Using the Dollar Index to Short EUR/USD – Trade Closed

Trade Closed: 2011-7-07 2:31

EUR/USD 1-hour Chart

Thanks to the combination of risk aversion, the Portugal debt downgrade, and China’s rate hike, EUR/USD experienced a massive fall yesterday. I had initially shorted at 1.4450, but since the move was so strong, it made a lot of sense to add to my position (while moving my stop loss to keep my risk the same of course) at the break of 1.4400.

It took a couple of hours for my second position but price did eventually hit my profit target at 1.4300. Yay me!

First position (short from 1.4448): +148 pips / + 1.06%
Second position (short from 1.4380): +80 pips / +0.57%
Total Gain: +228 pips / 1.63%

Normally, I’d call it a week, especially with the ECB rate decision later and the NFP report tomorrow… but given how weak the euro has been, there could be one more be trade idea out there for me. I’ll continue to keep a close eye on price action, I don’t want to miss the next big move. I’ll keep ya guys posted!

Trade Idea: 2011-7-06 2:51

Good evening (or morning if you live in the East Coast like me) traders! Today, I’ve got a hot setup on EUR/USD! Check it out!

Fundamentally, I am bearish on the pair due to the overall level of risk aversion. Just a couple of hours ago, EUR/USD dropped like a rock on the news that Portugal’s credit rating was downgraded to “junk” status by Moody’s.

The non-farm payrolls report is also predicted to show an improvement from the previous week. From my research, I found out that the dollar reacts POSITIVELY to good employment data. This means that better-than-expected results cause EUR/USD to fall, while worse-than-expected figures lead to a sell-off.

What I am really wary about is the upcoming European Central Bank (ECB) interest rate decision. There is a possibility of a rate hike, which could lead to a EUR/USD rally. If that happens, I’ll be sure to watch price action closely to possibly close my position early.

Looking at the technical aspect of this trade, we see that the pair has pulled back to the 38.2% Fibonacci retracement level and a shooting star and a doji have materialized on the 1-hour timeframe. According to my candlestick cheat sheet, these two candles are usually taken as reversal signals.

EUR/USD 1-hour Chart

At first I was hesitant to pull the trigger because Stochastic still wasn’t in the overbought territory which could mean that perhaps the pair still has room to move higher. So I just placed a sell order at 1.4490 with my stop at 1.4520.

However, when I saw that the dollar index (more commonly referred to as the USDX) also formed a doji on the daily frame that was followed by a bullish candle, I decided to go ahead and sell EUR/USD right on the spot (1.4448). Check out the chart below!

U.S. Dollar Index Daily Chart

I know that USDX reflects the dollar’s strength and shares an inverse relationship with EUR/USD from the U.S. Dollar Index section of the School of Pipsology. The reversal signal was enough reason for me to take the risk of jumping in at market.

Here’s how I plan to earn some shopping money (not really, all my winnings go to increasing my trading capital!) with this trade:

I sold EUR/USD at market (1.4448) and I have another sell order at 1.4490. I risked 0.5% on EACH position. My stop for both positions is above the 1.4500 major psychological handle at 1.4520. I didn’t enter any profit target yet because I’m planning to add as I go.

I’ve been getting a lot of tweets from some of you that are also bearish on the pair. I would appreciate it if you let me know how you plan to make some dough on EUR/USD. So hit me up on Twitter (@Loonieadventure), Facebook, or write your thoughts in the comment box below!

  • Ilya Gruntal

    Hello, Loonie Noob :P
    You’re absolutely amazingly correct about shorting this pair, I’m shorting it since Monday! Yes, Monday! And i’m looking to get 3000+ pips out of this trade, also adding to my position while we’re going down.

    I’ll show you the picture of what is actually happening on Days! That’s strange nobody could actually post it.

    That’s the picture I saw on holidays while doing my stocks homework :)
    I’ve opened a forex account the very next day just to play this formation on dailies!

    Our short target will be reached at the end of this week: 1.4165.

    After that 2 variants:

    1) Any of the rating agencies will do something stupid and just-in-time again, or Greece goes default after all (we don’t want that, or do we?!) and we break this triangle and rally down even more.
    2) We bounce off that triangle to the high edge, the news will be great and we rally even higher than before!

    Loonie, your avatar pic is very pretty and i love it :)
    See ya soon!

    • Ilya Gruntal

      Let me please also share Andrew’s pitchfork image i’ve managed to build on tuesday night, it seems to be working perfectly.

      • huck

        I’m not a fan of Andrew’s pitchfork, but I’m glad we came up with the same analysis. Adding positions to a winning trade (while moving stop of course!) is one of the best strategies I think! Let’s see how low this pair goes and hope that the ECB decision and NFP report do botch our trade idea! Hah! <3

        • Ilya Gruntal

          Neither the fan am I, but that’s a great way to build up channels early before they even appear :)
          Thanks for your reply, Pip, no need for hope, the picture has never been so clear. Add up, moar pipz to cum!!! lulz.
          Cheers :)

  • Yq1hss

    Congrats……Hucklekiwi Pip, you’ve found a winner!!! I hope you exit just as well as you entered ;-)))

    Kind Regards
    Another Yousef (spelt differently)

    • huck

      You are absolutely correct… I can’t count anymore how many winning trades that turned to losers cause of a bad exit plan…

  • Dingalo

    Phew, I need to start following your blog and tweetz as i’m always on the loosing side these days.. :(

  • Martinius

    Hey there Huk! Where do you get the USDX data feed from? Does it come with your broker?

    • huck

      It comes from my charting software, XTICK. :)

  • Dean FX Paul

    I’m not in EUR/USD right now due to uncertainty.. however I’m short EUR/CHF.. hence short EUR. Good luck with this!

  • Joshua Pearce Gibson

    “Aside from a customer at the coffee shop telling me that I looked different in a very good way (his words, not mine!)”
    Huck is a barista??

    • huck

      That’s my day job… :)

  • Rana

    Hey seems like your making some good pips,

    however i remain bullish on the currency for the time being, and there is bullish divergence on the 4 hour chart, plus daily trend is still bullish. 

    I see your reason for choosing the dollar index as a rationale to this trade but, the COT report suggests that a deffinete extreme is forming as hedgers buying to the max and speculators selling to the max with a good deviation.

    However i wish you the best of luck and i hope you prove me wrong. Happy Pips.

    Yousuf.

    • huck

      Thank you Rana. I appreciate it.