Tuesday, October 13, 2009

Sometimes you need to ignore the news

I am convinced that most traders would be better off if they’d turn off CNBC, stop scanning news, and start trading their charts based on plain old, classical technical analysis. Oh sure, you want to be aware of and careful around major economic news announcements. But otherwise the noise from news can result in information overload at best and distract and keep you out of good trades at worst.

Here’s an example.

Yesterday one bit of constant news was that the pound was taking a beating along with the weak dollar. The pound dropped to a four-month low against the dollar and a six-month low against the Euro. This morning I woke up around 3 AM EST as I sometimes do. It’s a nice time to trade—so quiet and peaceful here in Florida while London is gearing up. While flipping through the shorter time frame charts, I noticed the pound had slipped beneath a daily support line I had drawn. Here’s the daily chart showing where the level has proved to be both support and resistance, something that’s known as polarity. I have removed my trade from view so as to give a clear look at the chart alone.
Many traders, influenced by news and the belief that the pound was in real trouble would stay away or worse, jump in with a short. On the shorter time frame though, 15-minutes and then 5-minutes, I noticed some interesting things.

Looking at the 15-minute chart below, one can see the lower shadows indicating the market was rejecting those lower levels. You can also see divergence between price and RSI. The divergence was more pronounced on the 5-minute chart. The pair had experienced a significant fall, causing a lot of news. It was swooning below its daily support line. Yet the pair has been in an uptrend since early in the year. I bought, of course. It’s another of those trades where, yes, there is risk it could continue down, but I could set a tight stop. So here we are at 1:15 PM EST with 154 pips of profit. I’ve lightened by half my position and the rest is stopped at a point that will provide a 6o pip profit. I may move it up soon. The point is this—don’t be afraid of a falling pair if you can find reasons to buy on a shorter time frame. Most falls are not free falls forever. It just doesn’t work that way. To be honest, I expected to grab 50 pips or so from this trade before it started falling again. So it has done better than expected. To be honest a trade like this can fail. I’ve certainly had them do so and will try to remember to post the next one that does. But that’s why you set a tight stop. Here’s the 15-minute chart:
Am I a contrarian? Some will think so. I’m not. Much of the time the crowd is right, after all. I am quite sure I’ll be shorting the pound soon. But this was a nice little trading opportunity. So I took it.

My purpose in writing this blog is to show you how one trader, me, makes trading decisions and survives while trading Forex. One of the biggest problems I had when I first started trading was trying to apply the “rules” to actual trades. Another was the psychology—limiting losses and letting profits run. If you study my blog you’ll see how I deal with both those issues. So my writings are not trade recommendations but rather educational in purpose. You have to decide on your own approach to trading. Remember that trading is risky.

© Dianne Fecteau, 2009. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.

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