EUR/USD Reversal at Last Week’s High

Good evening! Got some fresh data today to spark a bit of volatility in the markets. We saw plenty of great reactions to my usual inflection points in the majors, but the best setup of the day in my opinion goes to a reversal signal in EUR/USD.

For those who are not familiar with my framework, signals, or setups, please visit my discretionary day trading blog here.

EUR/USD 15m

PCDPOD20110118.png

Fundamentally, there was a lot going on the Forex calendar for EUR/USD today as we got mixed German ZEW data, weaker-than-expected Empire State Survey Index, and a big positive TIC surprise. As we can see, EUR/USD rallied after the TIC data was release showing us the “risk on” trade on positive data is still in play.

Technically, we can see the market rallied strongly from the Day Opening (DO) price at 1.3284 all the way to the cluster of inflection levels (Week Open price, Major Psych (MaPs) level 1.34, and the previous day high (PDH)). It wasn’t until we saw that great TIC data that the market rallied higher and signaled probably my favorite reversal setup: a divergence in price and stochs at a cluster of inflection points.

Price made higher “highs” while Stochs made lower “highs” to signal a potential reversal at a weekly level and minor psych level.

The market did stall at the PWH/MiPs and reversed lower where it stalled at the cluster of inflection points mentioned earlier and then found a bottom at the broken top of the daily ATR (20).

That move from the PWH to top DATR was about 100 pips.

Best Way to Play?

Since this is my first review on this framework, I’ll go through a COMPLETE example of how I manage trades and the best possible trade execution scenario to stay in the 100 pip move and maximize your return. I emphasize BEST POSSIBLE because there’s a range of issues that can affect how we execute even the best laid out plans. (ie. we won’t always catch the best entry/exit points, our fears may take us out of the trade prematurely, trading platform user error, etc.). Again…BEST SCENARIO POSSIBLE.

Example Trade Scenario:

Before we enter orders, we have to figure a few things out, most importantly our risk.

Let’s say you saw the signal and decided to enter short at the minor psych level 1.3450. To keep it simple, let’s also assume you decided to risk no more than 1% of your $400 account, which you calculated that risk to be $4. Finally, I like to use one third to one fourth of the daily Average True Range or a significant support/resistance level as my stop. But to keep this example simple, we’ll say 40 pips.

To maximize a trade’s reward potential, I like to use an age old trade management technique describe in our lesson: Adding to Winning Positions. (Disclaimer: Before ever trying this technique, read the lesson, know the rules and practice it in demo many, many, many times before ever trying it live). When used correctly and safely, adding to winning positions can boost profits exponentially. When used incorrectly, or by someone who won’t adhere to proper risk management or stops, it can blow out an account in one trade.

So, think of adding more to your positions as a loaded gun and handle with extreme care. You’ve been thoroughly warned. Alright, let’s move on to the trade and zoom into the chart.

PCDPOD20110118a.png

Step 1: You entered short in 1,000 units of EUR/USD @ 1.3450 (Please visit our Position Sizing lesson to see how I got “1,000 units”). Regardless of the position size, I like to call this initial position “Unit 1.” Your stop is 40 pips at 1.3490 and you trail it by 40 pips. So, your initial risk is -$4, or 1% of your account.

Step 2: The market moves lower and you add another unit (1,000 units) at 1.3410. You immediately adjust your total position stop to 1.3450. This means that your first and second units are closed at 1.3450 if the market moves back up there. Your new position risk is still -$4 (Unit 1 would be closed at breakeven and Unit 2 would lose -$4 if stop was triggered @ 1.3450).

Step 3: The market continues to drop, even after stalling at the infection cluster (WO, PDH, and MaPs), and triggers your third Unit short @ 1.3370. You adjust your total stop to 1.3410. This changes your position risk to $0 if the market rises and you exit at your adjusted stop of 1.3410. Cool, huh?

Step 4: Again, best trade execution scenario, but you decided to close out the entire position at 1.3360 because you thought the DATR would turn into support–which it did. Knowing that the price per pip with 1 microlot of EUR/USD is $0.10/pip, let’s see how the profit picture looks now that you closed it all at 1.3360.

Unit 1: Sold 1,000 EUR/USD @ 1.3450. +90 pips gained = +$9 profit
Unit 2: Sold 1,000 EUR/USD @ 1.3410. +50 pips gained = +$5 profit
Unit 3: Sold 1,000 EUR/USD @ 1.3370. +10 pips gained = +$1 profit

That is a total of $15 gain on $4 of risk, or a 3.75:1 reward-to-risk ratio. That’s a great return on risk, and all-in-all, a very good trade with risk managed well every step of the way.

