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Trade Closed: 2011-12-20 12:24 ET

Good morning forex friends! No luck on my day trade today as we saw strong euro buying and risk-on sentiment at the European session open. It looks like euro bears never stood a chance, and neither did my day trade. Check it!

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

PCDPOD20111219.review.png

It looks like the major psychological level of 1.3000 was the launching point for euro bulls at the open of the European trading session. Forex Gump actually made a great argument on why a contrarian bet higher on EUR/USD made sense this morning–and he was on point! I mostly believe that the bounce was due to the extremely oversold conditions of the euro rather than a shift in the fundamental outlook. It was just time for traders to pull in some profits before the end of the year.

So, I underestimated the bounce and paid for it with a hit to my account. The pair shot up and blew past 1.3050 without breaking a sweat. That level actually turned into a support area after it was broken! My trade was triggered and quickly invalidated, but I’m glad I kept the stop tight because traders pushed it all the way up above 1.31.

Total: -35 pips; -0.50% loss

In retrospect, I guess a breakout strat was a better play given the consolidation. I thought the holiday environment would keep volatility low as it did in the past, but it looks like traders had other ideas. Also, I didn’t anticipate strong profit taking or risk-on sentiment, probably because I still do put a lot of weight on the fundamental factors rather than the sentiment. For me, there is no fundamental reason to go long the euro. I suppose I still have to work on weighing out various aspects of my analysis in the future.

Well, it’s still early this week, so I may catch one more trade opportunity for the week if I see one in the next few days. As always, be sure to follow me on Twitter and Facebook to stay in tune with my market thoughts or if you just want to say hello!

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Trade Idea: 2011-12-19 18:05 ET

Good evening traders! We’re nearing the end of 2011, but don’t think the action is over yet! There’s a bearish chart pattern forming on EUR/USD, possibly giving me a day trade opportunity for the Tuesday session. Check it out and see if you agree!

PCDPOD20111219.png

On the 60 minute chart above, we can see that EUR/USD is consolidating after a strong drop off last week. This consolidation can be seen as the formation of a bearish wedge, or more likely a bearish flag, signaling a potential move lower. Typically, you would sell on a break lower of this pattern, but I think that major psychological level has just enough buyers for one more pop higher in today’s session. If that does happen, 1.3050 has served as a pretty good resistance area, a point where euro bears may jump back in for quick pips on the session.

And on today’s forex calendar, we do have a potential catalyst in the form of the German Ifo Business Climate report at 4:00 am ET. The last two releases have come in weaker than expected, and if we see a third weak read, that may signal a new trend weakening business sentiment. I’mma go ahead and say that won’t be good for the euro sentiment. This pair does tend to react well to major and minor psychological levels (’00s and ’50s), so I think if the market retest 1.3050, there’s a good chance it could hold.

Finally, Forex Gump wrote a great article this weekend on how to handle Christmas week volatility, and based on that I won’t be going for huge pips on this one. It’ll be a simple near 2:1 trade on a reduced risk of 0.50% of my account. Here’s what I am going to do:

Short EUR/USD at 1.3050, stop at 1.3085, pt at 1.2985

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 a potential return-on-risk of about 1.85:1 and again, since this is a day trade, I’m reducing my risk to 0.50% of my account.

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!

This content is strictly for informational purposes only and does not constitute as investment advice. Trading any financial market involves risk. Please read our Risk Disclosure to make sure you understand the risks involved.