Bearish USDJPY on 19th week of 2011

I am going bearish on USDJPY this week using my QTD system. No position is opened at this point. I am merely entering my sentiment into the system to trade for me. Figure 1 is a daily chart of USDJPY. Notice it’s lack of life despite the USD making headlines last week. Figure 2 shows the move with a US dollar index, USDX, daily chart. Furthermore, according to the order book on USDJPY, there are massive bullish positions in the red (at a loss) which make this pair ripe for some bull squeeze.

I am going short on NZDUSD as a hedge on this move. It is my favourite long USD pair these days.

USDJPY, daily

U.S. dollar index futures, USDX

Bullish USDJPY on week of April 17, 2011

I have unofficially launched my Quantised Trading Desk (QTD) expert system this weekend as the system is ready for live trading after almost a year in development. You can’t miss the announcement if you visit the new frontpage of this blog. So, I won’t talk about it anymore here. The purpose of this post is to discuss my forex trade. It’s been over 7 months since I’ve traded on the forex market. I have been working on QTD during all these months to improve my overall trading. Anyway, let’s dive right to it for my first trade back into forex.

I am bullish on the U.S. dollar this week. Why?

The Financial Times is letting on rumours that the US Fed is signalling an end to quantitative easing. Coincidentally, the U.S. dollar appears to be testing supports across all major currencies. Secondly the US equities market hasn’t been able to make higher highs even as the dollar is marking new lows. Still, I’m not one to call a bottom, nor am I hunting for one. This is merely a good risk-reward trade to gun for an obvious move.

In particular, USDJPY appears to be the best of the bunch as its been holding well over the past few months while the dollar crumbled. The fact that Europe and US are rumoured to be lighting up on the money printing whereas Japan’s money printing press is on full steam for the quake reconstruction (Yen bearish) is a decent excuse to place some chips on USDJPY.

You might have noticed, I haven’t specified my entry price, amount, or stop loss price as usual. This is because I am relying on the Quantised Trading Desk expert system to trade USDJPY for me. QTD will monitor the market for me and execute trade entries and exits as it sees fit to accumulate a long position in USDJPY. All the risk management and quant analysis are built into the system. So I don’t have a position yet because I’m waiting for QTD to do the grunt work.

USDJPY weekly chart

EUR/USD +95 pips in 2 hours: An example of swing and day trade convergence

I had my best day-trading day this quarter on November 27. I made 95 pips in two hours at the open with only two trades. This post is a review of my trades that day for my future reference. To save you and myself from reading, the two reasons for this good run are:

1. Convergence of intermediate term signals with day trading signals
2. Ignoring my bearish sentiment (Dubai news) and traded what I saw from the prices

Before moving on, let’s start by setting the stage with some background information to summarize what conditions were like that day.

Background

The news on November 25 after NY close of Dubai World delaying their debt repayments sent the dollar and yen soaring. I made my first 400+ pips trade by being at the right place and time on this panic wave. The U.S. market was closed that day but FTSE sold off more than 3% the day after the news. So the expectation was for US to do a catch-up sell off when it opens again on Friday 27th. Risk aversion (equities down, yen and dollar up) was the talk of the day.

Figure 1 below shows the charts of ES futures (e-mini S&P500). Left is a 1-min. from midnight of 27th to that morning’s NYSE opening. Right is an hourly showing the move overnight from 26th to 27th.

ES Futures (e-mini S&P 500)

Intermediate term signal

Figure 2 shows my intermediate term signal. EURUSD has been printing an uptrend on the daily (not shown). Figure 2 shows that EURUSD was testing the bottom of my channel so I should consider going long. Notice that this is the same channel that called for the 1.5150 top on 25th. At least it has proven itself useful once.

EURUSD, 3-hour

Short term signals

For the short term signal, we need to go back to Figure 1 for the ES charts. ES tanked 40 points over the holiday with very low volume. It made it all the way to 1067 just before 3am on 27th. Then it lifted all the way to 1080 at 9am. 1080 is the line in the sand for the bulls and bears. So retracing all the way to that level before opening is significant.

This pre-open strength in ES was the sign of oversold for me. This is the short-term confirmation I needed. I entered my first position to long EURUSD @ 9:09 am to test the water.

Then I watched both EURUSD and ES closely for the next half hour. Once NYSE opened. I noticed that the TICK was relatively mellow with readings around -250 to -500. It’s unusually good for a -20 points open drop on S&P 500. One would expect at least -800 readings for a strong negative sentiment. So after watching EURUSD, ES, and TICK for about 10 minutes, I entered a second position on a weak retracement at 9:39 am.

The exits

For my exit, I took profit at 1.5180 because it’s the 50% Fibonacci level and it’s also the top of another of my channel (Figures 2 and 3). After about 10 minutes of watching the 1M bars, EURUSD failed to clear that resistance, so I took profit on the second half to go flat in this pair just before 11 am because it’s an early-closing Friday (NYSE closing at 1pm).

The gains were +95 and +93 pips for +0.27% and +0.28% in my demo account total. Not bad for holding for 2 hours.

Update: Thanks to Jeff on Twitter for the question. I updated Figure 3 with the Fib. levels and showed the top and bottom used to draw it.

EURUSD, 30 min.

