Today is a tricky day for most traders as the European session started off bullish with favorable German Factory Order News but only sees it wiped out in the New York Session. After the bullish session, the market dipped before initial jobless claims report in the US before heading up for a while. These events are captured in the chart above as reference.
Selling Pressure too strong:
Following up from the published article, it is presuming that market is respecting the resistance level of 1.3120 and the growth problem in the Euro Zone. Looking at the violent sell off, it sure points this pair for a good down trend now.
Recognising the strong momentum downward, it is prudent not to predict a turn at this moment, hold your buys and get ready your sells. Once again selling at uptick will most likely make your trading session a fulfilling one.
If the Europe and US traders remembered a thing yesterday, that is they had shorted the EUR/USD. Despite months of bullish run for the Euro dollar, there were real signs of the uptrend dying. These were none other than the major resistance at 1.3120 and poor fundamentals from the Euro Zone, it is no doubt they are ringing the bell of traders. A probable fall is targeted in the 1.278 region as seen in the chart above where recent prices have buoyant off.
The whole Europe and USA sessions (in light blue rectangles) are filled with the reigning sellers. The next 2 dark blue boxes (Sydney and Tokyo Sessions) also reflected the negative sentiment of the Euro Dollar. I remembered the days when positive initial jobless claims were released, Asian session will always acknowledge it by their bullish buys. Apparently, they seem to be expecting negative surprise and this is no doubt with the disappointment from ADP nonfarm employment last afternoon.
The signs from all 3 sessions are pointing this pair down, buying at an up move may be a prudent choice to do in todays session.
The Euros has rallied strongly against the Greenback during yesterday’s session and see it heading back to the 1.2400 level. Putting our attention on this level, we will notice the strong selling interests of the market players as highlighted in the 3 rectangles. Buying it up, could means tighter stop losses to accommodate for the limited reward if the Euros rallied further. Assuming we are lucky enough to see it head to 1.2440, we would gain a good 90 pips. What are the risks here? You can take advantage of yesterday rally that is still fresh in the minds of others and set stop loss near buying interest level. 1.2326 denoted by the green horizontal line. A 30 pips risk and that’s how much we want to risk, anything more would be risky and against the principle of keeping losses small.
3 particular bullish candlesticks circled in the chart above were evidenced in the possibly of a strong rally. Selling it now would not be a prudent choice as we are ignoring the fact that there is a high possibility of market heading up. Nonetheless, a possible break at 1.2250 may build up momentum downwards. Following the article: EUR/USD August 16 2012: Eyeing on a Break of 1.2250, I am not supportive for this uptrend, as I would still prefer to sell it after this rally has reached its perceived high. However, noting of this bullish behaviour in the market at least in the short run does open to buying opportunities with tight risk to make this whole venture worthwhile.
If you have been following the article EUR/USD: August 14 2012, Rally Sustainable? For the Short Term, you would have been reminded of the fact that 1.2390/1.2400 remains the key resistant level for the past few days. 1.2260 remains the buying level of the day as EUR/USD was pushed back up to 1.2280 levels at the point of writing showing a long lower shadow in the last candlestick. If price head lower than 1.2250, this will put short term trend back to the selling side.
Using the 200Moving Average as a Gauge, this will tell us that we should stick by the short side and sell at rally. If price is clearly below the moving average and short term rally presents opportunity to enter, do so considering to your risk management plan. Stubbornness to stick to selling and ignoring flesh news is a discipline approach to drive out emotions off trading as we based on the results it was able to achieve in the past. While past results are not representative of the future, reacting to fresh news and the short term up and down is a worst approach. Relying on a systematic way will guide you in participating in the EUR/USD downtrend and tells you that picking bottom is not easy tasks and costly in terms of time, effort and money if whipsawed as we seen how the pairs rallied and died with a downtrend. Time, effort and money are what institutional traders have but not the retail traders. Thus, sticking to the 200Moving Average systematically and a Long Term outlook will be the playing field. Attached below is a strategy executed with 200Moving Average along with privately owned code to conduct over a period of 6 years to derive the following stats. It is able to derive a decide profit factor of 1.84
This rally is just not sustainable for the long run and the peak around August 7 presents opportunity to go short. Chronic problems are still not solved, bond purchases calms investors but increase government debt. Isn’t this what’s the crisis is about ?
