Looks like I was a little too cautious closing down my USD long trades (GBP/USD and NZD/USD short) before NFP on Friday. With major data out of the way, I’m looking to get back into the strong bullish trend.
Before you move on, for those who are not familiar with my framework, signals, setups, or acronyms, please visit my discretionary trading framework blog.
With a big positive surprise from the monthly U.S. jobs data last Friday, the Dollar continues its bullish run on the idea that the U.S. economy is strong enough for a Federal Reserve rate hike sooner rather than later. I’m in general agreement with this sentiment and I’d like to play it against the outlook that the ECB quantitative easing program is likely to weaken the euro further.
After a couple hundred pip drop last week, EUR/USD may be due for a a pullback on profit taking and possibly risk-on behavior, which I’m sure many forex traders will view as an opportunity to play the monetary policy divergence between the Fed and ECB, as well as the price trend lower. On the four hour chart above, I used the Fibonacci retracement tool to pinpoint a potential sell area, and it looks like we could see sell orders start triggering as early as 1.1050 to as high as the 61% Fib/moving averages around 1.1200.
I’ll look to scale into a short position in that area, with a wide stop of one weekly ATR from my average entry price. The next likely area of potential support is the major psychological level of 1.0500, where I will re-assess and adjust, but with monetary policy divergence as the fundamental driver, this move can go much, much further. Here’s what I am doing:
Short half position EUR/USD at 1.1000, stop at 1.1350, initial target at 1.0500
Short half position EUR/USD at 1.1200, stop at 1.1350, initial target at 1.0500
I’m only risking 1.00% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of about 2.4:1 if both positions are triggered. 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!