Trade Closed: 2011-03-10 21:00
It looks like the mix of economic and geopolitical events over the past day or so has brought back fear and safe haven flows to the Greenback. Cable also deviated from past behavior after the BoE held rates and bond purchasing plans steady.
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So, my orders to go long were triggered and I was looking good for a little bit as the market rallied from the support area I highlighted earlier. It helped that I got a nice boost from a positive surprise on UK Trade Balance data. Then came the good stuff….
The first wrench thrown into my trade was the surprise negative Trade Balance number from China (-7.3B vs. +4.9B forecast). This lit the fire of risk aversion flows that brought Cable back below 1.6200. Next to fan the flames was a downgrade of Spain by Moody’s as they expect recapitalization costs to be much, much higher than the 20B EUR estimated by the government, and on concerns of the government’s commitment to ensure fiscal compliance. Mix these events in with the escalating violence in the Middle East and we see everybody and their mama running out of commodities, equities, and high-yielders in to the safety of US assets.
Of course, the nail in the coffin was the Bank of England interest rate decision. They held their main rate at 0.50% and there was no change to its bond holdings at 200B GBP. In the past 5 or 6 interest rate announcements, Cable usually rose after the event, but this time was different, probably because interest rate hike expectations were priced in before the announcement. As a result, Cable fell after no change was announced, nor was there any hawkish rhetoric by BoE members.
Needless to say, my adjusted stop at 1.6100 was triggered and took me out of the market at a very small loss.
Total: -50 pips/ -0.41% loss
Overall, I thought the original setup was good, but what I could have done differently was to exit early after the weak China Trade Balance data. That was a sentiment changer and the starting point of the broad USD rally, but I thought the stop adjustment after that event was a good move. Regardless of the outcome, it was good experience added to my skills.
Well, that’s it for me this week. I hope you’ve learned a little something about the markets as I have. Have a great weekend and I’ll see ya next week!
Trade Adjustment: 2011-03-10 01:00
Good afternoon to my Asia session friends! With the Bank of England interest rate decision right around the corner, I have decided to adjust the stop on my open position to avoid any surprise moves against me.
My trade was triggered not too long after I posted my idea and as I hoped, the area highlighted on the chart below held nicely. With the help of broad USD weakness and a surprise positive read on UK Trade Balance, Cable bounced higher and momentarily traded above 1.6200.
Today, a surprise negative report on the Chinese Trade Balance (-7.30B vs. 4.90B) has taken the air out of risk bulls, having traders favor the Greenback early in today’s session. Cable is now back below 1.6200, erasing a majority of my small gain.
So, what to do now?
Well, the outcome of the BoE decision and statement could be anything. There’s speculation the pair will rally as BoE members are becoming more hawkish against inflation and may speak of rate hikes in 2011 after today’s announcement. A spike higher would surely be in the cards if that scenario played out. Then there’s also the chance they may change their tune and if they do, we could see a huge spike down. Or we may actually seem them shift rates one way or another. Again, anything could happen in the FX market.
So, I’ve decided to adjust my position and orders to take advantage a potential volatility spike, and in a way reduces my risk if the outcome is Cable bearish or enhances my profit if it is Cable bullish.
With the current market at 1.6166, I have decided to:
Adjust my stop to a 50 pip trailing stop, taking me out if the market hits 1.6100. This reduces my 1.0% account risk to 0.41%.
If the BoE event sparks a bullish reaction, then I will add a full position size every 50 pips. If we do see that, and it’s something crazy like official plans for a rate hike–or an actual rate hike–then I think we could easily see 1.6350 – 1.6400 range before the end of the session. So, that’s where I will target, and if the best case scenario plays out, then I could max out my reward at around a 6% gain.
I have no clue what’s going to happen later, but with the trend intact and still in my favor, this is a setup I’ve gotta take every single time. Let’s see what happens and stay tuned because it’s about to get interesting!
Trade Idea: 2011-03-07 23:35
Good evening Forex fanatics! I thought I’d start off the week with a swing trade idea on Cable. After re-testing the strong resistance at last week’s PWH and failing, the pair seems like it’s on its way to test a potential support area created by a cluster of inflection points. Will buyers overwhelm sellers then?
On the one hour chart above, we can see the pair slowly grinding higher over the past month. After sellers dominated for the third time around the 1.6300 handle, traders have taken the pair back lower, almost to an area I feel comfortable going long.
Around 1.6130-1.6150, we can see potential support levels: A 61% Fibonacci retracement level, bottom WATR, and a rising trendline of higher “lows.” This area seems to be an area of interest in recent past as the pair has stalled or reversed there over the past month.
Finally, it looks like a divergence signal is forming and I feel it’ll complete if the market does reach the 1.6130-1.6150 area.
Fundametnally, we have an action packed week on the Forex calendar. With so much uncertainty of how rising inflation will continue to affect global growth, I feel the UK MPC Rate Statement could have the same market moving affect as did the ECB did with their surprise statement on staying vigilant on inflation. We also have UK PPI and US Retail Sales data to push the markets around at the end of the week.
With the potential of high volatility, I have decided to use a wide stop (daily average true range of 120 pips) and go for the top of the week’s range. Here’s what I am going to do:
Long GBP/USD at 1.6150, stop at 1.6030, pt at 1.6390.
Remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly.
This setup has a 2:1 reward-to-risk potential, and depending on how the market behaves, I may add/remove from my position as the week goes on. So, stay tuned for updates and adjustments, and don’t forget to sign up above for our Twitter, Facebook, my email updates to be notified of my “Pick of the Day” right away, or check out my Twitter page as I like to call out levels to watch during the Euro/US session overlap! Good luck and good trading!