Will all trades work out this way? No way Jose! In fact, you’ll probably have more losing trades than winners, but if your winning trades have a reward-to-ratio of 3:1 or higher, you can lose 70% of your trades and still be profitable. It’s a weird concept for many to accept but it can work for some.

So, there you have it–a complete example of my approach to discretionary day trading, but it is just one example. Inflection levels and their influence change every day, news events can surprise, market reactions are almost always unpredictable, and so on. The variables are endless and everyday is different, but that’s the challenge and that’s why I enjoy it–even the losing days.

I hope this helps you see how price action behaved against today’s news and potential inflection points, and hopefully you can look to tomorrow’s session with this framework to find high probability trade setups with high reward-to-risk potential.

Thanks for checking out my review and stay tuned for more. Sign up above for our Twitter, Facebook, or my email updates to be notified of my “Pick of the Day” right away! Good luck and good trading!

  • Currency Trading

    Thanks!I want to trade in EUR/USD currency pair.I need a signal system that provide up to date information about market trend.Trading signal system is the best way to save from loss.

  • 6505341124

    Hi, do you look out only for short trade? From the 4 hr chart, clearly the short term trend was going up. The best trade would have been at the previous day low at 1.3270 region.Fundamentally, news released aided the upwards push to a high at 1.3470. If you have gone long , the rewrd would have been more than a short at the reversal. I am not too sure if it is indeed a reversal. You may basically be trading a retracement.

  • Pipcrawler

    Again, every day is different and my trade ideas all depends on what the market is doing. Yeah I saw the rally during the Asia session, but I usually don’t trade that session. I mostly watch during the US session, occasionally as early as the late morning Euro session, and that was the best trade I saw during that time frame today.

    Also, my framework is for day trades, which means I’ll probably keep a trade on no longer than a few hours. I’ll usually look at 4 hour charts at the beginning of the week, but that’s about it. But maybe I’ll check’em out more and incorporate it into my framework and trade plans if I find it helps. Thanks!

  • solidshadow

    This sounds like a great way to reap in huge profits during a large wave however, what do you do to prevent yourself fakeouts? Also, from my experience sometimes the market is so volatile that some trades will hit their stop losses right before the move happens. What will you do then? Do you jump back in or do you sit out of the move?

    Which time frame do you focus on? You mentioned looking at the 4-hour chart but you have posted examples of the 15-minute charts. In addition, why did you pick the 15 minute chart and how well would this strategy work on the 4-hour chart?

    You also seem to rely on placing stop losses in certain places so that even if the trade goes the opposite way you are limiting your losses. What are the percentage of trades that are winners, losers or break even?

  • 6505341124

    Hi, do you look out only for short trade? From the 4 hr chart, clearly the short term trend was going up. The best trade would have been at the previous day low at 1.3270 region.Fundamentally, news released aided the upwards push to a high at 1.3470. If you have gone long , the rewrd would have been more than a short at the reversal. I am not too sure if it is indeed a reversal. You may basically be trading a retracement.

  • Pipcrawler

    Again, every day is different and my trade ideas all depends on what the market is doing. Yeah I saw the rally during the Asia session, but I usually don’t trade that session. I mostly watch during the US session, occasionally as early as the late morning Euro session, and that was the best trade I saw during that time frame today.

    Also, my framework is for day trades, which means I’ll probably keep a trade on no longer than a few hours. I’ll usually look at 4 hour charts at the beginning of the week, but that’s about it. But maybe I’ll check’em out more and incorporate it into my framework and trade plans if I find it helps. Thanks!

  • solidshadow

    This sounds like a great way to reap in huge profits during a large wave however, what do you do to prevent yourself fakeouts? Also, from my experience sometimes the market is so volatile that some trades will hit their stop losses right before the move happens. What will you do then? Do you jump back in or do you sit out of the move?

    Which time frame do you focus on? You mentioned looking at the 4-hour chart but you have posted examples of the 15-minute charts. In addition, why did you pick the 15 minute chart and how well would this strategy work on the 4-hour chart?

    You also seem to rely on placing stop losses in certain places so that even if the trade goes the opposite way you are limiting your losses. What are the percentage of trades that are winners, losers or break even?

  • SalviaLover

    Can you alert for day trading opportunities you see prior to entering the trade?

