Trade Review: 2013-04-08 03:43 ET
Greetings Forex friends! Once again, Draghi threw in a few comments that surprised market players, and when coupled with massive moves thanks to the BOJ, it was quite an active few sessions for currencies. Here’s a review of how I played EUR/USD through it all last week.
Before you move on, for those who are not familiar with my framework, signals, setups, or acronyms, please visit my discretionary trading framework blog.
The ECB rate decision pretty much played out how I expected it to and EUR/USD fell through the week, unfortunately without the retracement I was hoping for before hand. So, why did EUR/USD rally after the event? Well, my main man Forex Gump laid it all out here in his recent blog post: Why Did the Euro Rally After the ECB Statement? It’s a great article that you should check out, but the short version is that Draghi eased concerns that “Cyprus is no template.” This sparked euro short positions to come off, which may have had the side effect of causing a “short squeeze” (a snowball effect of sellers quickly covering their positions).
But the biggest factor, I think, is that the euro rallied thanks to the derivative effect of the insanely massive Japanese Yen sell off thanks to Kuroda’s first official move as the head of the BOJ. All of the majors got a boost as capital flowed out of the Yen and into other currencies, including the euro.
At first, I thought this was perfect as I thought these events would have a short-term side effect of lifting the EUR/USD market to a better price in which I could sell, so I let my entry orders at 1.2900 trigger and put me in short. But after taking another look at the weak US ADP numbers and trend with recent US initial claims data (rising over the past few weeks), I decided that the odds are that NFP would come in weaker and based on last month’s behavioral reaction to NFP data, the US Dollar would sell off. So I closed my EUR/USD short at market (1.2944) (announced on Twitter and Facebook) a few minutes ahead of the US Non-Farm Payrolls report for a very small loss.
Total: -44 pips/ -0.20% loss
After a bit of retrospect, what I could have done differently was to factor in the ADP and initial claims numbers in a little bit sooner and close out my trade much earlier. Even though I took a small loss, I could have avoided it and gotten back into a short EUR/USD position around 1.3000.
The market is now currently trading just under 1.3000, so I am looking to short EUR/USD again because the story hasn’t changed, but I’ll take a bit of time to go over recent data and the markets behavior before committing to a new position.
Trade Idea: 2013-04-03 7:32 ET
Good morning forex friends! I’m watching a trendline setup to play the negative euro themes that continue to be priced in the market at the moment. Will we see more sellers into the trend?
I’m still bearish on the euro due to the fact that even though we see a lot of hustlin’ to get some bailouts going, the structural fiscal issues remain and the austerity being implemented will not help the eurozone grow. This week, we’ve already seen examples of a weakening economy, not only through in Europe (worse-than-expected Spanish and Italian Manufacturing PMI’s, high unemployment rate), but from weak PMI data in China and the US as well.
The current data makes for a really good argument for a dovish shift in rhetoric from the ECB, as well as the markets to continue in risk aversion mode. The Greenback tends to be a beneficiary in environments like this against most of the major currencies.
So, I look to short EUR/USD once again in this environment as I can’t see any reason for the ECB to raise rates or do anything else that would the get the market excited about buying euros. But then again, Draghi has been known to surprise the market a time or two at recent ECB press conferences. I’ll still keep my risk controls on tight.
For now, I look to short if EUR/USD pulls back up to the next major psychological level, 1.2900, which happens to be previous-support-turned resistance. My stop will be above the falling trendline drawn in the chart above as I think a lot of traders will be eyeing those intersecting levels as an area to play a short euro bias. My max profit target will be the next major psychological level below the area the market is currently trading. Here’s what I am going to do:
Short half position EUR/USD at 1.2900, stop at 1.3010, max profit target at 1.2700
I’ll only be risking 0.50% of my account on this trade, and with this trade structure, I have a potential 1.81:1 return-on-risk. Depending on how the ECB event turns out tomorrow, I may add to or close out my position at the previous lows marked on the chart above. As always, if the story changes then I’ll adjust my position quickly. Stay tuned to my market thoughts and adjustments by following me on Twitter and Facebook.
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