EURUSD—For now, up

I wrote yesterday that, although I was holding a short, if RSI started climbing out of oversold and a bullish candle formed on the hourly chart, I’d consider a long. As I explained, there didn’t seem to be a strong direction but the Euro was resisting falling with momentum holding its own on the daily chart. Thus, if momentum on the short-term chart fell into line with that on the longer term chart, I’d want to be in that direction. This is exactly what happened on the hourly chart.

Euro dropped to a low of 1.4808, just below the support level it’s been holding on prior drops. The fact that it dipped just below is telling, though. It might drop lower the next time down. Regardless, the hourly candle closed at 1.4829 with RSI oversold at 20.90. I stayed in my short because I had no other clues to work from. The next candle closed at 1.4846 with RSI staying oversold but rising to 28.57. To say the pair had my attention is understating the case. Then, the third candle closed at 1.4856 and RSI was out of oversold at 32.74. This was what I was watching for. Clearly, the drop was over for now. I closed my short at 1.4854 (profit of 107 pips) and bought at 1.4864. Obviously, I’m profit stopped at this time since it climbed from there.

Let’s see where it goes. The place where it tops out this time should be informative. I will be ready to short again because the overall direction is unclear. Might as well grab some pips where they are. Here’s the hourly chart:


© 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.

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.

Thursday morning trades, canoodling with EW Theory, and other thoughts

GBPUSD

Yesterday's short trade is still on. I took a third off the table earlier and have my stop at plus 60 pips. I may move it again soon. I also took another short position earlier this morning and have the stop at breakeven. Note on the three hour chart below how RSI respected its Fib levels. The horizontal orange lines are why I said yesterday I wanted to short around 1.6150. I explained yesterday that I shorted under that because of price behavior. The thing to watch now, in my mind, is how the pair begins to behave as it nears the short uptrend line. Here’s the 3-hour chart but I’ll be watching shorter time frames.
USDCHF

My short was obviously taken out yesterday morning at profit. I entered long on the pullback where it continues to do well. But it’s nearing the top of that channel I’ve shown on prior charts so I need to assess this.

EURUSD

I got in and out of a quick short yesterday. I’m carefully analyzing the recent price activity. My “belief” is that the pair is headed down but you know how beliefs can blind you to what’s really happening? A good price analysis will tell the story.

AUDUSD

Yesterday I wrote that I was out of the Ozzie until I could form a clearer picture. I hypothesized that perhaps we could be in some sort of B wave (Elliott wave speak for corrective waves that are often choppy and difficult to decipher).

I’m not a big fan of the Elliott Wave Theory (EWT) for actual trading because it’s difficult to use it for trades by itself (although I know some people do and more power to them if it is profitable for them). I do, though, count waves. I do spend oodles of time canoodling with my Elliott Wave Principle book (Frost and Prechter).

Why does EWT appear so difficult? Why is it that there are so many interpretations? One reason is that while there are several rules—and these are inviolate—there are many more guidelines. These are just that—guidelines. The guidelines lead to arguments among EWT practitioners. Another reason is that many so-called EWT practitioners don’t seem to have memorized the rules and say things that simply aren’t true. A third reason, as I’ve mentioned before, is that the corrections are devilishly difficult to identify until well after the fact as to what they are and what they mean. While they’re in process they can lead to some strong arguments among practitioners.

Arguing over interpretations of anything on the charts is a valid activity. After all, if one person or theory held the absolute answer then that would be the fountain of youth, Eldorado, and the lost city of Atlantis rolled into one. Wouldn’t all who practiced that theory be lucky? But people that hold strongly to any given theory get extreme in their arguments, often using emotion where reason fails. So you hear such phrases as “I have this on absolute authority from a close relative of Elliott himself who verified it had never been written down and therefore I’m right and you’re not and you’re also stupid.”

Where I find EWT most useful is in gauging market psychology. It supplements my other analysis. I won’t necessarily act on a wave count that seems to be present if it goes against other factors I consider more important.

Briefly, since I don’t have the time to write a treatise on the topic, certain waves are technically strong and have real oomph. Others are not strong at all. Often, such as the B wave I mentioned as a possibility yesterday, they exhibit divergences, non-confirmations and the like.

Getting back to the AUDUSD, I studied charts dating back 30 years yesterday, in an attempt to clear up my confusion over what the pair was doing. I can make a case for three alternative wave counts based on the monthly chart. This is not helpful. One can’t trade this. But it’s a good exercise to write down the reasons for each. Briefly, though, my favored wave count is that we’re in a primary wave two correction (wave one being the steep drop from July, 2008). If this is true then it could retrace most or all of wave one. So it can’t exceed .9851. Since its high yesterday was .8860, this isn’t helpful, either. At least not to me, a small trader, who is not going to buy now, damn the torpedoes, and put a stop quite a distance away. I can make a good case for why I should have gone long at .8590 and stayed in. Had I done that I wouldn’t be doing all this work right now. I didn’t buy but should have doesn’t cut it in trading. Or anywhere else.

