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Good afternoon! As I expected, we did see a good amount of volatility after a very slow Monday trading session. But it wasn’t only UK data that moved the markets, China and Spanish bond sales played a nice role too. 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.

As I mentioned above, we got news from Asia and Europe to spark risk-taking sentiment in the global markets. First, China’s Q4 GDP rose 8.9% from a year ago, beating expectations.

In Europe, traders shrugged off the S&P downgrade of the EFSF to AA+ and focused on the strong Spanish bond auction for 12-month and 18-month bills.

Again, this all sparked “risk-on” sentiment, and Cable took off higher with the rest of the markets. UK CPI y/y came in as expected at 4.2% in December, which was lower than the previous month but had little effect to sway broad risk sentiment.

Fortunately for my trade, the move higher maxed out at about 1.5403 before sellers took over and pushed the pair lower. By about 2pm ET, it looked like US traders were already looking to close up shop and head over to their local watering hole as volatility seemed to move to a crawl, so I decided to close my trade out manually at 1.5345 for a very tiny profit.

Total: +5 pips/ +0.02% gain

Mr. Market must have been following me on Twitter, because as soon as I closed out, I saw a quick spike lower in Cable, another 20 pips from my close level. Haha!

Upon reflection, there are two things I could have done better on the day. First, was to play my original idea of straddling EUR/USD. I saw the tight Monday ranges, and it made sense to play breakouts on Tuesday.

But in keeping with my negative risk sentiment based on the fundamental landscape, I went with the Cable short instead. Definitely, a lot of pips were missed there.

Second, I saw the divergence signal at 1.54 (as marked on the chart above). I could have added another position there and the increase to my risk would have been minute since there were only 10 pips to my stop. Had I done that, the potential reward-to-risk would have shifted from just under 2:1 to about 4:1, and only with increasing my risk from 0.25% of my account to 0.29%.

Well, at the very least I can say I closed with a profit and not a loss, right?

That’s it for today, but stay tuned by following me for my latest market observation and thoughts. Good luck and good trading!

Trade Idea

Good evening forex fanatics! I’ve decided to start this week off with a very simple day trade play Cable as we get into the yearly UK CPI numbers. Will this event spark the action I need?

As I mentioned earlier, we have data from the UK in the form of the yearly CPI number. Looking back, it looks like the trend for inflation has been steadily dipping lower, and probably the reason as to why the forecast is lower than the previous read (4.2% vs. 4.8%).

Also, the reaction to this data point tends to be with a positive correlation, meaning a weaker read tends to bring on a weaker British Pound.

Of course, no one really knows what we will see, but I think this event will bring the market quite a bit of volatility, and if it hits the minor resistance area marked up on the chart above, around 1.5350, there may be enough sell orders for Cable bears to hold off the bulls and jump in at a nice price.

Also, given the potential for negative sentiment to hit once again after the S&P downgrades, and when the US opens up after a holiday weekend, I like this area for a day trade short, so this is what I’ll do:

Short GBP/USD at 1.5350, stop at 1. 1.5410, pt at 1.5240

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 near 2:1 return-on-risk as I go for Friday’s low, and because it is a day trade, I am reducing my risk to 0.25% 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. 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.