Welcome to another trade example. In this example we will be looking at a short trade taken on GBPCAD on the 18th of March 2016.
Although the trade resulted in a profit of 63 pips, the lesson of this trade is about having conviction in your position. This was a bad trade in the sense that the original reason for getting in the trade warranted a much more ambitious take profit target, just above the 1.85 handle. As seen in the video, I did cut the trade without good reason much earlier than planned, and missed out on 2/3 of the potential profit.
The reasons for getting into this trade was two fold, Brexit concerns were heating up, and the day before on March 17th we had the Bank of England, where the MPC Official Bank Rate Votes remained unchanged at 0-0-9, with the BoE stating that “it is more likely than not that the bank rate increases over the forecast period adding that they remain watchful that low inflation is having second round effects on wages”, as seen in our Live News Feed. The market did see this as a very hawkish comment as it implies that the next rate move will be an increase, hence we saw pound rally across the board. Instead of trying to get involved in this rally, I saw this as a good position to sell from at a later date.
To bring the CAD side of the equation into the picture, we had the announcement from April’s oil meeting and various comments in the news feed that Saudi Arabia would be prepared to freeze output without Iran, as well as lots of other encouraging comments which helped support oil prices.
At the same time as the positive oil comments, we saw various polls for the UK’s EU referendum showing quite a close margin between votes to stay in the EU and votes to leave the EU. This overshadowed the BoE’s recent positive comments, turning GBP sentiment once again bearish.
The overriding bearish bias on the GBP and the strength in oil which supports CAD, were the catalyst to get into this trade, and as seen in this video, GBPCAD initially went 120 pips against me, however as GBP crosses typically have very big average daily ranges, I ensured I had a sufficiently large enough stop loss which was nice and out of the way. Although the trade was successful and we did take some profit, the moral of the story is – don’t close the trade early, unless there is a fundamental or sentiment based reason to do so.
Source:: Early Close on GBPCAD – March 2016