Long-term Short on EUR/USD?

Good afternoon forex friends! I’m checking out EUR/USD for a short play based on the fundies.  Check out my idea and let me know what you think!

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

EUR/USD 4 hour forex chart

EUR/USD 4 hour forex chart

I’ve got a long-term bearish bias on EUR/USD on the difference of outlook between each country’s monetary policies.  First, we saw the ECB cut rates down to 0.25% in November, with Draghi recently reiterating that rates will remain low “for an extended period of time” and that they still have tools to act if conditions warranted more supportive action for the European economy. While 2013 seems like the year that Europe’s troubles bottomed out, economic conditions are still weak.

On the other side of the pond in the U.S., the Federal Reserve initiated a reduction of the quantitative easing program back in December.  The $10B reduction in bond purchases is very small, but it’s most likely only the first step in the direction of removing support for what seems to be an improving U.S. economy.  This is should be bullish for the Greenback for now.

So, on the four hour chart of EUR/USD above, we can see that the pair seems to have topped out in mid-December around 1.3800; this area was also a strong resistance area mid-October.  The second set of retests/reversal came after the Fed Taper announcement, and it’s been bullish for USD since.  I think this may be the start of a new trend lower, and after the bounce higher from Friday’s weak NFP number (which some argue may be an outlying number thanks to the weather).

Right now, the pair is consolidating around the mid-December consolidation area (1.3650 – 1.3700), so I will look to short on a move back lower.  My initial target is the November lows, with a stop above the next major handle above.  Here’s what I am going to do:

Short half position EUR/USD at 1.3650, stop at 1.3820, initial profit target at 1.3350

Remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly. Create your own ideas and don’t follow what I do. Risk Disclosure.

I’m only risking 0.50% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of about 1.76:1 with my initial target–more if I scale in as the trade goes my way! Of course, anything can happen in the forex markets, so if the story changes I’ll be sure to reassess and adjust quickly if necessary. Stay tuned by following me on Twitter and Facebook!

11 comments

  1. Speculator

    I don’t know about that one Pipcrawler. From a technical standpoint, it doesn’t look good to me. There was a double bottom pattern breakout shown earlier which reversed the trend. Although stochastic is oversold, there is no divergence so far, and decreasing ATR implies a possible impending breakout. Looks to me like it could be to the upside of the WO. The fibo levels line up with all the weekly inflection levels. I would wait for more confirmation, such as a bullish candle stick pattern to follow cuz this could be a long move.

    Reply
    • PipcrawlerPipcrawler Post author

      Thanks for your thoughts Speculator! Like I mentioned in my blog post, I’m more in this for the monetary policy outlook. That of course, could change on a dime, but I think what I described has a better than average probability of holding out for now. Technically, I agree that there may be a possible breakout, but on the higher time frames. 1.36 – 1.38 is the range, and if that breaks, I’ll adjust accordingly.

      Reply
      • Speculator

        Yes I see. Looks like the trade worked out in your favor! That just goes to show that news trumphs technicals! Great job hope you caught some nice pips there! Right now I’m long USD/GBP. I’m playing the bounce off the PWL for a short term long position. Wish me luck!

        Reply
    • ForExchange

      Hi Pipcrawler!

      The trade and it started out very well! Hopefully the trend remains the same! Do you have an idea in what time period should the 1.3350 goal be reached?

      Good that your are back from your “holiday” :-)

      Good luck!

      Reply
      • PipcrawlerPipcrawler Post author

        Greetings ForExchange… yeah, it looks like the positive US data today was a big help! I didn’t really set a timeframe since I look to try to hold on to this longer-term, but based on average volatility, maybe by the end of January if the story doesn’t change. A lot can happen until then, but the probability is that I think we’ll see USD strength for now. Thanks for you comments and good luck to you too!

        Reply
    • PipcrawlerPipcrawler Post author

      Thanks Marijan! I’m always careful in that I use stops and limit my account risk to a very small percentage. No worries and I’ll watch that 200MA closely thanks to you :)

      Reply
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