The secret to win is to learn from losses

Not all trades work

I have previously shared some of my before & after trade details (most recently HERE and HERE), mostly of those that provided a profit. But it is from the ones that do not work that you learn more from about. So in this short article I have shared the details of the DAX short trade that went against us. Hopefully you will learn a thing or two from this article.

I issued the short trade signal to the group when noticing the DAX had hit resistance on Thursday 8th October 2020. This is what I wrote to the group:

DAX Daily testing resistance – potential short opportunity could be on the cards here as the index tests the point of origin of the breakdown (where the arrow is pointing to). If we find one, we will use the high of that big red candle as our invalidation

DAX
Source: TradingCandles.com and TradingView.com

Based on the above daily chart, I then looked for an entry, as I normally do, on the hourly time frame:

DAX short trade idea – we are fading into the rally as the index tests prior breakdown point. Once support, this area could turn into resistance. I am looking for a big move lower, so the first objective is to merely fund the trade – IF we get there, make sure to take some profit and then lower the stop on the remainder for a potential drop.

This is the first short attempt on an index in many months. I think there are a number of major fundamental risks that are not being priced in by markets e.g. brexit, covid resurgence across the eurozone etc.

DAX hourly
Source: TradingCandles.com and TradingView.com

As we were going against the trend, it is always important to manage risk. I was getting worried this trade will not work because of the rallying equities on Wall Street, though the DAX was already more subdued…

DAX update: time to move the stop lower, I think. I have moved mine to above this hourly inverted hammer candle. After the big rally on Wall Street, there is a risk this could go against us, so lets reduce the risk as much as possible

DaX update
Source: TradingCandles.com and TradingView.com

Meanwhile, the S&P 500 was also hitting resistance, which further strengthened the bearish case:

(you may want to check out that tweet as I posted a few other charts that showed similar price characterises as the above)

Anyway a few days later this is how the S&P looked like:

S&P
Source: TradingCandles.com and TradingView.com

However, the DAX had rallied again – triggering our adjusted stop loss for a small loss in the process – before tanking!

DAX after
Source: TradingCandles.com and TradingView.com

So, we got very unlucky with our short on the DAX – would have worked wonderfully if we had timed our entry better. This underscores why it is very important to time the market correctly even when you have a very strong feeling about a particular trade. I was almost convinced the DAX was going to drop because of rising virus cases and other fundamental risks, but mis-timed the trade.

This is the nature of trading, but it is important we learn lessons from our losses, even though we lost very little in the DAX as we had tightened the stop loss very close to the entry. If we hadn’t done so, we would have taken a full 1R loss. This is why risk management is really important, which you can learn more about HERE.

Another lesson from this is that when going against the trend, it is always a good idea to wait for the trigger. We didn’t wait for a proper breakdown, as we sold the first rounded re-test of resistance on the daily. Had we waited a day or so, when the index made a lower low on the hourly after the latest break higher had failed, then we would have had some confirmation to work with.

But what do we do now?

We don’t want to chase a market which is down about 2.5% lower on the session – that is going to be very risky. Equally, we also don’t want to be buying the dip either, as the losses could certainly extend on the session. We need technical evidence that the market has carved out a short-term bottom, before looking for a potential long trade, or wait until a small pullback to some resistance level before looking for new shorts.

More opportunities will show up, we need to remain patient.


Update: 28 October 2020

Indeed, more opportunities did show up and so I wanted to add one more before-and-after to this article to make a point. That is, you don’t need to trade the exact top or bottom. With the DAX trade, we were trying to pick the top and after we got stopped out, it just went on to collapse.

This is how the the DAX looked like when this update was written:

DAX after
Source: TradingCandles.com and TradingView.com

As you can see, the index collapsed from the area where our short entry was stopped out (red arrow on the chart). This is why I had suggested to the group to keep a small portion of the trade open in case it did something like this.

Anyway, I wanted to post a before/after chart of another short trade we took on Tuesday 27th October, which luckily worked. This was the daily chart of the S&P I posted on which the idea was based on:

S&P before
Source: TradingCandles.com and TradingView.com

S&P yesterday broke below 21-day exponential and the pre-lockdown high. We could possibly see some further weakness today given the shape of the candle from the day prior

Telegram group

Based on that, this is the trade idea I then posted:

S&P  trade idea
Source: TradingCandles.com and TradingView.com

S&P short trade idea on 2H chart.

If you think markets are about to take a beating then a short-term bearish setup is this one. The index has returned to an area which was previously support, could turn into resistance now. The main target is the 61.8% Fibo, and you can leave a small portion open in case it drops big. The invalidation is above the recent spike high, as per H2 chart

And this was the outcome…

S&P after
Source: TradingCandles.com and TradingView.com

So, the moral of this update is that you don’t need to trade the exact top or bottom, and if you learn from your mistakes, better opportunities will present themselves!


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