Fibonacci Short on EUR/USD? – Trade Closed

Trade Closed: 2013-01-10 15:30 ET

Good afternoon forex traders! My EUR/USD short was looking good for a while there, but a great Spanish bond auction and Draghi’s surprise comments after today’s ECB meeting put the euro on a rocket ship to go higher.

Before you move on, for those who are not familiar with my framework, signals, setups, or acronyms, please visit my discretionary trading framework blog.

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As we can see in the chart above, the 32% Fibonacci levels held throughout the week, eventually drawing in enough sellers into today’s events. Again, traders expectations were that the ECB would hold rates and re-iterate a weak European outlook.

But when we got into the European trading session, we got a strong Spanish bond auction to lift the euro higher, and then the big boom came when Draghi spoke after their announcement to hold rates at 0.75%. What got traders buying up euros was the statement that it was a “unanimous” decision to hold rates and that the economy should gradually recover. This obviously surprised traders, especially myself, as it was only a month ago that Draghi’s rhetoric on the economic out look was negative, creating speculation that rate cuts were a possibility.

So, EUR/USD bounced back higher and my second position was triggered, giving me an average entry of 1.3145 on my total position. But after finding out as much as I could as the event was unfolding, I felt the statements changed the overall euro story, so I closed my trade early (1.3198) to limit my total loss.

Total: -53 pips/ -0.48% loss

As I reflected on this trade, I thought about the many different adjustments I could have done ahead of the event. Obviously, there’s the profitable adjustment of closing out my half position ahead of the event for a small profit. But the reason I didn’t was because given the information that was available at the time, the most probable situation to unfold was weak rhetoric on Europe’s outlook, especially given that data has not improved since the last ECB meeting. To me, that means we were likely to see at least the 1.3000 handle. But we didn’t and that’s why the saying goes, “anything can happen in the markets.”

The best thing I could have done–in hindsight–was to close my open orders and set my stop to breakeven to possibly capture a bigger profit. But I didn’t and that’s how the market goes sometimes. We live and we learn; in the future, I’ll definitely look to reduce my exposure ahead of big events, even when the probability of success looks high.

That’s it for this week’s swing trade. I am a little bit peeved I let a winner turn into a loser, and I hope not make the same mistake down the road.

Thanks for checking out my blog and have a great weekend!

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Trade Idea: 2013-01-07 15:30 ET

Good afternoon! For my first trade of 2013, I’m selling some euros for a swing play this week. Will the fall from last week resume after a pullback?

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Sentiment seems to have shifted on a dime once again as the minutes from the last Federal Open Market Committee (FOMC) meeting revealed that a few members want to end the Fed’s open-ended stimulus program by the end of the year. This was a shock because in the same meeting, they decided to increase quantitative easing until economic targets were hit. Kinda confusing, huh? For now, the possibility of the Fed ending QE may continue to lift the Greenback this week. But I think that’s only half the story for EUR/USD.

This week, we have the European Central Bank (ECB) monetary policy decision, which could put pressure on the euro. At the last meeting, Bank President Draghi cut their economic and inflation projections, which sent EUR/USD tumbling. Euro zone data has not been kind since then, so we may get more rhetoric of a weak European outlook, and thus an increased possibility of a rate cut. It could be another rough ride for euro bulls this week.

Technically, we saw the pair breakout of consolidation on the US Fiscal Cliff and FOMC news. Is that area of broken support now resistance? I don’t know, but I’m sure a lot of traders will be watching it this week. For me, I like the odds that it may hold–especially at a Fibonacci retracement level–and with stochastics indicating overbought conditions at the moment. So, I look to scale in short into that area for my trade, and if it breaks above the area I’ll look to close for a loss. If it does hold and reverse, my target will be the next major psychological area. Here’s what I am going to do:

Short half position at market (1.3111), stop at 1.3255, max profit target at 1.3000

Short half position at 1.3180, stop at 1.3255, max profit target at 1.3000

Remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly. Risk Disclosure.

If both positions are triggered, this trade structure gives me about a 1.3:1 potential return-on-risk. Of course, in the markets anything can happen, especially with top tier events like the ones we’re seeing on the forex calendar this week. If the story changes, I’ll be sure to adjust quickly; stay tuned for thoughts and updates by following me Twitter and Facebook.

Thanks for checking out my blog. Good luck and good trading!