In the article EUR/USD 10 August 2012: Room for Decline: We concluded very closely that 1.2240 was where a possible buying level and 1.2390/1.2400 remains the key resistant level. This 1.2240 level is in fact the turning point of a rally on Monday that pushes it out of the downtrend line drawn based on recent articles. In the first chart above, the red rectangle box shows a bullish shape but with some resistance met probably by those shorting the rally and respecting the down trend. The last 3 green candle sticks suggest buying demand up with long bottom shadow followed by 2 bearish candlesticks.
The next few hours will trade thin and represent a good chance to hop the rally for a 100 pips a proximity. A tight stop loss is viable at this point as the 3 green candle sticks that suggest buying demand is where people could be referencing. If things turn around which is highly probable due to the intermediate downtrend, 1.2240 is again where we are looking at since market reversed at that level.
The EUR/USD has fallen pretty much today and probability has sided to the conclusion of articles lately to short at rallies. As mentioned in the article EUR/USD 9 August 2012: Take Cue From London Session Today 1.2390 remained as our resistant level as the EUR/USD plummeted through London and New York Sessions.
More Room for Decline
The last candlestick- a prominent seller dominant signal may indicate further decline of this pair. A viable support level can be seen on 03 August 2012, 1.2240 level where strong buy interests were spotted after a retracement from the uptrend. Do expect a period of drifting in price from the point of writing till the London open the next day as price has fallen relative fast and deviated strongly from the downtrend line drawn.
In the past, when US experiences bullish news, all major pairs would rise against the greenback. This time round, it is just the opposite! People are refusing to buy the Euro dollar for a good reason may suggest short term trend to point downwards and go in line with its intermediate trend.
Conclusion just felt stronger today as the Euros fell and is in line with my consistent view of the intermediate downtrend.
The EUR/USD has fallen pretty much from an obvious “3 peaks” in the 1 hour chart attached above. It bottomed at 1.2323 before rebounding up during the US afternoon session. The existing “retracement” seems more than just short term traders covering short as it steadied up on a quiet afternoon and Sydney open to signal a level of optimism.
The 1.2394 is a reference point for the price level when a strong bearish candlestick closed down signalling selling interests. This particular candlestick happens around 2 hours after the London open and sure show an obvious bearish behaviour. We can expect that to be a level of resistance for price to head up as of now. Breaking that level may put the 3 peaks at the spot light again, whether it will break higher today lies in the mood of the London Session.
What you could do, really
In the article, EUR/USD August 7: When Rules Supersede Reality, it continued to be my intermediate term view point to short rallies. In all cases, predicting can be a too upheaval tasks for institutional traders let alone the retail trader. Relying on simple signals for prominent confirmation along with money management rules to help you ride through the probability of up and down. Often after a trend, market just goes wildly up and down as good news pour in faster than bad news. This is a period when uptrend just can’t be ascertained at least when price hit a prominent level first. Be willing to short and stick to the main trend (200MA) but take care of your risks position.
EUR/USD Daily Chart Red Line representing 200Moving Average, Blue Line representing 100Moving Average
All forms of technical or fundamental entry-exit strategies has to be accompanied by good win amount and high opportunity in order for us to drive out emotions in trading and be confident in what we are doing. It is definitely dangerous to pick up a few nice technical tools and start evaluating the situation. Yes, they do tell you the current market state, but the confidence to make decision is just not there. For example, How do I know whether it work out this time round? It has to be time tested. It is all about probability and having a system that works with the probability is essential in giving us confidence and direction in the market without emotions of the ups and downs.
