EUR/USD

The EUR/USD had a nice run up earlier this week but it's not moving worth a sou right now. Where's the action? But this is what trading is all about--waiting for another move that will be definitive. Trading is nothing if not about patience and yet patience is the one trait many traders seem to lack. Actually, patience isn't the bon mot. It's too bland. Forebearance would be better--a determined struggle to not give in to negative feelings. How many times has someone bailed out of a trade after the pair waffled back and forth and then watched as it took off in whatever direction one was originally in? Or, getting into a trade, one starts to second guess oneself?

There are various ways to cope with this and I'll be getting into some of them over the weekend. For now, I thought I'd amuse myself by building a word cloud of some of the recent news about the Euro. Isn't that cute?

The first chart is my 3 hour/3 box P&F chart, based on close. It shows the uptrend, an engaging consolidation period, and the pair is now at a key resistance level. If it can break through....but I'm getting ahead of myself. Note the symmetry in time of the last moves up. It evokes the three-drive pattern from which one could expect a break down.

The last chart is the hourly updated from yesterday. One could still make the case for the broadening pattern but there is also the appearance of an upward wedge with its two upsloping lines and multiple touches. However, one could also argue for a pennant.

More important to me is that there has been selling that has come in several times when the pair has achieved this level (take a look at the 15-minute chart). So even in the face of the strong uptrend, I feel OK with my short with its teensy-weensy, yellow polka dotted stop. Remember, I will reverse myself if and when taken out, depending on what the market shows me.

Now I have to remind anyone reading this that these aren't trade recommendations. They're just my musings. All trading carries significant risks the lawyers tell us to say. And you know something? They're right. That's why I keep my stops small.

EUR/USD

Well here's the deal with this pair. It's been in an uptrend on the monthly, weekly, and daily charts (as well as on the 3 hour since early September after a consolidation period). With that kind of trending one wants to wait for a pullback to enter.

Had I been on top of things the last hour or so I might have gone long on the pullback on the hourly this morning to 1.4503 with the close at 1.4534. Especially since that was a nice little Fib retracement from the prior low at 1.4467. I wasn't. I didn't.

But there are some other interesting things going on in this pair. Look at the hourly chart above and notice the uptrend lines in both black and orange. Price dipped its teeny tiny toes below the orange line (baby, it's cold down there) and fell below the RSI orange uptrend line yesterday. (sorry, for the funky dates on my charts from Oanda. Today is the 10th but they show it as the 9th--this plays hell with any cycle work I'd be inclined to engage in, I can tell you. Or movements of the planets...oh well, let's save that topic).

The black uptrend line on price shows a divergence with the black downtrend line on RSI. So price going up and momentum is going down. Uh-oh.

The other chart shows a broadening formation on the hourly. I take these seriously. Taking something seriously doesn't mean I'd trade it in and of itself. But now I've got three rather bearish indicators on the EUR/USD hourly. If I look at the candle formations themselves I see a nice strong black candle three bars back and also some indecision with the candle shadows. But this is only the hourly so let's not get too, too carried away with the analysis or start hopping to conclusions. What I'd like to see next is another touch at the high of the broadening formation or a bit higher. Then I might try a short and I can use a fairly tight stop to get me out if price merrily continues past that point, assuming if it happens, that the trend is still very much in force.

Watch the price; watch the price; watch the price. Too many times we trade our expectations. "I'm bullish on the Euro; therefore it must continue up." Or "The Euro is over-valued given economic conditions in Eurozone; therefore it must go down." Uh-uh-uh. While expectations can help us make sense of situations in life--i.e. we can fill in a conversation if we miss a word or two or u cn rd a txt msg despite missing letters--it can cause traders to make stupid and foolish errors, i.e. "Me think bull so I'll ignore the bear signs," or "me big bear so even if it's going up the pair can't be bullish."

Don't trade your expectations.

