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Trade Review: 2011-05-05 22:43

Good evening evening! It was a wild day in the markets as weak economic data and Trichet’s comments sent risk aversion flows into overdrive. It took Cable down to my long entry levels, but unfortunately previous major support wasn’t able to push risk aversion back.

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

PCDPOD20110506.png

So, it was bad news for risk takers, but great for the Greenback today as crowded trades–like long commodities (especially silver, gold, and oil), equities and currencies –sold off. The move was mostly profit taking after extended bull runs in those assets since last summer, but it was sparked off by weak US data (increase in US jobless claims) and mostly by Trichet’s signal that he will wait until after June to raise interest rates.

As we can see in the chart above, the pair eventually did hit my long orders at 1.6430, but the risk aversion sentiment was too strong on today’s events. The area didn’t hold and my position was stopped out at 1.6370. I have closed all of my remaining open orders.

Total: -60 pips/ -0.50% loss

So, what did I do right? what did I do wrong? And what could I have done better?

In the “do right” department, I think my decision to reduce my risk was a good one. There is never any clarity on what will happen with major events, or what would even spark major moves. Taking extra precaution is a good idea in these types of situations, and you can always maximize your trade later if it does go your way.

I don’t think I did anything wrong as I still feel my analysis and trade plan was solid. I was just on the wrong side of an event that surprised traders, but luckily I got out quick with a small loss. Of course, I could be missing something, so please feel free to comment your thoughts below.

That’s probably it for me this week, but I’ll definitely keep an eye out for a day trading opportunity. If I have chart ideas, I’ll throw them up on my Twitter and Facebook as I always do. Stay tuned!

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Trade Idea: 2011-05-04 1:48 ET

Good morning forex fanatics! It’s already been a big week of movement for GBP/USD, and it’s definitely not over yet! We still have big events to bring some volatility and I think I see a nice setup to hopefully catch a trend. Check it!

PCDPOD20110504.png

This is a trade setup based mostly on technicals and my feeling that the USD rally against the British Pound is a bit overdone this week. First, we can see on the one hour chart above that the pair has dropped almost its entire average weekly range (288 pips) and is about to test a major support level: PWL (blue line above). Stochastics are showing oversold conditions on the one hour and four hour timeframes, indicating that the sell off may be running out of steam.

Traders could take profit there and push the pair higher ahead of the next two major events for the pair: BOE interest rate decision and US Non-farm payrolls.

As far as the BOE interest rate statement, with the first quarter UK preliminary GDP coming at a mediocre 0.5%, we will probably see the MPC keep rates at 0.50%. With no chance of a rate cut, this keeps the interest rate differential in the British Pounds favor, and in the highly unlikely chance we do see a rate hike, this could be a huge boost for the British Pound.

On Friday, we have the Non-Farm Payrolls expected to increase for the seventh straight month. If this were the case, we tend to see a short-lived Greenback rally against the Sterling as buyers jumped in long and faded any initial drops in the last couple of releases. If we see a weak number, the market could still go in Sterling’s favor in an anti-dollar reaction. Again, both scenarios look good for Cable bulls.

In my view, buyers will probably have the upper hand with the upcoming events and the current levels Cable is trading at, so I’ll go long the market if we see a test of last week’s lows. I’ll keep my stop tight incase the pair is quick to break that level, and because of the potential movement these two events can create, I’m going for a big profit on this one by scaling into a winning position. Finally, because of my tight stop, I’ll also cut down my trade risk to 0.50% of my account, giving me the flexibility to jump in again and stay within my risk comfort levels. Here’s what I am going to do:

Long GBP/USD at 1.6430, stop at 1.6370, trail stop and add full position every 60 pips. Initial risk is 0.50% of my account. Profit target is the major resistance area WO/PWL, taking max profit at 1.6670.

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

So, if everything works out my way, the potential return-on-risk is 10:1, meaning a 5% return on this trade if it all works out. Stay tuned by following me on Twitter and Facebook!

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.