Losses are not something to fear.
They provide valuable information – either your bias was wrong or your timing was out.
The chart below shows the 30 min 6B chart (GBP/USD equivalent) prior to the UK session yesterday 8th July 2010.
We’ve used this chart to define our structure for the market, based on support A (1.5100-5120), support B (1.5175-5180) and resistance C (1.5240-5250).
And the 3 min chart below for identifying the trend and our market bias, within our higher timeframe structure.
The pre-session price action has rallied strongly to test our upper resistance at C, before returning at a slower rate back to the area of initiation of the rally. Our expectation is for a ranging market between B and C, initially looking for an opportunity to enter long off B.
As the session commences, the 3 min chart (below) demonstrates price stalling at support area B (point D). The price stall is evidence of increasing bullish pressure; and although there’s not yet any evidence of this demand overwhelming supply, the price action does offer opportunity for an anticipatory entry (limit order) close to support. I’m happy to take such an entry, in particular after having seen the second green candle, showing two tests of the support level. If not there, then certainly at area E where price breached the level and rejected lower prices, evidenced by the lower tails.
Not every trade is a winner. The break below the candles at E show that demand was clearly not able to overwhelm supply in this case and the trade is stopped out for a loss.
Our bias was for support B to hold and the market to range between B and C. Clearly this has not occurred. The loss has provided information which now affords us an opportunity to reassess our game plan. Area B provided weak support, with tempting opportunities to enter long. Traders with stronger stomachs than mine, who held through the drawdown to F will be looking for an opportunity to exit as close to breakeven as possible. If price returns to the vicinity of the breakout below B, I’d be expecting an increase in bearish orderflow, as these traders close their position.
Price rallied to this area at G. Watching closely for confirmation, we see another two candle stall with upper tail rejection. The break below confirms a bearish bias, with previous support B now acting as resistance, and offers a great opportunity to enter short.
The bearish bias holds, with further entry opportunities available short at H, and on subsequent pullbacks as the market trends down to previously defined support area A.
Losses are information. What are your losses saying about the market environment, and your current read of price action.