AUD/USD

I stopped out at just above breakeven in Ozzie and didn't trade yesterday, 9 September, because I was out of town. But I went long again this morning at 8586, only a bit below the prior entry the other day. To say the pair has been unexciting the past couple of days is an understatement with its narrow range. This area in the 8500 range is significant historically (e.g. 8525 (June '07), close of 8517 (July '07), low of 8554 (Dec. '07), low of 8512 (Jan '08). If you go back further on the monthly chart into the 80s it was also a confluence area. My Gann calculations also bring me into this area. So the pair is bound to dither about here until it finds a direction one way or the other.

When I first started trading I found this enormously frustrating--50 to 100 pips up; 50 to 100 pips down. Sure you could take these small gains and that's perfectly appropriate if it's your style and/or if you believe you're in a rectangle. But I sense the Ozzie has a bigger move coming, in part because this area has such significance.

But for now, there's no bigger move taking place. Sometimes traders forget (or maybe suppress) that the market moves because certain people think a price is at a point to buy and others think it's at a point to sell. When these points are close togather the market is stagnating. And who likes that? It's especially galling when you have a strong belief that the market is going to move in one certain direction. We have a strong need to be right, after all, especially when we're operating in a world where uncertainty causes a lot of stress.

In Reminiscences of a Stock Operator, Jessie Livermore said the trader, "cannot make the stock do what he wants it to do.) (p.226). This is true. You can only wait and let the market show you what it's going to do. And then you need to be ready to move and take advantage of that.

The market will do what it will do. Stay present; stay ready to move with it.

Long entry into AUD/USD

As soon as I woke up this morning I entered the AUD/USD long based on the analysis in my prior post from the weekend. That's the picture on the right (I'm having a little trouble posting pictures but I'll figure it out). I wish I'd woken up a bit earlier but there you go. In any case, even though it was up only 30 pips at this point I decided to move my stop to breakeven (the red line) because I'm thinking I can get a better entry on a pullback. I'm a technical trader so I don't pay a lot of attention to news. But I'm wondering if the good news from Australia (businesss conditions up and more important, business confidence up) isn't behind this quick spike.

I also went long GBP/USD this morning (the chart on the left above) but only after getting stopped out from a short. I honestly think this pair is weaker than it's acting but price behavior trumps my opinion at the moment. After some nice long candles, though, there's a little uncertainty being indicated by the market. Its stop is also moved up to breakeven plus 10. Here's that entry on the hourly chart.

Hedging

Sometimes traders, usually inexperienced or going through a period where fear is the prevailing emotion, decide to “hedge.” Using the case of the AUD/USD in my previous posting they might decide to take two trades—one long and one short in the same pair.

Is this a good idea? After all, if you have tight stops and it starts to run in one direction…

The answer is no.

First, this isn’t really hedging which has to do with exploiting inefficiencies across different markets. The kind of trader that would “hedge” this situation usually is one who has a few other walls to climb, e.g. they close out trades too quickly and don’t adhere to tight stops. You can’t make money this way. In fact, you can lose money.

Technical trading requires hard work; technical trading requires making an informed decision.

Gann wrote in How to Make Profits in Commodities, “Many traders have the idea…they can hedge and protect themselves. There is no greater mistake than this. It often turns out the trader loses on both trades. If you are in the market WRONG (Gann used the caps) and don’t know what to do, there is but one thing to do. Get out and wait until you know there is a definite trend….[Hedging] does not pay and you must avoid it.”

Gartley wrote, “The first and most important part of this analytical procedure is the accurate determination of existing supply and demand conditions.” (Profits in the Stock Market) This requires study and hard work. He also wrote, “the technical approach also appeals to many persons because the vast majority are inherently lazy….[but] the technical approach…demands constant study and the application of reasonable judgment.”

Back in July there was brouhaha over the new NFA rules regarding hedging. People wrote posts on forums saying they were going to open accounts with brokers outside the USA because they could no longer hedge. Many of the brokers played into this misunderstanding of the ruling.

FXCM, in its communication to its users on this rule, wrote, “forex traders will no longer have the ability to selectively place stop-loss or limit orders on individual trades, nor will traders be able to modify or close trades from the “Open Positions” window.”

