This is a guest post by Ahmad Hassam
Please read the first part of How To Trade Out Of A Bad Losing Position Back Into Profit to understand this second part. The EURUSD pair starts to fall. You are happy, you plan to add the third lot at 1.3000. If the pair reaches this level, it means that the momentum is there for it to fall more. The pair falls, never reaches this level rebounds and makes a new high at 1.3420.
You are now stuck with a bad position. But you are confident about your technical and fundamental analysis and are sure that the EURUSD pair will eventually fall down to around 1.282 support level. So, you short another lot at 1.3410. Now, you are short 3 lots with an average cost of 1.3376 (=1.3335+1.3385+1.3410). Your stop loss is now 58 pips away (175 divided by 3) at 1.3434.
You at this point decide to disregard money management and remove all stops. After all EURUSD was supposed to tank. It has already become so overbought that it has to correct. You are short at an average cost of 1.3376 while the market is at 1.3405. You remove the stops.
But, EURUSD doesn’t tank. It makes a huge rally and reaches 1.3529 level giving you a loss of 459 pips (153X3=459). You are devastated. It looks like you are about to get a major hit with a large drawdown to your account.
But you are a shrewd trader. You get over the initial shock of market proving you wrong and the EURUSD pair refusing to go down to the level that you had wanted when entering into the trade. It is now clear, EURUSD is not willing to go down. Rather it will stay high at the levels that it has reached.
Now, you are a shrewd trader who knows that the market never moves up in a straight line. It makes a move, then consolidates, then moves again. So, these periods of consolidation is your chance to trade your way out of this bad situation into profits.
The EURUSD pair takes a dip and falls to the 1.3480 level. You get rid of the first lot at this level with a loss of 145 pips. Now, you are short 2 lots with average cost of 1.3397 with an unrealized loss of 83 pips.
Soon a range develops in the market that is 100 pips wide. EURUSD pair starts trading between the support of 1.3380 and the resistance of 1.3480. The market stays in this consolidation phase for 7-8 days. You actively start trading that range. Enter at the support and get out at the resistance with the third lot that you had freed up at the first go.
Every time you make around 100 pips. With just 2 trades, you make 200 pips recovering your initial loss of 145 pips and reducing the unrealized loss to just 28 pips. You make the third trade and now you are in a profit of 72. It is up to you now, when to get out of the market. But if you do another range trade, you make a total profit of 172 pips. So, you do it again and you are 272 pips in profit. You can now decide to close all your positions with a profit of 272 pips or continue to range trade as long as the range is in place.
By having a flexible trading strategy that combined swing trading with range trading, you got out of a very bad trade that could have wiped out your account. The lesson learned is to never lose patience when trading and always stay flexible and move with the market. You can practice this strategy on your demo account. Good Luck!
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Very interesting strategy, do you think this could be used as an entry strategy as well and not just to get out of a bad trade?