Observation, Generalization, Verification--Euro and other trades

I’m still short the Euro from the sell order that was triggered last Friday at 1.4712. I moved my stop to 100 pips profit if taken out. In addition, I this moment (10AM EST) took a third of my position off the table at 170 pips profit.

I wondered yesterday if I’d see another push up in the Euro. It hasn’t happened yet. One can see a few reasons for being short this pair. Some of them (from the three hour chart below) are:

1) It broke below an uptrend channel (on daily as well as the 3- hour)
2) There was prior divergence between the RSI and the upward movement in price
3) The 1.47 area was proving to be resistance
4) It broke below trough (1.4723) of a double top on the 3-hour chart
5) Long bearish candles were taking out small bullish candles

Some might argue a Head and Shoulder (H&S) pattern was forming on the three hour. If so, it’s a bit messy. More important is that it’s currently loitering just below the neckline. Until that’s definitively broken, there is no pattern. This is something new traders often forget. “Double top!” they’ll say, or “Head and Shoulders!” They correctly detect the beginnings of the pattern but don’t wait until it proves itself to be really that. Good observation of the possible but too much generalization and no verification. Trading is a matter of patience (forbearance, I wrote earlier this month).

But there is enough here to say, in short, a short. If it continues down and definitively breaks the upward channel on the weekly chart this could be the beginning of something big. Before one starts counting profits, though, note the three hour bullish divergence on the three hour chart. We’ll just have to continue watching. Here’s the three hour chart:

By the way, most will realize that as far as correlation goes this is a mirror of my long USD/CHF trade. I could have doubled up in either instead of trading them both. The important point, though, is that I realized this as I calculated position size for each trade.

Last week I wrote that I shorted the AUD/USD at .8738. It stopped yesterday at 20 pips profit. Talk about sideways movement. I shorted again at .8722. As soon as I finish writing this I’m going to analyze this again. This is how I spend my days as a trader. Analyzing and re-analyzing price movement from several different points of view. When I first started trading I heard many stories about how people would trade from the beach, grabbing 500 pips here or a thousand pips there. It hasn’t proven to be the reality for me. I have to work at this stuff.

The GBP/USD has had its fun with me, stopping me out yet again at break even. Talk about the need for more analysis. I’m also out of GBP/JPY.

None of the above is a trade recommendation. You have to develop your own ideas. I only hope to show some of the tools I use that can help you do so. Remember that trading involves substantial risk. Get written permission from Mommy before you attempt it but only if you and Mommy have a good financial cushion and are risking money you can afford to lose.

© 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.

Waiting for Entries

What will the Euro do this coming week? It doesn’t take much in the way of technical analysis to see that the pair is in an uptrend. Then there was the strong move up this past week—it started the week at 1.4295 and ended it at 1.4570 (the high for the week was 1.4635). Sentiment is bullish, judging by the news reports (see the word cloud from the last post). Even if you believe that this is a primary wave correction (Elliott wave speak), there’s little doubt, it seems, it could go higher, possibly up to 1.48 or so. But as I said in my last post it’s not moving right now. If you want to go long you’d have to wait for a reasonable entry point. So two questions:

1) If you were going to go long where is a reasonable entry point?
2) What do you do while you wait for it to get to that point? That’s the forbearance part I mentioned last time.

The first question is easy. Depending on your approach you can answer it a number of ways. I could use my 3 hour P&F chart I posted last time and hope for a retracement back to 1.4420/45. The pair closed Friday at 1.4570; its daily average true range (ATR) is 129. So that wouldn’t be such a stretch. Or I could use Fib levels, which would also bring me in at 1.4410/55. Finally, I could wait for something with more upside potential such as letting price come back to an uptrend line drawn from May which also coincides roughly with the 50 EMA on the daily chart. That would mean I’d enter around 1.4225/75. That would probably require waiting a few days at least. (Note that if I did take that approach, I’d want to carefully assess market conditions when it reached that point). Or I could wait for it to break out of some major resistance levels which would involve the highs in late 2008.

Why not just go long now if you think the Euro is bullish? Jessie Livermore answered it best when he wrote, “In a narrow market when prices are not getting anywhere to speak of but move within a narrow range, there is no sense trying to anticipate what the next big movement is going to be—up or down. The thing to do is to watch the market…and make up your mind that you will not take an interest until the price breaks through in either direction.” (Reminiscences of a Stock Operator, 1993)

Regardless of approach, what do you do while you’re waiting for your entry? If you think a market is going up you can fall into being fearful that you’ll lose out. This can make you jump in when the market is at a top. One answer is distraction. This can be as simple as putting on your headphones and listening to some music or doing the analysis on another pair. Or focus on how much you can lose if you’re wrong. Actually write down the numbers or plug them into Excel. Read them out loud to yourself. Traders often trade from the silence of their inner thoughts or with the babble of financial news in the background. Hearing your voice speak the results of an analysis, especially if it involves potential loss, can be effective in combating the urge to just put on a trade.

Relaxation anchoring is another technique. You do this by practicing progressive relaxation and then, when deeply relaxed, breathe in with the phrase, “I am relaxed,” and exhale with the phrase, “I am calm.” Each time you say the word “relaxed” squeeze your right thumb. If you practice this a few times it will only take squeezing your right thumb to bring on a more relaxed state during your normal activities. You can also anchor to a pleasant experience. I’ll include some audio links sometime in the future with both these approaches. Email me at dianne@feldyusa.com or post a comment with your email if you want to be on a list to receive them.

None of the above is a trade recommendation—in fact I’m short the Euro right now but that’s not a trade recommendation either.

© 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.