Conclusion

In summary, I started with an intermediate term setup that aligns with the major trend. I observed the reaction of the markets on an important news. Identified an oversold condition from the short-term charts for a short-term positive divergence signal. Scaled in a position. Then added more with another confirmation. I scaled out when the target was hit.

Recommendation

Once again, I could have been more aggressive on this trade. As shown in Figure 3, 1.4920-4930 was a short-term resistance. I could have added more to my position when that level broke, with a stop at 1.4900.

Paper trade: Long USD/CHF @ 1.0122, SL 1.0060, TP 1.0225

Seeing that this is my first commitment after the big drawdown, I’ll bring back my tradition of writing a post to log my rationale and market conditions on this entry for later review.

I sifted through the weekly charts of all pairs on my watch-list tonight and found that USD/CHF long is the most promising. Figure 1 shows my daily chart for the setup and Figure 2 is a 3-hour chart with my entry timing.

Let’s talk about Figure 1 first. USD/CHF is making a triple bottom with a positive divergence as shown. I have also marked the current major support at 1.0010. USD/CHF has trade below it for about a week now but failed to break any lower. Today is the first day when we’ve opened somewhat above it.

Secondly, note that we have broken above a descending channel as shown in Figure 1. USD/CHF has also tested the 1.0010 support twice already at both sides of that channel. And accompanied with a positive divergence as I said.

The major caution as shown in Figure 1 is that we’re still trading below the 10-day ma.

As for the entry timing, observe Figure 2. Notice that USD/CHF just made a higher low outside and above the descending fChannel (the two thicker brown lines). This is the signal for entry. Note that the fChannel is my proprietary channel.

This trade is initiated according to my new Forex Trend Fading (FTF) setup.

Position size: 100%, 50%

Entry: 1.0122, from fRays signal.

Stop: 1.0060, below major support

Target: 1.0225, first major resistance, ease off some at that point, add more above it.

Reward / Risk = 103 / 62 = 1.66 < 3. Not not good enough for my usual R/R target, but I’ve been considering lowering it to 1.5. So lets see if an R/R of 1.5 is a good enough number. I would have been more comfortable with a 2.0 though. Anyway, let’s see how this goes.

Update: I took half of it off at breakeven because of the lower R/R and the new setup. Only 50% in this trade now. I’m looking to add a EUR or JPY cross for my other half allocation.

Update 11/19: I’m stopped out of this position @ 1.0150 for +27 pips.

USD/CHF

USD/CHF, 3-hour

My bad EUR/USD day trading and what to do about it

I’ve stayed home from work this week because of the flu. So with spare time on my hands, I had the urge to experiment with day trading the forex market. Bad decision. After a good 3-4 days of day trading EUR/USD with my demo account, here is what I have to show as illustrated in my account balance graph for the past 4 trading sessions below.

Account balance Nov 10-14, 2009

Yes, you can push back up your dropped jaw now.

I considered not accounting for these losses in my paper trading account because these trades were meant to be experimental only. However, as the whole point of me paper trading the forex is to learn and improve, I decided to keep these losses and suffer the consequences of my own doing. Heck, I wouldn’t have had the choice if this were real money (which is the way that I should treat this demo account anyway).

I stepped out of my circle of strength (swing trading) into something that has burned me many times before. Well guess what, history does repeat itself.

Enough with lambasting myself. The real focus of this post is to point out what I did wrong and what can I do to improve in day trading the forex. Not that I’m intent on day trading though. This is merely to increase my arsenal in forex trading.

Figuring out what I did wrong is actually obvious in hindsight. Figure 2 below depicts the trades I made on Nov 13, which led to most of that steady decline in my account balance as shown in Fig. 1. See the bounce from about 1.4820? I kept shorting it and shorting it all the way up to 1.4880. What was I thinking?

The main reason for this epic failure is that I broke a fundamental rule in trading. Trade what you see and what you thought (Techniques of Tape Reading by V. Graifer). Based on the previous day’s market sell-off from 1.5000 and the Asian markets failing to break 1.4900, I thought the market would follow through on Friday and break through this 1.4820 support. In particular, just before NY open before 9:30am, EUR/USD had a couple of big drops, as shown in Fig. 2. All these circumstances led to my believe that we’ll see a weak day like yesterday.

EUR/USD, 5m

However, a support is still a support until it’s broken. I shouldn’t keep shorting it even though it has obviously bounced.

While identifying the trend is trivial in hindsight, what evidence did I have at the time to tell me that? The evidence was in fact staring me in the face that morning. Figure 3 shows part of the screen that I usually use for intra-day observation. As you can see, S&P500 rejected the previous day’s close with a strong negative TICK reading and then broke above the morning range. The TICK also remained strong with many +800 readings in the morning. All the classic signs that point to a strong positive trend.

intraday sentiment

Furthermore, if only I had stepped back and observed the bigger picture, as shown in Fig. 4 with a 30-minute chart, I would have seen that we have a great positive divergence swing setup (and which I normally would have exploited if I weren’t so focused on trading the 5m that day).

EUR/USD, 30-minute

What is my goal in future day trading? Instead of a declining equity curve as in Figure 1, just flip it up-side-down and that’s what would be perfect. All I needed to change is being able to spot the right trend and ride it. Easier said than done. So what is the moral of this story? I have once again proven that I am still no good at day trading. Stick with swing trades.