I'm going to trace back over my trades in the Euro from last week in the hope that someone might find this interesting.
When I wrote about Euro early last week, I was short from 1.3638. I took partial profits of +580 pips on Tuesday and wrote, "Only above 1.3317 would I expect to see a potential move back to the 1.35 area." I also added that I didn't think that was likely (haha as subsequent events proved). By Thursday I was seeing corrective action. Euro rose to 1.3217 and then sank to 1.3060. I noted that it cleared the 1.3150 resistance level and that it had closed four consecutive hours above that resistance.
This price action put me on alert that the Euro might rise further, especially since it had only missed my profit stop by one pip. What's interesting, though, is that I didn't want to believe this. One reason was because of what my regular readers know—I tend to stay in winning trades letting profit stops be hit rather than get out of them. This can be highly profitable, of course, and has been for me. But it can also mean I don't always get out when I see clear signs of change. Who wants to take on risk going the other way when the market has paid you so well for your original analysis?
The other reason behind my not wanting to believe things were changing is that I had faith in my original analysis. I spend many hours studying the market and use a variety of techniques to arrive at my conclusions. I always look for validation—at least three pieces of evidence that support my conclusion. I also go through a "what if I'm wrong" analysis and try to find evidence that refutes my conclusion. I had done this with Euro and I was pretty sure it was going to hit at least 1.28. Faith in one's analysis is something a trader needs to take on trades—otherwise the risk is too scary. Clearly, my original analysis had paid off well; just as clearly the market was signaling that my final conclusion—price would hit at least 1.28—was questionable. But that doesn't mean it was easy for me to let it go.
The final reason I didn't want to believe a reversal was in the cards is that the Euro is in trouble fundamentally and I think it's clear that the worst is yet to come. I can find lots of evidence for this. I don't trade on fundamental factors but that doesn't mean I ignore them completely because ultimately it's fundamental reasons that move charts.
I'm telling all of this because even when a trader is profitable they are vulnerable to being hostage to beliefs. However I've done lots of work on myself in this area—it's probably the majority of the work I've done that has led to my ability to successfully trade. After an hour or so of internal struggle I not only closed my short (for +499 pips) but went long at 1.3139. I had at least three reasons for doing so—on shorter term charts there was positive divergence, hinting that at best it was ready to work out the oversold status; both price and RSI were maintaining an uptrend line on dips; and price was hovering around the 1.3150 resistance. In addition, the drop had been fairly steep and rapid and, as I'm always saying, price never goes straight down. I set a wider stop than I wanted to (because there was quite a bit of chop) and hovered like a helicopter parent over the trade. As soon as I could move the stop to breakeven, I did so.
By Friday morning I was pretty sure I was wrong even though the trade was in profit. There's a certain type of behavior that goes on in prices before news announcements that I find is often predictive of the news (no, I'm not going to describe it). I don't trade on news but I observe prices and if I'm in a trade, the behavior will often give me the confidence to stay in the trade (or get out). I didn't act on it in this case but I was ready to reverse if need be. However the price behavior did not predict the news (that unemployment had edged up) and Euro took off Friday morning in a typical kneejerk reaction. I took partial profits at +235 pips.
As of now, 9:54 AM EST, the trade is up 233 pips. It has been struggling since Friday with the 1.3450 resistance zone, reaching a high of 1.3439 Friday and not quite attaining it since. So there's a warning here but I've haven't yet done the analysis I need to do to determine if I'm ready to reverse. I still believe my original analysis is correct—that lower prices are in store and that this is a correction. As my trading moves to longer term trades (a process that seems to be gradually happening), I might ignore corrective moves such as this (although over 1.3450 I'd want to be out of any short positions—I'm not that long term a trader). But the reversal returned a nice, quick profit.
As an aside, the daily chart (not shown) shows Euro poking its head above the upward boundary of a downward sloping rectangle. The boundary is at 1.3344. So there's a resistance zone in place from here to 1.3450. Paying attention to this zone will be key in any decisions I make. Also, any decision making is placed within the context of the weekly chart which I blogged about yesterday. (And monthly which I also look at in trading decisions.)
A definite close above 1.3450 opens up potential resistance at 1.3656 and 1.3786. Support is at 1.3247, 1.3197, 1.3160 and 1.30.
I'm showing a 30-minute chart below—I made the reversal decision based on the hourly and 15-minute charts.
© Dianne Fecteau, 2010. 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.
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.