I have seemingly weathered the worst of the drawdown I was experiencing.
In an earlier journal entry I stated that I saw the middle of last week as a key time in determining if AUD-USD would continue on its descent or if it would hold firm and maybe even resume its long term upward trend. My reasoning for highlighting the mid-week period was two fold. The first was there were US existing and new home sales data being released which if they continued to show rot on the housing vine would signal a greater likelihood of a Fed rate cut on December 11th. The second reason was that there might be slight switch of focus away from the Aussie dollar losing out as a high yielder against the Japanese yen to the RBA rate announcement next week.
The US housing data did indeed come in weaker than generally expected and by Friday there were even murmurings that a 50 basis point cut might be a possibility from the Fed. A 25 bps cut seems highly probable at this time.
The consensus seems to be for the RBA to hold rates steady next week, so this prong did not exert much influence on AUD-USD. The resulting effect was for AUD-USD to mainly hold steady with a slight bias to the upside.
If I was to be generous in describing how I've traded AUD-USD over the past few weeks it would be: scrappy.
The large drawdown I've been experiencing on this pair has certainly impaired my ability to really trade well. I haven't been able to focus on just going for bread and butter trades like I normally should be doing in this sort of situation. My drawdown was such that I haven't been comfortable at all putting on multiple trades at around the same level.
When going through a drawdown my trading methodology advocates being able to avail of the cheaper price. I should be buying at this cheaper level and ride price back in the direction of the long term trend when it resumes again. This way of trading is equivalent to employing a sort of cost averaging, with certain rules in place to make sure it does not get out of hand. Cost averaging when used prudently and within limits can provide a significant edge if it fits the trader's make-up.
Being able to put on two trades at around the same level can be beneficial in that I aim to hold one of the trades for the long term (looking for generally 100+ pips) while the other one is closed out for a much smaller profit goal.
By using this two trade strategy I'm able to hold one trade for when the long term trend resumes, while the second trade can be opened and closed multiple times, grabbing pips as the market moves up and then back down again, exploiting the volatility and randomness that exists in the short term.
With my gearing already so high on AUD-USD I was not able to really take advantage of this part of my trading plan. I just put on trades aiming to hold them for 100+ pip moves. The extreme volatility in AUD-USD meant that this wasn't really the best strategy to be employing as moves failed to breach 100 pips and would regularly retrace all the way back to my entry points.
At the same time, trading during this period was very mentally fatiguing. November was the most draining month of my energies in a very long time. So long that I can't even remember when the last time was.
I didn't feel out of control; I had my trading plan and knew what my actions would be if price went up or down. In effect, I knew how to limit any further drawdown taking place, as well as how I would handle the trades if price moved back in my desired direction.
My energies were being used up by the constant monitoring of all my trades that were under water. This was obviously pretty necessary, but the longer those trades remained under water the more draining it was to keep up the constant oversight.
I was looking at price much more often than I normally would. This subjected me to the random nature of the markets in the short term more than I am used too. This is probably also part of the reason why I ended up placing and taking off those trades that I was hoping would turn into large profitable trades. Worrying about the drawdown I was already experiencing I obviously didn't want to add to it any more. I therefore had to be careful not to let any newly placed trades add to my dilemma. When it looked like one of these new trades was about to go against me I would close it out. These trades were thus closed out for even less pips than I would normally get for a quick bread and butter trade even though they would have gone in my desired direction for 80 or 90 pips. They had failed to hit my original profit target yet I would close them out as price returned to the entry price, fearful that they would go deep into the red. By closing them out I was also denying them the chance to resume their move back in the direction of the long term trend.
All of this entering and exiting of trades has given me the distinct impression that I ended up overtrading. I'll have to examine my trade records in more detail to compare the number of trades I did this month against my previous monthly average.
Another factor that I have come to realise has been a hindrance is the trading platform that I am currently using. With forex.com I am unable to set stop loss and profit targets for each individual trade that I enter. I can only manually close out a specific entry using their Point and Shoot menu. If I want to close out an entry using a limit order then when that limit entry is executed the trading platform will match the order against the earliest entry that is still active.
This obviously can become a problem if I really want the limit order to apply against the last entry I placed and not the first one. It wasn't much of a problem prior to November as it was just affecting trades that were already in positive territory. It's a different ballgame when it starts to apply to trades in the red.
This issue has meant that I have found myself reluctant to place limit orders for newly placed AUD-USD trades, as I know that they will actually be matched up with my earlier trades that are still underwater. The result of any limit order being hit is to actually close out one of the earlier trades (or part of a trade depending on the lot size of the orders in question).
In effect this meant that I converted some of the unrealised loss I was carrying into a realised loss. Of course, when all the trades are closed out the final realised gain or loss will be the same in the end, no matter the order in which the individual trades are exited.
The end result is the same but the ease with which I'm able to manage my open trades getting there is dependent on the broker being used. I'm beginning to understand what a nice advantage it was to be able to set stop loss and profit targets for an individual entry using the trading platform from FX Solutions, at least with the sort of trading methodology that I use.
As well as on-going fine tuning that I'm doing to my gearing levels I'm seriously considering if I shouldn't move my account back to FXSol.
It takes more mental energy to keep track of profit targets for trades that have been closed out in reality but which I consider to be still in play. It's an extra layer of complexity that by using another trading platform I wouldn't have to worry about.
There are reasons why I am using forex.com as my broker. I have to figure out if those reasons dictate I have to remain with forex.com for the immediate future or if the pros for moving back to FXSol mean I should do so.
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