EURUSD Followup

As a followup to the EURUSD trade I posted two days ago, if you entered on the 1Hr time-frame you’d still be in the trade showing a nice 6.4% profit (based on 1% risk).

The high test bar (circled on the right) was the entry signal as it was a double top (circled on left) and had reversal divergence on Stochastic (pale yellow lines). This coupled with the higher time-frame signals (see previous EURUSD post) gave the possibility of a great trade, the downside being this is EURUSD during Non Farm Payroll week which makes it somewhat riskier.

There was a pullback to endure, but it had massively heavy resistance above it in the form of converging daily, weekly and monthly Pivot lines (blue, green and purple respectively) so moving the stoploss above that gave a good degree of protection. The higher low which followed wasn’t really – the closes were actually lower – so it was worth keeping the trade open to see if it would bounce from the EMA’s.

The move down today was extraordinary and unpredicted, but nevertheless I’ll take it. My stoploss has now been moved to just above the Weekly S1 Pivot line (green dashed line) to protect about 5.8% profit, although I’ll take profit before close of play tonight to avoid the possibility of a weekend gap and the likelihood of a EURUSD retracement on Monday.

The Euro USD 1 Hour Chart

EURUSD 1 Hour Chart – Tasty Profit.

After a very productive September and October, November has started with a cracking trade. Let’s hope that we get a few more like this before Christmas!

Happy Trading!

EURUSD Trade Idea

Here’s a trade idea for you, shorting EURUSD on the 4Hr or 60 minute timeframe.

First, we have have a short term bullish trend line on the Daily chart which has been broken and price has now come back to retest the trendline as resistance.

Daily chart of Euro USD

Daily EURUSD Chart Broken trendline being tested from below

On its own, this would be a uselessly weak sell signal, but if we drill down to the 4 Hour chart we start seeing a confluence of factors to bolster our suspicions that price is about to go south.

A double top has formed at a 1.3010 resistance level which is a previous support level too – two more short signals. In addition that price is the 50fib of the swing high at 1.3140 (not shown). 50 fib isn’t a true fib level, but enough people look at it to make it significant.

Euro USD 4 Hour Chart

The 4Hr EURUSD Chart shows a double top coinciding with an old support becomes resistance level

Finally, we even have correlation on the 60 minute chart in the form of Reversal Divergence between the last two swing highs. Price has moved higher, but the Stochastic peaks have moved slightly lower showing a slowing of buying momentum – a good sign of reversal.

Euro USD 60 Minute Chart

Reversal divergence on the 1Hr EURUSD chart is another signal that price could reverse.

 

So in summary:

  1. We have the trendline support being tested as resistance.
  2. We have a previous support level being tested with as a double top.
  3. The double top price coincides with the 50fib of the previous major swing high.
  4. There’s reversal divergence on the 60 minute chart.

All in all, we have some great signals across three timeframes showing that price is about to go short, at least in the short term. Going against this is that this is the Euro Dollar, which is particularly sensitive to news right now and this is Non Farm Payroll week.

If it wasn’t for that, these are exactly the signals I look for to get into the sweetest trades!

Adam  - The Day Trader

 

Moving Average Trades

Every now and then a moving average setup catches my eye because it is high probability trading at its best. It doesn’t happen often, which is why it’s such a pleasure to take – and there have been two which have really caught my eye recently.

The first is on Cable (GBPUSD):

A High Probability Trade on Cable

High Probability Trading: Strong support and resistance coupled with over extension from the moving average

GBPUSD has given us several opportunities this year. You’ll notice that there’s a strong level of resistance at about 1.6260 which was last tested in May. At that time it was over extended from the 50 exponential moving average by 328 pips and going back through the chart for a year or so, I noticed that the mean extension before snapping back to the 50 moving average was about 330 pips. In other words, once it’s extended by 330 pips or more, it’s a good time to look for entries back to the moving average.

In June there was an opportunity to go long when price hit an old support level coupled with an over extension of 411 pips. The two factors (strong horizontal support and over extension) gave us a another high probability trade back up to the moving average.

Then at the beginning of October, Cable did it again. Over extended by 383 pips and another retest of our old resistance level at 1.6260, my signal to get in was a break below the pin bar that faked out to the topside. The previous test of this level had led to a 1,000 pip slide, powering through the moving average without a second thought. This time, however, there was hesitation as the EMA coincided with the 1.6000 level, so when it touched I banked my profit.

It doesn’t mean this trade is over though. If there’s a break below the moving average tomorrow then there’s every chance that Cable could wend its way down to test the support line at 1.5345 again, so keep your eyes peeled.

Hollande’s 75% Tax

A story by Reuters today explains of the new 75% income tax; “The package will recoup 30 billion euros ($39 billion) for the public purse“.  Recoup? Really? Recoup?

recoup vb. 1. Regain or make good (a financial or other loss) 2. (tr.) to reimburse or compensate (someone), as for a loss. 

You can only “recoup” what was rightfully yours in the first place. How the hell is anyone recouping a tax?