Using a trend following system to assess today’s EUR/USD Market:
Equity Curve- Starting with $10,000 Dollars trading $100,000 Lot Size
This system enters based on 200Moving Average (MA) and exit based on 100 Moving Average (MA). Initial entry is based on price moving above/under of 200MA and exit when price moved under (buy)/above (sell) of 100 MA. Trades were given 800 Pips profit limit, 250 stop loss and 400 trailing stop to perform. Over a period of 7 years, 200 + trades were executed giving a profit factor of 1.39 (return for every $1 risked)
To conclude this article, in terms of systematic trading, market is still pointing down for the trend following system and all exits should point to around 1.2600.
On the same day of the 2nd article quoted, the pair rallied to the high of 1.2400 only to see it crashing back down to 1.2150 level. This particular event is highlighted by the red box in Figure 1. I would consider this as a major turnaround in the short term bullish trend and may see it now in line with long term down trend. This event really shows how faint hearted were the traders as they swung themselves around the actions of ECB and Federal Reserves. This lack of belief on positive long term fundamental about the Eurozone was the brake to the uptrend.
Momentum can be expected to possibly point Euro dollar down again after this week of disappointment. The area around 1.200 is the possible target point for the downtrend halt, 24 July 2012 low.
A month has past and picking bottoms has proved again to be the most difficult task to perform in the financial market. Forces of optimism that rallied the pair are almost accompanied by forces of pessimism of the same aptitude that push this pair down again the past 1 month for the EUR/USD. While the battle of buyers and sellers emerged, the Contrarian proves to be profitable during this time period. 5 Instances within this month have left momentum traders in painful situations.
Wary of Breakout Traps?
Traps after Traps happened at support and resistance levels as price exceed the level and immediately shown great strength in the opposite direction.
The days of momentum trading is over for now
The highlighted red box is a wary zone for the buyers and clearly a no trading zone. We look around the high of 1.2700 or at least when price is well above the 200MA before affirming a bullish strength. Expect more contrary actions to come and basing stops at technical level could be a bad move ahead.
The EUR/USD had stepped into a zone of confusion for short term traders as price whipsawed around. 25 to 27 July mark the biggest gain for Euro before coming to an absolute halt for the pair on 27 July. Shaded in the white eclipse was the reversal point as doubts about Euro zone recovery ignited even when ECB President, Draghi promised to drive down interests yield of debt securities through asset purchasing. Price dropped to the low highlighted by the second blue shaded rectangle from the right before showing strong buying interests, where price later hit the high of 1.2330 level yesterday.
The bullish hammer
Through the noon to evening session of New York was a bearish session for the EUR/USD. Around 1.2280, a bullish hammer (Buying interests) was formed, highlighted by the first blue shaded rectangle from the right of this chart. This buying interest was formed at a higher price level compared to the first mentioned shaded rectangle. Price may anticipate Fed Chairman today for some good news ahead and could expect the EUR to jump higher versus yesterday high.
Bullishness is only a short term outlook
The high seen on 27 July could just be possible today. Unless on the ground of short term trading decision, long term trades should still be pointing down, eyeing on today rise as a chance to sell for a good reward versus risks decision. It can be highly emotional and costly to trade during this time period as confusion arises and could just tip over your emotions.
As mentioned in article, EUR/USD: 27 July 2012 Why 5 Days High Could Matters today the situation has not changed much except an extreme euphoria that led this pair to go up as high as 1.2380 before the balloon popped and seeing it head back to 1.2276 at the point of writing. Just yesterday, price went to the low of 1.2225 yesterday and buying interests rallied to 1.2380 during London’s open today. Just 1 hour after the open, a fresh of sellers flood the market causing this pair to retreat 30pips down. Breaking the 1.2300 level may see this pair hit the high of 27 July again.
Throughout the past few months, price gain from stimulus news always went crushing with poor fundamentals. Will this time be any different? We really need to see results- definitely not in the near term as fundamentals are just not convincingly surprising the upside enough.
A trend following system trader will still probably stand firmly by the selling side and all these good news about EUR/USD turning bullish is just a great piece of news to them- to add on their position on a pull back over a medium term outlook. The downtrend for the Euro thus far has not shown great strength for everyone to believe the worst is over thus any upward movement now could be just delusional.
