Market Review: 2011-05-09 22:36 ET
Before you move on, for those who are not familiar with my framework, signals, setups, or acronyms, please visit my discretionary day trading framework post.
As we can see from the chart above, the market didn’t hit my short orders at 1.4450 before the pair found resistance and fell after the surprise S&P rating downgrade of Greece (you can find stories of that event in the euro section of FreshPips.com). I decided to close my short orders soon after the drop, so no trade today.
So, a missed trade by less than 10 pips and it looks like I would have got my full 6:1 return-on-risk! Doh! Beside that, there was another opportunity for a counter trend trade as the pair bottomed out around the bottom DATR. A long trade there would have been good for about 80 pips back to the upside.
Overall, interesting day in the markets with surprise news sparking some good volatility. Like the saying goes, “Anything can and WILL happen in the markets,” and today was another example of why you always have to be prepared, focused, and flexible.
Trade Idea; 2011-05-09 3:57 ET
Good morning and welcome to a new week of trading! I thought I’d kick it off with a day trade setup forming on the downtrending EUR/USD. Is the bounce higher an opportunity to jump on last week’s weakness?
This trade idea is based on the euro’s weakness sparked by comments from Trichet’s outlook on interest rates last week. Basically, he left the phrase “strong vigilance” out of his statement and this sent traders in super sell mode. I imagine the strong move was also a function of profit taking (EUR/USD has been in a long rally since the beginning of the year after all) and risk aversion flows.
I feel the change in overall sentiment could stay in risk aversion mode in the short-term, and without any major events today I think the usual levels of interest may hold as support and resistance levels for the day.
In the chart above, we can see the pair is retracing higher and nearly testing today’s top DATR (1.4443) and minor psychological (MiPs) inflection level 1.4450. Stochastics are not only showing overbought conditions, but also divergence as we see higher “highs” in price and slightly lower “highs” in stochastics.
I plan to short at the MiPs level and my stop will be 1/4 of the daily ATR (160 pips). Again, no major events in the line up today so I feel I can be a little bit tighter with my stop. My profit will be just above the potential support area of PWL/PDL at 1.4330. Because it is a day trade with a tight stop, I will only risk 0.25%, but to maximize my potential gain, I will trail my stop and scale into my position if it goes my way every 40 pips.
With this trade structure, my potential return-on-risk is 6:1 or 1.50% of my account.