Finance ministers have been keen on spinning the message that the money earned by you and I belongs, by rights, to the state. And the media are buying it. The message the Reuters story conveys is that the media is now comfortable with the notion that money earned by private individuals needs to be reimbursed - that it should be taken back from those it doesn’t belong to (private individuals) and repatriated into the public coffers.

So what should the rich of France do? Well, if it was me, the answer would be “leave”. The wealthy are also the entrepreneurs, the risk takers, the employers, the visionaries, the driven and the wealth creators. Lose them at your peril.

The question shouldn’t be how much extra tax needs to be raised to balance the books, but rather, how the hell did a western nation get into the state where a 75% income tax is necessary in the first place? What kind of criminal incompetence does it take to put a nation in such dire financial peril?

And how come those demanding the rich be vilified and taxed to death all live champagne lifestyles, live in the best part of town, travel luxuriously and enjoy all the trappings of wealth and are paid out of…. the taxpayer’s purse?

Breaks vs Bounces

What causes price action to do what it does? Have you ever looked at a currency chart and wondered what causes all those familiar price patterns and, more importantly, what it’s going to do next?

Of you have, because that’s the nature of technical trading. It’s in our DNA to look for reasons, for patterns, for answers in a seemingly chaotic market because we strive to understand and see order in the world around us.

And because it is in our nature it means that every other trader out there is looking for the same thing. When we look at a chart, we look for significance in the price action. Why did a price break through resistance? Where there any clues? Was momentum on its side or was there a discernible pattern we could measure and apply in the future as a clue to price continuation?

Or if the price bounced, why did it bounce? Why would price move with such force towards a point only for everyone to say “ok, that’s enough” and reverse?

The answer lies in our psychology and is the reason why bounces (reversals) are a more reliable trade and more common than break (continuation) trades.

When price bounces, there’s often a visible barrier on the chart which the market rejected because collectively, you, me and most other traders felt that the currency pair had no business jumping the fence and effectively swimming in fresh waters. Jumping these barriers values the currency in a whole new price range and takes significant will to push it from one price range into another.

For price to break the barrier and continue, it means that enough traders around the world thought that the currency was valued incorrectly and had enough conviction in their view to put significant money behind the move and push it through the resistance level.

That’s why price will often breach a resistance level, only for the breakout to fail and close back inside the range. If a price breakout fails, the majority of traders will instantly back the reversal and keep the price in a range they know and feel comfortable with.

If you’re interested in identifying high probability bounce trades, take a look at the Forex alerts service provided by our friends over at TheLazyTrader.com. They specialise in low frequency, high probability EOD bounce trades and I’ve been using them profitably for a few months now – highly recommended.

Happy Trading!

Adam – TheDayTrader

Disclaimer - TheDayTrader.org.uk expressly disclaims all liability for the use or interpretation by others of information contained in this blog. Decisions based on information contained herein are the sole responsibility of the visitor, and by using this website you expressly agrees to hold TheDayTrader.org.uk and its affiliates harmless against any claims for direct, or indirect, damages for decisions made by the visitor based fully or partially on such information.

The Forex Casino

The Forex market is like a casino, but it’s up to you to decide whether you’re going to be the punter or the house. In other words, the loser or the winner.

Gamblers love casinos, but casinos don’t gamble. The house only plays games that it knows will consistently beat the gambler and so, even though the house and the gambler are playing the same game, the game’s designed to make sure the house always wins in the long run.

The casino has no idea if the next game of roulette will be a winner or a loser and it doesn’t care. What it does know is that for every £100 it pays out in losing games, it will earn between £105.56 and £107.89 in winning games. It knows this because it made the rules and the rules incorporated a “house edge” which guarantees a winning percentage in favour of the casino of between 5.56% and 7.89%.

The casino knows the house will make money and the punter will lose money. That’s the casino’s edge over the gambler and it only ever plays games where that edge exists and can be relied on.

This is why it’s paramount in trading that you declare you are “the house” and the market is your punter, rather than the other way round. You make the rules, your trading edge, and stick to those rules like glue. You have to guarantee that “the house will make money and the punter will lose money. That you only ever take trades where that edge exists and can be relied on”.

If a casino has a losing run, it won’t start changing the rules to fit what happened in the last few games. It will play the next game precisely the same way as it played every previous game, and, sure as casino chips is chips, it will make its money back and a healthy profit on top.

If you have a losing run of trades, it’s equally important that you don’t start changing your rules. You don’t start taking profit early, you don’t start chopping out of a losing trade before your rules tell you to, you don’t start skipping trades because “it doesn’t feel right”. If you’ve tested your strategy and know its profitable, then you need to have faith that your edge will prevail in the long run. If you change the rules on a whim you instantly become the gambler and the market will take your shirt.

It’s up to you to decide whether you prefer the dead cert odds enjoyed by the casino, or the slow, certain bankruptcy of the gambler.

And you make that choice every time you place a trade – only you know if you followed the rules or took a punt.