This is not what the rule said. The rule said FIFO—first in; first out.. The first trade you open must be the trade you close first. If you go long and then try to “hedge” by opening a short position, you must close the first long position out before you can open the short position. It has nothing to do with not being able to place stops on any given trade. It has nothing to do with not being able to set profit targets on a given trade. It also doesn’t say you can’t have two trades in the same direction. (Scaling in? Let’s talk about that some other time). Of course you can also have two accounts where you have a long in one and a short in the other in the same pair.

NFA defines hedging as “where customers take long and short positions in the same currency pair in the same account.” The people at NFA think you don’t “understand either the lack of economic benefit or the financial costs involved.” They think you won’t be able to be profitable with this kind of approach. They also think it, “increases the customer’s financial costs in several ways.”

They have a point. When you buy long and sell short on the same pair you pay the spread twice. In addition, while one would think that the interest paid or received on the two opposite positions would offset, this doesn’t seem to be reality in many cases. In part this is because of the squirrely ways some brokers deal with interest.

It’s not my argument that government should be regulating traders to death. Hey, maybe if people want to throw their money away they should be allowed to do so. Regardless of how you feel about that, this rule actually addresses something that gives people the allusion they’re in control. God knows, many of us felt out of control when we first started trading. Some continue to feel that way—buffeted by an irrational market; stops being gunned by the big players; that some system or guru somewhere has the knowledge so desperately needed.

But I digress. The idea of hedging the same pair isn’t for the trader who wants to learn to be successful. To this kind of hedging I paraphrase George Carlin: “It’s BS folks and it’s bad for you.”

6 September 2009 - Musings on the Ozzie, indecision, and reversability

AUD/USD closed up again this past week at 8506, a nice uptrend that could continue on up to 8800, 8940, 9253, and possibly 9520 and 9750. I closed out my longs a week ago at 8470 and am mulling over whether to get back in. What's not to like about the pair? It's been in a nice rectangular consolidation on the daily chart and it just closed above it. One could also make the case for a flag formation on the daily with the flagpole starting at 7703. Will have to study Ozzie's behavior after Labor Day.

But I can also make a case for shorting it with a tight stop. There's a slight diversion between daily price and RSI during the last three days. It's near the September '08 high of 8524. If it closes above this, I'll go long for sure on a pullback. But this will probably serve as resistance for at least a bit. Then too, the close above the rectangle is hardly an impressive breakout. On the weekly chart, it could be completing a ZZ or ZZ combo wave two (if you buy into Elliott and I'll have more to say about that in a later post). But here's the thing: long or short it's at a good entry point because you can set your stops rather close to your entry and the potential is good either way. That is my kind of trade.

Sometimes this type of set up can paralyze traders into indecision. It could go up; it could go down. So they end up talking themselves out of a trade. Buridan's Ass comes to mind--the creature who was set halfway between two identical bales of hay. He starved to death since he couldn't decide which one to move to. Well you won't starve to death by not taking a trade and you certainly won't have any possibility of loss (or gain) when you don't take a trade. But when you can make a case either way by reasoning through with technical analysis, why wouldn't you choose one if you can do so with tight stops? Sometimes the clues are overwhelming in one direction. But often, especially in the Forex market and especially lately, they're not.

If you're wrong and the market takes out your stop you can also reverse yourself. Let's say I short Ozzie at 8506 and I place my stop at 8531 (a little above the Sept. '08 high). The market takes it out and closes above 8506 again. I can then try a long. My stop can be tight here, too. But I've seen traders not use the information they get from their stops being taken out. They walk away from the trade in a sort of eliminativistic fashion. Believe me--if you've set the stop based on reasoning about market behavior and not based on some random number, the market is giving you a lot of information if it takes it out. This isn't to say that you might not want to do another quick analysis--after all, Gann was right when he said to never change your position in the market without a good reason. But don't let a locked mindset interfere with your trading.