Figure 1.1 EUR/USD 4hours time frame- Courtesy from OANDA
As mentioned in the article “ Get Ready for the Pullback on EURUSD: 26 July Update” Traders may look 1.2250 levels at 5 days high price level to enter a short (sell) position. This seems to be happening as shown in Figure 1.1, the highlighted area showing 2 bearish (seller dominant) candlesticks. The 2nd candlestick from the right shown in the blue shaded rectangle experienced a high of 1.2314 and a low of 1.2273. As of 27 July 2012, 1hour after the London Open, Price was seen flirting in the level of 1.2250.
Enter at 5 days high
A strategy that enters when price moved in opposite direction of a main trend (or counter trend) to reach 5 days high or low can be rather lucrative to trade. Shown below is a simulation result on equity growth did from 2005.04.27 till 2011.02.10 that triggered over 90 trades. Equity growth is dependent on entry/exit and not solely on the strategy, thus the below results only serve as a reference. Short Positions won% was 47.06% and Long Positions won% was 56.90%.
Yesterday presented the pullback to hit the criteria for my entry, and certainly look forward to see probability works in my favour. The 5 days high reached by the EUR/USD yesterday may just be the best opportunity to ride the trend!
Get Ready for the Pullback on EURUSD: 26 July Update
Fig 1 EUR/USD Daily Price Data- A Courtesy from Oanda
Attached above is the price information of EUR/USD in daily timeframe. Price bottomed 1.2066 on the 23rd July 2012. Currently, it is experiencing pull back to the level around 1.2127. Traders may look 1.2250 levels a 5 days high price level to enter a short (sell) position. As long as price is below 200 days average, we look solely at the possibility of shorting and ignore any upwards correction in price.
Fig 2 EUR/USD Hourly Price Data- A Courtesy from Oanda
The 3rd bar from the right of Fig 2 was formed by the pessimism during London Open. Price at the point of writing fluctuates above the level of 1.2111 where buying interest was seen yesterday. 1.2170 serves as a level that interests sellers to come in and partial position can be entered at this level and subsequently adding the next portion if price reaches the 5 days high.
Fig 3 EUR/USD 30mins Price Data- A Courtesy from Oanda
Figure 3 is a focus into intraday price movement. Price has shown a strong correction as circled in the white eclipse and just seems to offer the opportunity to enter a short position. Wait and get ready for the correction!
At the point of writing, German 10Yrs Bond stood at 1.381 while Italy and Spain both Averaged at 6.459 to derive a difference between the German yield of 5.078. Shown in the scattered diagram is a diagonal line drawn that tries to fit itself best between the fear indicator and the EUR/USD closing rate. Call the line the best friend of both Fear Indicator and EUR/USD. This line (their best friend) showed us the general relationship between the 2 variables, which is a inverse relationship. This line also has a simple linear equation that tries to summaries the relationship between the Fear Indicator and the EUR/USD.
Y being the EUR/USD and x being the value of fear indicator. Seems like we can find out EUR/USD rate using the value of fear indicator right? Not so simple! This is just a simplified equation that explains the relationship and should only be used as a guidance. In fact you see a R squared= 0.5363? It means that only 53.63 of changes in EUR/USD is explained by the fear indicator!
Based at the point of writing, the fear indicator is 5.078 so the equation suggests that EUR/USD should be somewhere near…? 1.2558 (about there) which is not true as price already went down to 1.2370. Then does it suggest price will go up to that level? No one knows, what we know is EUR/USD is below is 30 Moving Average and certainly pointing it Midterm trend down. If we give it a little faith, we can expect EUR/USD to head up again and that’s where shorting opportunities come in to join our mid term trend. In the very few days, EUR/USD may just move up abit.