So I need to work on a smaller chart, right? Yes. But before leaving the monthly chart I drew an uptrend line from the lows earlier in the decade and it is coming in right about where the pair traded yesterday. Sometimes these old trend lines, once violated, serve as resistance. If I draw a horizontal line back in time to the early 80s on the monthly chart, I also see this is an interesting area known as polarity. Price has roughly used it for support and resistance.

Is it worth a short then? Well this would tie in with my belief we might be in a B wave correction. But there’s a bit of cognitive dissonance here. I’ve been calculating resistance ever since the secondary low in November, 2008. At each key resistance level I dutifully lightened or closed my longs, only to have to find a way to get back in. I’ve been trying to go long since the beginning of September and had some decent trades, e.g. one at 90 pips, but, for the last couple of weeks, have only found short setups where I’ve made small amounts of pips or taken small losses. (I’m not trashing 20 pip profits—they can add up—but one hopes for better than that, usually).

Here’s my opinion. It’s in an uptrend although it seems to be struggling with robust, sustained up moves. It’s at a resistance level that held once, yesterday. I may short it if it reaches .8860 again, depending on the behavior on the charts. Or I may go long if I can find behavior to support that position. That’s the best I can do at this point. Wait and see.

None of the above are trade recommendations. Remember that trading involves substantial risk.

© 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.

Could the report of its demise...? (USD/CHF 9/29)

Anyone following my dance with the USD/CHF knows it stopped out Monday morning with the measly 20 pips profit. This can be frustrating. It may be a sign of what I’m really doing here which is trading against the trend. The pips just aren’t there; it’s a correction. It can also be the mark of a trend petering out—remember that bottoming (and topping) is a process and not a one day event (usually).

I say it could be contra-trend because although shorter time frames are showing an uptrend, the overall daily and weekly chart show a downtrend. However I was true to my word that I would buy if it touched its hourly uptrend line. That happened yesterday at 1.0288.

This pair is in an upward channel right now. The Elliott Wave theorists can refrain from bombarding me with how this is a correction. The cycle hunters can back off as well. I will disregard the skepticism about the USD; I will disregard the remarks of everyone from World Bank president Zoellick to Chinese central bank governor, Zhou Xiaochuan, to Uncle Tad (I mean the United Nations Conference on Trade and Development aka UNCTAD. I will also disregard optimism. I will not, to paraphrase Mark Twain, ask if the reports of the USD demise are greatly exaggerated. Well, I can ask it. But I'm not going to trade on it.

As a trader, I read the market. I ask, “Can I make a case for a trade here?” If I can, there’s greater probability the trade will make money. There’s still probability for loss. Once I calculate the loss (that’s before I calculate profit) I know if I can place my trade in such a way that the risk won’t give rise to a throbbing pain in my stomach and anxiety that will have me hovering above the key board.

In the short term, I believe I can trade this pair. Here’s the hourly chart I’m working from: The pair is now up 98 pips as of 6:48 AM EST and my profit stop is guaranteeing me 20 of them. I’m getting ready to move my stop to take a bit more because it’s possible that the pair will hit its head on the upward line of its channel, say “Ouch!” and scoot back to its trend line. At which point I would buy again with my super tight stop. On and on the story goes. At least until it doesn’t.

Now look at the daily chart. Here you see a pronounced downtrend. You also see how laughably small this little uptick is in the overall scheme of things. Selling rallies in a downtrend is always the “safer” way to trade. I may do so at some point in this rally (although I'm hard-pressed to call this a rally. It's more evocative of a sputter). But for now, I’m going to wait to see.

None of the above is a trade recommendation. Remember that trading involves substantial risk.

© 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.

Thursday (9/24) trades

AUD/USD

I was stopped out of my Ozzie long yesterday. This morning, after studying the charts, I decided to short it. I know; I know. It sounds as though I’m waffling on this pair—mostly long but now short? What’s up with that?

Well here’s the thing. While the pair is in an overall uptrend, it’s waffling too. It had that lovely consolidation range (.8543 - .8676) from early September until last week when it broke out, pulled back, and broke out again. One premature or false breakout I’ll accept. Two and I begin to get suspicious. It’s back inside its range (a peek a moment ago showed .8627).

