retracement would even be! The price fell 170+ points in five minutes - but, of course, paused long enough for me to get a Long position in WAY before it reached its bottom at 1.2464 - ha!

    6. Of course, a Long position would NOT have been taken because of all of the above (that is, had I not broken those rules).

    Do you see any other rules I broke in this trade?

    Anyone else broke rules that resulted in big losses? If so, what are they?

    Overload