  • Pipcrawler

    @solidshadow If I get faked out, then I get stopped out…simple. To help reduce fakeouts, I set intelligent stops based on ATR or recent price action. Also experience from watching and practicing with this framework for a while helps me be pickier on when to enter and exit. As I said in the post, I expect to lose more than I win, but I will safely try to press my winners so that they out weigh my losers. Bill Lipschutz (co-founder and Director of Portfolio Management at Hathersage Capital Management and considered one of the greatest FX traders of all time) once said, “I don’t have a problem letting my profits run, which many traders do. You have to be able to let your profits run. I don’t think you can consistently be a winner in trading if you’re banking on being right more than 50 percent of the time. You have to figure out how to make money by being right only 20 to 30 percent of the time.” That’s the kind of the philosophy on trading I am taking on with my day trading approach.

    I mentioned I looked at the 4 hour charts at the beginning of the week, but my framework is on the 15-min chart. I posted a link to it at the top of this blog post for those who are familiar with it. Please visit that link to read more details on how I look at the market.

    Again, I place my stops using historical volatility (ATR) or recent price action, and if it’s hit then that tells me my idea or signal is invalid. I just take the hit and move on.

    I began a daily study of this framework last summer as I decided I didn’t want to hold overnight positions anymore. I just didn’t feel comfortable with sentiment seemingly shift almost every single day. So, I’m a relatively new student to discretionary day trading and I began live trading this framework only a couple of months ago.

    I don’t share my stats for several reasons. First, they are of absolutely no help or have no baring to any other traders performance. We all trade differently. 100 traders could get an awesome signal and the perfect execution plan, and I guarantee you’ll see 100 different results. While trading is a competitive game, traders should not compare themselves to other traders. Stats are meant to help find out your own weaknesses, not gloat to the world about how awesome you are. Worry about your own performance.

    Second, with only a couple months of live trading, my stats are meaningless–even to myself. In my view, they won’t start to mean something until after a year of data, and I won’t consider myself a success until I have 10 years of positive trading with this system.

    Finally, I feel newbies put way too much emphasis on stats and finding the “holy grail” rather than focusing on the process of actually learning how to trade and developing trading skills.

    But, to show this framework at least works sometimes, for this ONE TIME ONLY I’ll share to that in Nov and Dec I had a 70% win ratio, BUT my average R:R ratio is .65:1. (I’ve come to find that I am absolutely HORRIBLE with holding onto winning trades with day trades). Again, all meaningless as I will continue to study, practice, and improve.

    Ultimately, my intention and goal with this new project and blog is to show that these behaviors and tendencies I have observed and studied for a while do exist and are reoccurring, and I hope that it can help improve your own trading decisions and give you a better edge. Take what works for you and leave the rest.

    I hope this answers your questions. Thanks!

  • Pipcrawler

    @SalviaLover. No, I will not alert to day trade opportunities in real time. This blog, along with the rest on this site, is intended to help you develop your own trading skills.

    My intention is to review the day, its best setups, and analyze/discuss market behavior, so that we all can learn and internalize market tendencies to increase our trading edge.

    This blog is not a day trading signal service, but a tool for education and deliberate practice.

    I hope this helps.

  • solidshadow

    Thanks Pipcrawler. The quote from Bill Lipschutz was really helpful because I am trying to maximize my profits despite losing the majority of my trades. I will be adopting this philosophy into my trading system.

    I don’t think that stats from your trades are meaningless. I read your blog but I was interested what I should be expecting in adopting your trading system. I did not mean to judge your system but to improve the way I trade because I have very similar methods.

    How do you deal with the emotions that you may feel if you get constantly stopped out or the market makes an quick and strong correction that stops you out of our position before resuming its trend?

    Thanks!

  • SalviaLover

    Can you alert for day trading opportunities you see prior to entering the trade?

  • Pipcrawler

    @solidshadow If I get faked out, then I get stopped out…simple. To help reduce fakeouts, I set intelligent stops based on ATR or recent price action. Also experience from watching and practicing with this framework for a while helps me be pickier on when to enter and exit. As I said in the post, I expect to lose more than I win, but I will safely try to press my winners so that they out weigh my losers. Bill Lipschutz (co-founder and Director of Portfolio Management at Hathersage Capital Management and considered one of the greatest FX traders of all time) once said, “I don’t have a problem letting my profits run, which many traders do. You have to be able to let your profits run. I don’t think you can consistently be a winner in trading if you’re banking on being right more than 50 percent of the time. You have to figure out how to make money by being right only 20 to 30 percent of the time.” That’s the kind of the philosophy on trading I am taking on with my day trading approach.