I decided to short because:

1) Two upper candle shadows reached .8788 and then fell back (This later became a double top because it broke below the lowest low between the two tops (in this case .8703) but I didn’t know that when I placed my short trade at .8738.) I was more concerned with the upper shadows that meant higher prices were being rejected.
2) The strong black candle that happened before the last little uptrend. This showed me selling pressure was coming in at that level so when price returned to that level I thought it might happen again.
3) The pair was stumbling at the same price it had stumbled at on the first breakout
4) There’s still negative divergence on the chart between price and RSI

Since then of course, there has been confirmation of the double top. A calculation of what the price objective could be based on that would be .8616. It reached that point so I lightened my short by a third to take some profit and moved my stop to a small profit stop. When it reached 100 pips profit I took another third off the table. If it definitively breaks the trend line from mid-September (it’s already broken the one from the beginning of the month), I suspect it will at least return to the bottom of its range. Maybe more. Last week I wrote that I believe the .8500 levels are significant and that the pair could have big moves in either direction it took itself to. I still believe that. Here’s the 3-hour chart (the little downward triangle is my short entry):

USD/CHF

When people pile on against the USD they really pile on. It’s been in a whale of a downtrend. I wrote last week that there had to be a dead cat bounce in there somewhere. This morning I took a long position which is currently up 75 pips but I’m not picking out any Prada’s with my profits just yet. The equity market needs to start dropping for me to feel comfortable this is going to run. Will it? Some people think so. Reasons I took the trade were:

1) The lower shadows showed the market was rejecting those lower prices
2) Positive divergence between price and RSI on the 3-hour chart
3) It took four candles to get to the low of the prior long white candle on the 3-hour chart
4) I was at a support point so I could go long with little risk

In addition, some other calculations I do suggest it might be bottoming. Bottoming is usually a process, though, and not an event. So this pair could stammer and stagger a while. Here’s the three hour chart:

OTHER TRADES

I went long USD/JPY this morning. I’m not going to go into all the reasons right now except that it’s obvious it was at support and I could enter with a small stop. I’ve moved my stop to a small profit. I also went long the GBP/JPY because it was at an obvious support. That trade has been slightly up or slightly down all day. I’m watching it. Remember it’s in an overall downtrend and it’s always safer to sell rallies. But we’ll see. As I’ve written before, one mustn’t get married to a point of view. That means I can reverse if I find evidence to do so.

None of the above is a trade recommendation of course. Remember that trading involves substantial risk.

© 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.

Friday thoughts and the Guppy

After struggling a bit with the chart yesterday I decided to stay short the Guppy trade. Mostly the reason was that when I looked at it from different time frames and different perspectives, e.g. changing compression on the charts, I still believed in my reasons for getting into it. The pair managed to overcome its initial shock at touching 149.61 and has gone slumming as low as 148.62 this morning. It’s now over a 100 pips profit. Obviously, I’ve now moved my stop to lock in at least 50 pips. But will I close out? It is Friday, after all, and I often close all positions at the end of the week.

Take a look at the three hour chart now. It’s finding some support at the 148.60 level. There’s also some positive divergence with price and RSI. Of course, divergence is all over many charts right now. It may climb back up a bit. I think there’s more downward potential. But it doesn’t really matter what I think. At this point I need to pull back, look at what has happened this week to date, and make some decisions. In any case, it is what they so quaintly call a “free trade.” I can only make money on it now despite what happens.
To be honest the week has been a little frustrating. This is because of the sideways movements that largely took place in the pairs I traded. You can make some steady profits in this kind of market (and take small losses if you manage your stops). But let’s face it. The really big profits come from trending moves—being in at the right time and staying with it. And not taking small profits. For me this usually means that if I get a free trade going I stay with it if my analysis shows there could be more to come. That doesn’t mean I won’t take partial profits at a point. I did so this morning with the Guppy at 118 pips. That is how I quiet the savage and greedy beast within that shouts, bellows, and roars to take profits, any profits. Three pips? Five? Oh my, it starts to get excited. 15? 20? Now it positively palpitates with anticipation. At 50 it starts the heavy ammo—old messages from the past having to do with each and every one of my many, many failures in trading. When that fails to move me it jumps to parental assaults on my self esteem.

For a couple of years it won. I tried everything—reading, courses, various mind/body techniques. All helped to some degree but what finally did it for me was simple awareness of the feeling. Letting myself feel it and moving on. Without touching the keyboard. Sounds simple but it was devilishly difficult. I’ll write some more about it in an upcoming post this weekend.

Nothing I write here in this blog is a trade recommendation. Do not act on it as though it were. I hope to only share some of my own decision making process and some thoughts on the psychology and philosophy of trading. Especially when it’s so easy to fall into the me David without a sling shot, they Goliath mindset. Well maybe the me David, they Goliath is reality. But there is always a sling shot.

© 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.

Will I get back in AUD/USD?

As I wrote in the last post, my profit target in the Ozzie was hit overnight. This morning the pair reached a high of .8729, a high not seen since the summer of 2008. Now I’m wondering how and when I can get back into the pair. I’ve posted the three hour chart below.