The stare down is happening again and we are expecting the bear to do so once again like how they did it when the bulls entered thrice to the area around 1.2660-1.2700. This could potentially be the last up rally if the Euros did not break the highs seen on 17 and 19 June as it now seems like it is not as strong as it was on that both days forming a “double head and shoulder”” -Quoted from article, EURUSD The Bears Territory ”
We may see this pair head even lower than the low seen on 29 May 2012 after the formation of this pattern (failure to move higher 4 times). Price is now below its 30 days moving average and broke major resistance of 1.2430 levels as suggested in the article: EUR/USD History and Tales of Price Suggest Room to Decline. Such big move seen today was the reaction of market to interests’ rate reduction. It was expected from tell tales sign in prices as explained in these 2 articles.
There should be no reason why one should go long at this moment. If you had shorted this pair, stay short and let your profit run, do not let greed take over you to cover short.
I am sharing with you my personal fear index which I use to trade the EUR/USD. The Chart above was formed using excel with the blue line representing the “amount of fear in the market” and the Red line representing the EUR/USD Closing. We can clearly see the inverse relationship even without me working out the equations for you.
What is the value of fear derived from? From the difference of (Italy + Spain 10Yr Bond Closing Yield) – German 10Yrs Bond Closing Yield. The bond market is the core of the financial markets as everything else will be priced based on the bond conditions. If bond yield rises, it simply signify deteriorating economic conditions or even raising inflation (heighten interests rate to slow down economic activities and thus inflation). Now you see how important are bond yields indicating about our economy! When Bond Yield rises, it could also be due to Stella stock market performance which leads to lesser demand for bond and thus yield raised to compensate for the decrease in price of bond. In the Case of Euro, the latter case is definitely not true. Only the first case fits the Euro Conditions now which is deteriorating economic conditions.
Taking a break from technical analysis and move across 2 markets offers you inter market analysis which will give you more confidence in executing your trade. How it can help you?
As you see from the value of fear, it clears show no sign of drastic dropping and that means we can expect Euro to be down at the meantime. After this confirmation, now you can whip out your technical tools to analyze a good entry point to enter.
You can build your own personal fear gauge and it will guide you confidently in your trading! The validity of this gauge is developed last year when the debt crisis went back into the spotlight in the financial market. If you feel that the debt crisis will not come to an end so soon, then you can trust this gauge to perform for you.
1 week ago, I missed to publish an article about the EURO/USD on the significance of 1.2430 levels. Here I am extracting it for your reference
EURUSD- 1.2436 deserves our attention and why
Just a moment
Before you think you should jump into this trade, we could focus our attention to the 1.2436 level. In the first occation back in 4th June, price went below that level and bounce back up, but that was nothing unusual since good news of stimulus has been pouring into the market by the US Federal Reserve. The second rectangle highlighted has a strange psychology, first price dropped all the way to the 1.2436 level and then bounce back up 60pips to close at the upside. On the 7th and 11 June, Market once again test this level after failure to move higher, convincing enough the market respected this level and went to the high of 1.2700 area to form a double top before moving down again. Somewhere around 24th June when market is at a downtrend now, highlighted in the 2nd last rectangle, the market shown a strange psychology of counter trend behaviour when price met at the 1.4366 region.
In fact the area between the 2nd last and last rectangle deserve a rectangle shaded as the long down candlestick was immediately reversed with another long up candlestick at the level.
A few hours later…
A few hours later after the writing Price zoom back up from that level to the highs of 1.2600
As far as forecasting or predicting the future is concerned, I always try to keep them to the minimal. We know it is never right except how close is it. The EUR/USD topped twice once on 17 and another time on 19 June in the area of 1.2700. On the 29 June it rallied just close to the area.
Entering the Bears (Euros sellers) Territory
The long upper shadow of the candlesticks always signify price has entered the bears’ territory as they are more than interested to halt the rally by selling at the highs of the rally. Sooner or later, the top of a rally will see declining strength and price dropped to form a declining triangle shape. Then it is a period of stare down between the Bulls (Euros buyers) and Bears. Who will take the first offensive move?
On the 21st June, the bear took the move and see price drop all the way to 1.2400.