Happy Trading

Disclaimer - TheDayTrader.org.uk expressly disclaims all liability for the use or interpretation by others of information contained in this blog. Decisions based on information contained herein are the sole responsibility of the visitor, and by using this website you expressly agrees to hold TheDayTrader.org.uk and its affiliates harmless against any claims for direct, or indirect, damages for decisions made by the visitor based fully or partially on such information.

Yay, Euro Crisis Over!

It was a Big Day for the Euro Zone crisis today, with the German constitutional courts deciding that the ESM bailout fund of up to €700bn is legal but Germany’s exposure must be limited to €190bn unless the Bundestag approves more.

In other words, as soon as the €700bn runs out (won’t take long), the Bundestag will approve a lot more than €190bn because it won’t have any choice. So after much pomp, ceremony and silly costumes, nothing has changed then.

In discussing whether or not the crisis is over, the Guardian reports today that “Immediate concerns include: whether Spain and Italy will need help with their borrowing [Er, yes]; whether Greece has done enough to receive its next aid tranche [haha, you're joking, right?]; and whether leaders can produce a credible growth plan (at a time when austerity packages are driving the economies of Greece, Portugal, Italy and Spain deeper into recession).[Growth? With the exception of Italy, what industries do they have to generate growth?]

Picture of German Court

Dressed as druids, some might say the German court isn’t taking this seriously enough.

The Euro zone is still up Stinky Creak without a paddle. But relief buying is pushing EURUSD toward the 1.3000 level (a high of 1.2936 as I write) demonstrating the market’s bizarre voluntary myopia where the fundamentals are concerned. Every bit of good news is bought as if the all the EZ’s problems have been solved, but the rot is now so deeply ingrained and a part of the Euro that the market must be in a near constant state of denial to keep buying.

But nothing in the Euro Zone has changed. Greece is all but ruined, Spain has no economy now that property has crashed, Ireland was shafted by the ECB, Italy is….well, Italy, and the austerity measures mean the Portuguese fall into the flames has simply gone into slow motion horror-vision. Nothing the ESM has done or can do changes any of these Euro show stopper facts.

My personal view is this relief rally will find a top sooner rather than later and the sell-off will be fast and violent as traders quickly take profits on their longs and jump short.

Happy Trading!

Adam – TheDayTrader

Disclaimer - TheDayTrader.org.uk expressly disclaims all liability for the use or interpretation by others of information contained in this blog. Decisions based on information contained herein are the sole responsibility of the visitor, and by using this website you expressly agrees to hold TheDayTrader.org.uk and its affiliates harmless against any claims for direct, or indirect, damages for decisions made by the visitor based fully or partially on such information.

Plan Your Trade, Trade Your Plan

Without a trading plan you’re a fish out of water, you’re directionless, you have no means to measure your performance and you have no rules to follow.

That last point is particularly important. Trading is one of the few disciplines where there are no rules. If you work in an office, or as a baker, a carpenter, a pilot, a doctor or even (apparently) a politician, there are rules to follow and guide you. This gives you a solid reference against which to measure your actions. What’s more, if you break those rules, it tends to have a negative impact on your career but because you know the rules, you know how to correct it in order to resume your flight to the top.

Not so when trading. Look at any chart right now and every tick you see represents the actions of both buyers and sellers. Was buying the right thing to do on that tick, or was selling? Or were both right? Or both wrong?

The answer is, yes, no and maybe. It all depends on the rules the individual traders set themselves.

Your trading plan needs to specify exactly what your criteria are for a valid trade setup. If, for example, you trade with trend and wait for a low test to form on the 20SMA and buy the break of that, have you defined the low test? How big does the bar have to be? How high up is the open and close? Do you need more supporting factors such as timeframe correlation, divergence, horizontal levels etc?

It is up to you to define the rules and then have the discipline to follow them precisely for every trade you take.

Some of the definitions you need to have in your trading plan are:

  • Define precisely the setup of your trade.
  • How will you manage the trade?
  • Where will your exit(s) be?
  • What is your risk strategy?
  • Under what circumstances will you cut your losses or take early profits?
  • What daily / weekly routines do you need to perform (news checks etc)?

Make sure your trading plan leaves little to discretion. You want a check list to follow before you get into a trade, and then an instruction list for managing it. If the setup on the screen doesn’t match the plan, it’s not a trade.

By following the trading plan, you know that every trade you take meets your criteria and therefore losing trades are acceptable because they’ve been planned for.

Adam – TheDayTrader

This article originally appeared in the Sep/Oct 2012 issue of YourTradingEdge Magazine (www.YTEmagazine.com). All rights reserved. © Copyright 2012, YourMediaEdge Pty Ltd. 

Disclaimer - TheDayTrader.org.uk expressly disclaims all liability for the use or interpretation by others of information contained in this blog. Decisions based on information contained herein are the sole responsibility of the visitor, and by using this website you expressly agrees to hold TheDayTrader.org.uk and its affiliates harmless against any claims for direct, or indirect, damages for decisions made by the visitor based fully or partially on such information.