Remember that the consolidation range was.8543 to .8676. I pointed out in my post on Monday that false and premature breakouts are not uncommon with rectangles. One obvious strategy is to wait to see if the price goes back to .8676. I’d then go long with a tight stop. This approach requires watching the price action carefully at the time it approaches that price. Carefully, means I’d look for bullish signs before jumping in. Another entry point, assuming the breakout was premature, is to wait until it reaches the three-hour uptrend line which is also at the point of the 62 EMA. This is at .8587 now but of course that could change a bit by time price gets back to it.

There is bearish divergence between price and RSI right now. I need to watch that, too. Here’s the three hour chart:

As usual, I’ll just have to continue to study price action.

None of the above is a trade recommendation of course. Remember that trading involves substantial risk.

© 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.

AUD/USD

Last Thursday I went long the AUD/USD at .8586. I moved my stop Friday to .8596 and was taken out last night during the Asian session at that price. I just went long again at .8570 so I’m in at a slightly better price than the last trade. Had I not been mucking about with the Euro charts for so long or not gone for a cup of coffee I might have noticed when it hit the near bottom of the range but there you go.

One thing I won’t do in this blog is hypothesize about possible trades. Lots of people put out a lot of analysis that has nothing to do with whether or not they’re really trading. Jessie Livermore tells the story of a guy who was going to fight a dual the next day (Reminiscences of a Stock Operator, page 27).

His second asked him, “Are you a good shot?”
Well, said the dualist, “I can snap the stem of a wineglass at twenty paces,” and he looked modest.
“That’s all very well,” said the unimpressed second. “But can you snap the stem of the wineglass while the wineglass is pointing a loaded pistol straight at your heart?”

Like Jessie, I need to back my opinions with my money.

Looking at the three hour chart, there’s a range of .8543 to .8676. Another thing that struck me on the chart was the beautiful symmetry of the moves back in August. From there it moved out of its triangle and is currently in a consolidation range. It’s showing some symmetry here as well.

Notice that it’s well above the .618 retracement of the July to October ’08 move down. And, as I wrote last week, this .8500 area is significant historically, all the way back to the 1980s. My Gann calculations on different highs and lows also show the significance of this area. It has also cleared the .8524 high from back in September ‘08. Why do I consider that high significant? Because it was the last high before the egregious move down. So if it can get above its current range high of 8676 it might have some significant moves ahead. If it breaks below, it will also be significant.

With a trading range such as this, also known as a rectangle, box, or horizontal channel, the price must touch the support and resistance lines at least twice. Edwards and Magee, in their classic work Technical Analysis of Stock Trends, believed ranges were most often continuation patterns. It’s also worth noting that there are many false and premature breakouts (Encyclopedia of Chart Patterns, Bulkowski, 2000). Regardless, the pair will exit this range eventually. Even if you just trade support and resistance though, it’s a wide enough rectangle that you could pick up 70 to 100 pips with tight stops. However I’m hoping to not have that kind of trade because both the upside and downside on a breakout offers much more potential profit.

Another thing I like about the pair on this chart is that RSI isn’t falling too far on the reactions. That’s a bullish sign. I use RSI primarily for divergences and for such things as this and not usually for buy or sell signals depending on overbought or oversold levels. There is one concern here, though, in that the RSI is showing momentum is falling off so there is some divergence.

As usual, I’ll just have to continue to study price action. And of course I have a tight stop since I entered near the bottom of the range.

None of the above is a trade recommendation of course. Remember that trading involves substantial risk.

© 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.

EUR/USD Monday Morning

I'm still short the Euro but I did close out more than half of my position a little while ago. Take a look at the following 3 hour chart. It's still showing the weakness in the shorter time frame that I wrote about last week and some nice selling came in early in the Asian session last night. Then you see the hammer so the behavior of the current candle is going to determine whether the pair will continue to break down or whether it's going to pick up strength. Given the overall bullish sentiment and given the fact of triple witching this week (see my Sunday post), it's time to lighten up shorts for now. My stop is above the high this month of 1.4635 but I closed enough of my position that I will still be at slight profit on the trade as a whole if it takes out my stop.

The hourly chart also supports my decision to lighten up on my short. Although there is still weakness showing--the divergence between RSI and price and the breaking down through the upward trend line for both RSI and price, the market is slightly expanding rather than contracting. It will take a high above 1.4622 to maintain this expansion (and since high from last week is 1.4635 it would ideally close above that to show a continuing pattern of higher highs and higher lows). Why not take the paltry profit and get out completely at this point? Well, we're at a very interesting price level based on my Gann analysis on the numbers of extreme highs and lows and of the fib level 1.4623 from high of 1.6041 to low of 1.2329. So we'll just have to see and the only way to see is to watch the price action.

None of the above is a trade recommendation. It's only my musings. We all know that trading carries a substantial degree of risk.

© 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.

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.