Shorting Cable…Third Time’s a Charm? – Trade Closed

Trade Closed: 2010-07-01 12:37 pm ET

Wowzers! I went to bed with a nice gain on my trade only to wake up with a nice punch in the face from the FX markets. Has the “Risk”-to-US Dollar relationship changed?

PoD Chart

In the chart above, I zoomed in to the one hour time frame to take a closer look at what happened.

The rising trendline and previous day low was broken as I hoped and my short GBPUSD trade was triggered at 1.5000. The pair continued to trend lower into the next trading session and putting me in the money about 125 pips.

As soon as Europe opened for trading this morning it seems like European traders began pricing in the recent weak US economic data by selling Greenbacks, and at the beginning of the US trading session we got hit with another 472K people filing for unemployment (greater than expected), ISM Manufacturing lower than expected at 56.2 vs. 59 forecasted, and the whopper of the day, a 30% decrease of pending home sales in May. Yowzas!

Now, instead of money flowing from “risk assets” to the usual safety of US assets, it looks like US assets actually got weak on weak US economic data. What the heezy?? Needless to say, Cable rallied back above my trigger point and to my stop 160 pips above in the blink of an eye. Stopped out.

Total: -160 pips/ -1% loss

Now, I can’t say that I wasn’t disappointed with the outcome of this trade, but I’m not crushed over it either. I limited my loss so it’s only a small dent to my pocket book.

What could have I done differently? Well, there was no major news during the Euro session to warrant taking some off the table and I couldn’t have known that the correlation between risk and the USD would change. The best I could have done differently was to close early to limit my loss right after the morning US data. Something to remember in the near future.

So, is this a new shift in market correlations? Shoot even gold got sold off today!! Well, it’s too early to tell really. But as we continue to trade in unprecedented times, with an uncertain outlook, and an ever changing market environment it’s safe to say we’ve gotta stay on our toes and be disciplined with risk management more than ever.

Thanks for checking out my blog and hopefully I can catch a winner next time! Have a great weekend!

Trade Idea: 2010-06-29 6:41 pm ET

PoD Chart

Greeting Forex friends? How’s everyone’s summer? It’s been a blazin’ hot one so far, which I don’t mind at all because I get to sit back with a nice tall glass of sweet iced tea as I check out these charts! And you know what else is blazin’ hot? A new technical setup on Cable? Will my third idea in a row on Cable pan out? check it!

I’ve been sitting back, patiently waiting for this rally in GBPUSD to lose its steam after traders went into a buying frenzy after the announcement of budget cuts in the UK. This took away the threat of a credit rating cut and helped the British Pound fend off the recent round of risk aversion.

Now the pair is testing an area that held as support throughout April, but broke at the beginning of May. Will it hold? There are a couple of technical signs that point to a possible reversal back to the downside…

First, we can see a bearish rising wedge pattern forming, and it is consolidating tighter and tighter. This shows that either the sellers are less and less willing to sell at higher prices, buyers aren’t willing to buy higher, or maybe both. Next we can see that persistent bearish divergence pattern forming as price makes a higher “high” while stochastics make lower “highs.” Also, if the pair breaks below this week’s current lows around 1.5010 and the psychologically significant number of 1.50, then that may also signal traders to start pressing the sell button.

Fundamentally, it’s still a mess of uncertainty–Is there a recovery or isn’t there? Who knows, but let’s take a look at what’s out there….

As I mentioned earlier, the UK introduced inflation is expected to fall back in 2010, as unemployment wage growth remains a problem. Don’t expect the Bank of England to raise rates any time soon!

The US isn’t looking to rosy itself as housing data has been very weak after the expiration of the home buyer’s tax credit in April. This pushed future home purchases into the beginning of the year, so I don’t expect housing to get any better in 2010. This week, we also have the US jobs data for June coming out on the forex calendar this Friday at 1230 pm GMT. The job market has been propped up by the hiring of government census worker in the first half of 2010, but with those temporary jobs now going away, there are expectations of over 100k jobs lost in June. Again, it doesn’t look pretty folks.

Finally, let’s take a step back to take a global macro view and we got reports today that China’s leading indexes are pointing to a slowdown in growth in the emerging market powerhouse later this year. This sparked today’s risk aversion moves of selling “risk assets” (equities, commodities, and most “higher-yielding” currencies) and moving into US bonds.

And last item to point out on the global stage is the recent statement from the G20 that the major economies all need to cut spending and raise taxes. C’mon now…even if all the major economies vary the pace of these measures, doing it at the same time will almost certainly slow down the recovery. But, it’s what they have to do folks to fix this financial mess, so we might as well get ready for it now.

So, it looks like the recovery isn’t quite here yet, and the future is still uncertain of when the “good times” will be back. I’m bearish on risk, bullish on the Dollar in the short term, and I think the best risk-to-reward play is a short on Cable.