    I mentioned I looked at the 4 hour charts at the beginning of the week, but my framework is on the 15-min chart. I posted a link to it at the top of this blog post for those who are familiar with it. Please visit that link to read more details on how I look at the market.

    Again, I place my stops using historical volatility (ATR) or recent price action, and if it’s hit then that tells me my idea or signal is invalid. I just take the hit and move on.

    I began a daily study of this framework last summer as I decided I didn’t want to hold overnight positions anymore. I just didn’t feel comfortable with sentiment seemingly shift almost every single day. So, I’m a relatively new student to discretionary day trading and I began live trading this framework only a couple of months ago.

    I don’t share my stats for several reasons. First, they are of absolutely no help or have no baring to any other traders performance. We all trade differently. 100 traders could get an awesome signal and the perfect execution plan, and I guarantee you’ll see 100 different results. While trading is a competitive game, traders should not compare themselves to other traders. Stats are meant to help find out your own weaknesses, not gloat to the world about how awesome you are. Worry about your own performance.

    Second, with only a couple months of live trading, my stats are meaningless–even to myself. In my view, they won’t start to mean something until after a year of data, and I won’t consider myself a success until I have 10 years of positive trading with this system.

    Finally, I feel newbies put way too much emphasis on stats and finding the “holy grail” rather than focusing on the process of actually learning how to trade and developing trading skills.

    But, to show this framework at least works sometimes, for this ONE TIME ONLY I’ll share to that in Nov and Dec I had a 70% win ratio, BUT my average R:R ratio is .65:1. (I’ve come to find that I am absolutely HORRIBLE with holding onto winning trades with day trades). Again, all meaningless as I will continue to study, practice, and improve.

    Ultimately, my intention and goal with this new project and blog is to show that these behaviors and tendencies I have observed and studied for a while do exist and are reoccurring, and I hope that it can help improve your own trading decisions and give you a better edge. Take what works for you and leave the rest.

    I hope this answers your questions. Thanks!

  • Pipcrawler

    @SalviaLover. No, I will not alert to day trade opportunities in real time. This blog, along with the rest on this site, is intended to help you develop your own trading skills.

    My intention is to review the day, its best setups, and analyze/discuss market behavior, so that we all can learn and internalize market tendencies to increase our trading edge.

    This blog is not a day trading signal service, but a tool for education and deliberate practice.

    I hope this helps.

  • solidshadow

    Thanks Pipcrawler. The quote from Bill Lipschutz was really helpful because I am trying to maximize my profits despite losing the majority of my trades. I will be adopting this philosophy into my trading system.

    I don’t think that stats from your trades are meaningless. I read your blog but I was interested what I should be expecting in adopting your trading system. I did not mean to judge your system but to improve the way I trade because I have very similar methods.

    How do you deal with the emotions that you may feel if you get constantly stopped out or the market makes an quick and strong correction that stops you out of our position before resuming its trend?

    Thanks!

  • Pipcrawler

    You’re welcome @solidshadow. The only way to combat negative emotions, habits, and decisions can come from only one thing: confidence in your system or trading method.

    You have believe that at the end of the day, week, month, year you will come out on top because you know so from either excessive study and backtesting of your system or thousands of trades/chart hours forward testing your system/method… or more preferably, both.

    Through study, deliberate practice, and experience, your confidence will grow and negative emotions will slowly wither away. Will emotions totally ever go away? We’re human, so “No” but we can learn how to control and manage those negative feelings and actions, and keep them from interfering with good trading decisions.

    It’s gonna take work, but doesn’t all good things take work???

    I hope this helps!

  • Pipcrawler

    You’re welcome @solidshadow. The only way to combat negative emotions, habits, and decisions can come from only one thing: confidence in your system or trading method.

    You have believe that at the end of the day, week, month, year you will come out on top because you know so from either excessive study and backtesting of your system or thousands of trades/chart hours forward testing your system/method… or more preferably, both.

    Through study, deliberate practice, and experience, your confidence will grow and negative emotions will slowly wither away. Will emotions totally ever go away? We’re human, so “No” but we can learn how to control and manage those negative feelings and actions, and keep them from interfering with good trading decisions.

    It’s gonna take work, but doesn’t all good things take work???

    I hope this helps!