The stare down again
The stare down is happening again and we are expecting the bear to do so once again like how they did it when the bulls entered thrice to the area around 1.2660-1.2700. This could potentially be the last up rally if the Euros did not break the highs seen on 17 and 19 June as it now seems like it is not as strong as it was on that both days forming a “double head and shoulder”
Risks/ Reward favours the short
The risks and reward simply favours the short at the moment if we assume the defensive territories of the bear and bull. We can expect the bears to chase back the bulls to the low of 1.2442 area if they were to fight back. Even if the bulls can penetrate even deeper, unless supported by new surge of positive news from the economy they will not forget about their last attempts (2 tops) and most likely back off .
This is a typical case when people simply hear the bad fundamentals about Euro zone and immediately wanting to short the EUR and Long the USD. Even if you are right 5 months down the road, it is still not a prudent move. As mentioned in the article, EURUSD has met its support at 1.2436 areas, and it is not expected of the trader to long it or short it. Ignoring it is like ignoring the tactical advantage that is presented to you.
Important Lesson 1:Not being in a position is as good as taking up a position.
The graph supplied above is just a few hours after the writing of that article. Look how berserk price reacted as highlighted in the blue rectangle even when no major economic news. Can we say price reacted to the support level? I don’t know as I don’t hold a crystal ball. If you were to short it at that point you could face a 150 pips movement against you as highlighted.
Important Lesson 2: Clues in price provides the best news not news from other sources.
If you were to visit some news site and look at the asset price, they are more than happy to tell you what had happened. But, “What had happened” is no longer useful to you, price has already dropped or went up. In fact, in the chart selected below when price ranged from 0310- 1010 time frame, there are 3 news releases all stating the past when the sudden spike in price is not mentioned in their 3 reports. You can be sure, there will be a news right after this strange big moment in EUR/USD , again price and not news from other sources is the best news to you. Give this article a read: The Frequent Misconception of Price That Disillusioned Investors
A chart from the courtesy of Forexpros.com
Important Lesson 3: Technical and Fundamental Analysis is not a crystal ball
Even when you have identified a support level as per mentioned in the previous article, they only provides you with higher probability, not a sure thing. No one predicted this big spike just perhaps minor correction. The future is as uncertain as whether there are Aliens around us. Even with crying reports of high unemployment in the Europe and everyone is negative about its outlook and tells you that Euro is heading down to 1.150, you should listen to it with caution and apply Lesson 4.
Important Lesson 4: Technical and Fundamental Analysis is just a tool that can be used at your own risks
It enhances your educated guess but don’t buy you reality. Always be confident in your trading system by measuring their success rate, loss rate and profitability if you plan to include these beautiful concepts that make you seems like an analyst. Whatever systems you have come out, use them at your own risks.
Important Lesson 5: Position sizing is the key to reducing risks and preserving your capital
It is important to know how Forex fits into your portfolio. If this is your only investment (hopefully not!) then there is no way to hedge another assets that you possibly own and thus you are taking up the additional risks rather than diversifying the risks that comes along with your money when it is invested in the market by cherry picking on a specific currency to go the direction you guessed. The only way to reduce the impact of uncertainty is by reducing your trade size. This will minimize your possible losses/winnings that will preserve your capital.
Important Lesson 6: Why is capital preservation so important in investment?
Case A is a scenario of chasing small returns through betting small with 1.66% return per year. Case B is a scenario of chasing big returns through aggressive bet size with 20% return per year.
As you can see, a particular system may give you high positive and negative returns are not good for your capital as it failed to preserve it. Some people double their bet size after a loss and this is really not recommended. A loss will require a higher % return than the % loss to breakeven as you can see from Case B.
Returns -1st Year -2nd Year -3rd Year
15% -30% 20%
70% -80% 70%
1st Yr Hypothetical Capital
2nd Yr Hypothetical Capital
3rd Yr Hypothetical Capital
Important Lesson 7: Forex is highly volatile, risky and unpredictable but you can minimize its negative impact.
By adopting Lesson 5! We have seen in the above case of EUR/USD big spike which a retail trader cannot explain but to only face the fact that it did increase. We can minimize the impact of cherry picking a currency by betting small and enjoy Case A (a lower average return yet a winner to Case B).