I will look to short Cable if it breaks below this yesterday and the current week’s low around 1.5010. My stop will be the daily average true range of 160 pips. And I will target May’s lows around 1.4250. I look to lock in profits at my first profit target, and if the trade goes my way, I may add back onto the position and trail my stop. Here’s what I am going to do:

Short GBPUSD at 1.5000, stop at 1.5160, pt1 at 1.4840, pt2 at 1.4250

Remember to never risk more than 1% of an account on any single trade. Adjust position sizes accordingly.

Stay tuned as I may make adjustments ahead of US jobs Friday. With it being the summer, there’s less liquidity in the market as traders are on vacation. This means moves can be fast as there are less orders at each price to absorb any fast moves sparked by news events or catalysts. Stay sharp and trade safe!

  • umakuitteru

    Pipcrawler, I’m wondering how you came to the conclusion it is a rising wedge – the price does not seem to correlate to the wedge drawn on the chart very much. It seems more like a rising channel? Not trying to be critical, just trying to understand how others recognise chart patterns. Thank you for the blog, it’s a great learning tool.

  • hedgehog

    TP 1.5840 for a short? A mistake….. should have been 1.4840, correct?

  • PipWolf

    Thanks for the post Pipcrawler. Shouldn’t PT1 read 1.4840 rather than 1.5840 though?

  • umakuitteru

    Pipcrawler, I’m wondering how you came to the conclusion it is a rising wedge – the price does not seem to correlate to the wedge drawn on the chart very much. It seems more like a rising channel? Not trying to be critical, just trying to understand how others recognise chart patterns. Thank you for the blog, it’s a great learning tool.

  • hedgehog

    TP 1.5840 for a short? A mistake….. should have been 1.4840, correct?

  • PipWolf

    Thanks for the post Pipcrawler. Shouldn’t PT1 read 1.4840 rather than 1.5840 though?

  • Newbornbabytrader

    i am short from 1.5130 :)

  • floxy

    hi , i’m a bit new to trading . may i ask ? Can u place a trade with two profit targets?

  • Newbornbabytrader

    @floxy: open 2 positions with different pt :)

  • Pipcrawler

    @umakuitteru… while it doesn’t look like a classic bearish wedge, to me it does….or it’s “close enough for jazz” as I like to say.

    Remember, that chart patterns are often subjective and that nothing is ever “black and white” in trading. Just gotta find what works for you in analysis and hopefully you can execute and manage the trade well after you’re in it. Makes sense?

    @Newbornbabytrader – good job at getting in at a great price… good luck!

    @Floxy – at my first profit target, sometimes I like to take off half of my position. For example, let’s say I shorted 100k units of GBPUSD. If the market hit my first profit target, I would buy back 50k units, move my stop to break even, and continue to target the May lows…. make sense?

    Thanks to the rest of you guys for pointing out my clerical error…! haha

  • Newbornbabytrader

    i am short from 1.5130 :)

  • fabulono1

    i think it will still continue on its long later 2 day

  • Newbornbabytrader

    Double dip recession fears has waken up the jiny called risk aversion and tomorrow bad NFPs could add fuel to the fire?

  • Newbornbabytrader

    Double dip recession fears has waken up the jiny called risk aversion and tomorrow bad NFPs could add fuel to the fire?

  • floxy

    hi , i’m a bit new to trading . may i ask ? Can u place a trade with two profit targets?

  • Newbornbabytrader

    @floxy: open 2 positions with different pt :)

  • Pipcrawler

    @umakuitteru… while it doesn’t look like a classic bearish wedge, to me it does….or it’s “close enough for jazz” as I like to say.

    Remember, that chart patterns are often subjective and that nothing is ever “black and white” in trading. Just gotta find what works for you in analysis and hopefully you can execute and manage the trade well after you’re in it. Makes sense?

    @Newbornbabytrader – good job at getting in at a great price… good luck!

    @Floxy – at my first profit target, sometimes I like to take off half of my position. For example, let’s say I shorted 100k units of GBPUSD. If the market hit my first profit target, I would buy back 50k units, move my stop to break even, and continue to target the May lows…. make sense?

    Thanks to the rest of you guys for pointing out my clerical error…! haha

  • fabulono1

    i think it will still continue on its long later 2 day

  • Newbornbabytrader

    Double dip recession fears has waken up the jiny called risk aversion and tomorrow bad NFPs could add fuel to the fire?

  • TradeWithPrecision

    Hi There, I’ve read this a couple of times and still not sure why you’re shorting GBP/USD – can you please clarify? On my charts, I see a strong uptrend with convergence on the macd across the 1hr, 4hr and daily charts. I would expect a pullback to about 1.5050 but I’ve gone long on this trade and placd my stop at 1.5020.

  • TradeWithPrecision

    Hi There, I’ve read this a couple of times and still not sure why you’re shorting GBP/USD – can you please clarify? On my charts, I see a strong uptrend with convergence on the macd across the 1hr, 4hr and daily charts. I would expect a pullback to about 1.5050 but I’ve gone long on this trade and placd my stop at 1.5020.