Looking for a Pullback in the EUR/USD Downtrend – No Trade

No Trade: 2012-01-11 18:03 ET

Good evening! Thanks to Fitch and weak European data, it was big moves for EUR/USD today, but unfortunately my entry orders were missed by like two pips! Check it out…

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

PCDPOD20120109.review.png

As I mentioned above, we saw Germany’s economy by 0.25% in Q4, but the kicker for the big move apparently was Fitch’s announcement that the European debt crisis will spread. The sell off pushed the pair back down to this week’s lows around 1.2665.

As we can see on the chart, I was able to participate in this down move as the pair narrowly missed my first short entry order at the 38% by just a few pips…doh! We also saw a nice reversal signal on the 1hr chart in the form of a doji and divergence with the stochastics indicator. Needless to say, with the pair testing this week’s lows, and the ECB interest rate decision coming up tomorrow, I have decided to close my open orders to avoid event risk. No trade.

Overall, a great setup, but the market didn’t play out to my favor. In the future, I could adjust my process by going in at market once I see a nice reversal signal, like the doji and divergence, so I’ll be sure to remember that for next time.

Well, that’s it for me today. I’ll most likely be in reaction mode with the big events coming up on Thursday’s session. If an idea does spark up in my head, I’ll be sure to post it on Twitter and Facebook to see what you think. Stay tuned!

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Trade Idea: 2012-01-09 16:06 ET

Good afternoon forex friends! After an extended break from the markets, It feels good to jump back into the swing of things. It looks like I missed the strong selloff in EUR/USD at the start of 2012, but that doesn’t mean there’s still a chance to go with the trend, right? Will there be a pullback for euro bears?

PCDPOD20120109.png

On the 60m chart above, we can see my usual favorite setup of trying to jump into a trend on a pullback. I’ve thrown up the Fibonacci tool to help me spot a potential resistance area, and we can see that the usual area to watch (between the 38% Fib and 61% Fib) is between 1.2820 to 1.2915. This area lines up between the last couple of consolidation areas in the downtrend, so traders may view it as potential support-turned-resistance areas.

Fundamentally, the euro is still between rock and a hard place as the massive sovereign debt is still present, austerity looks to slow down growth, and there is the idea that new ECB President Mario Draghi is open to interest rate cuts. We do have the ECB meeting this week and it looks like the market is not expecting a rate cut this time. But if they do cut, it should work out nicely for my trade.

Last Friday, we got positive job numbers in the US in the form of +200K net jobs added (versus +155k forecast) and a dip in the unemployment rate to 8.5%. While I always remain skeptical of the BLS’s numbers, it did seem to have a positive effect for the Greenback. Also, given that the huge risk event everyone is watching out for is a European sovereign debt default, I think sentiment still favors the US Dollar in the short term.

So, with that line of thinking here’s what I look to do this week:

Short half position EUR/USD at 1.2820, stop at 1.2985, pt at 1.2640

Short half position EUR/USD at 1.2920, stop at 1.2985, pt at 1.2640

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

This trade structure gives me approximately a potential 2:1 return-on-risk if both positions are triggered; possibly more if the trend is strong and I decide to ride it further.

As always, if the market environment shifts on a new catalyst, I’ll be sure to adjust my open orders or open position quickly. Be sure to follow me on Twitter and Facebook for updates. Thanks for checking out my blog…good luck and good trading!

  • Ilya Gruntal

    10th of january we got a morning cloud on 4H candles, but it has to be approved, for now we’re just getting back to the trend line, and EUR still looks very weak. I expect 1.25-1.24 to be the possible reverse level. Please look at the bigger timeframes, and draw a proper downtrend channel.

    • Ilya Gruntal

      Ops, sorry, i ment we got a morning cloud cover on Daily timeframe, thanks to the recent gap, but can talk about retracement only after the channel break… and even if the retracement takes place, i would short only after candles confirm, that the level holds, since we got more levels upper.

      Please take a look at the image I share with ya!

      • Ilya Gruntal

        Tho now, when i think about it, your trade will basically still be in that daily downtrend, so probably it’s cool :) Tho you could take a little better price for your first trade, 1.2890 for example, with the same stop level:)
        Cheers.

        p.s. But again, it could be daily reverse, channel break, and then the pull would be a lot deeper, it depends more or less at the way that american sp500 futures takes this week. We could see a miracle… but still… i don’t trust americans, neither their economic reports. Must stay in touch :)

        • pipcrawler

          Thanks for your analysis Ilya.  It’s helpful and I’ll take it into consideration if I need to adjust my position :)

  • Astock460

    hi,
    why you put in both entries the sl on the same point??
    Short half position EUR/USD at 1.2820, stop at 1.2985, pt at 1.2640

    Short half position EUR/USD at 1.2920, stop at 1.2985, pt at 1.2640

    • pipcrawler

      My SL is the area where traders have pushed the market high enough for me to think it won’t go back down within the current or maybe next.  Basically, it’s where I feel my trade idea is invalidated, and that I need to get out and move on to the next opportunity.  I hope that helps :)

    • Astock460

      hi, thanks for your reply. but still dont understand very well, because the stop from your trade 1.2820 with stop 12820 seems very far away.
      how you start the trades – 1. you will wait  until eur/usd reach 1.2920 than enter short and the second short trade you start at 1.2820?
      regards

  • lollytripathy

    thanks