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.

An undisciplined trade: Shorted EUR/USD @ 1.499, stopped 1.505 (-62 pips)

I started to doubt this move mere minutes after placing it, which rarely happens. And not because of the price action. It was solely for my reasoning for this trade. On a quick mental review of this entry, I noticed that they sounded more like excuses than reasons. First sign of it was that I laid in a 100% position to fade a strong trend on the daily on the basis of my 3-hour chart. My strategy is to not risk more than 50% (preferably 25% – 33%) to fade a trend on the daily. Lack of discipline #1.

Next, I already had six 50% positions open at the time. That would roughly translate to 3% of my account, without even taking into account the high correlations (working on a spreadsheet for this). By adding this 7th position, I’ve broken my fundamental rule of risk management to not risk more than 3% of the totals funds at any single moment.

Lastly, it was the end of the trading day on Friday. Carrying trades over the weekend is well known be even more risky than usual because so much could happen over the two days. To add a low probability trade on a loaded to the neck account into the weekend is practically suicidal. I’m just glad that I had a hard stop to limit my risk. At least I did something right here.

In terms of the dollar amount lost, the loss for this trade is $44.17 on paper. And after this stupid move, I have given up all my +500 pips gain (also on paper) from the week before. Much work remains to be done to improve my trading performance.

A last note to self from this what-not-to-do lesson. All trades should be taken with logic and reasons. I failed to do that in this trade by convincing myself that USD should reverse over the weekend. On top of it, I took as big of a position as my system allows to gamble on this intuition. These are two breaches of trading rules that could ruin an account. It’s good that I’m stopped out with a loss in this trade because if this became profitable, it could boost my ego and this problem would only get worse.

Another silver lining in this is that I am beginning to trade forex with paper trading instead of diving in with real money first. In addition to testing my forex strategies (which I haven’t followed as diligently as I should), I’m learning much about my weaknesses in trading in general by keeping a detailed journal and statistics of my trades.

Update: EUR/USD cratered to 1.4844 today. Another shortcoming with an undisciplined trade is the opportunity cost. If I weren’t so preoccupied with the stop loss from this morning, I would have followed my setup and shorted EUR/USD today as it went spiraling down.

EUR/USD

EUR/USD, 3-hour

Paper trade: stopped out of AUD/JPY 83.59/84.90 (-130 pips) and EUR/JPY 136.73/137.50 (-77 pips)

I shorted AUD/JPY on the 20th and then shorted EUR/JPY on the 21st. Both positions were stopped out before Tokyo opened tonight. I didn’t write an opening post for EUR/JPY because it’s the same as usual, long term setup, short term timing. I’ll briefly go over the two trades here and what I have learned in hindsight.

First let’s talk about the AUD/JPY trade. I wrote about the entry here. Figure 1 shows the daily chart. AUD/JPY has managed to edge out of its channel with an obvious negative divergence on the RSI. However, it feels as though it’s going to turn any time soon as seen in Fig. 2. I’m not going to try again though because I need to learn to trade what I see and what I feel. I shouldn’t even consider to short it until its below the short term channel.

For this AUD/JPY short entry, I entered too early because I drew my channel too tight. If you compare Fig. 2 in this post with Fig. 2 from the entry post, you’ll see that the supporting line is lower here. The previous line didn’t enclose everything as it should.

For my EUR/JPY trade, I tried to short the top again…. When will I learn? Fig. 3 shows the setup on the daily. EUR/JPY is obviously testing a strong resistance. So far so good. Fig. 4 shows the 3-hour chart for my entry (yellow inverted triangle to the right, the last red dot is the exit). This is where I failed. EUR/JPY was testing 137 and the top of the channel before I entered. Then once I saw that EUR/JPY failed to touch 137 again for a few bars, I entered.

Shorting a new top is ill-advised because the price can consolidate upward along with the channel as shown in Fig. 4. You’ll be fighting a losing battle as the momentum is working against you. In any case, the lesson from both of these trades is that I need to learn to be more patient with my entry.

The loss for AUD/JPY is -130 pips for -$29.82 and the loss for EUR/JPY is -77 pips for -$26.46. At least my position size was halved because I knew these are risky trades.

Note: All the charts were taken just now after the exit.

AUD/JPY

AUD/JPY, 3-hour

EUR/JPY

EUR/JPY, 3-hour

Paper trade: Closed EUR/JPY @ 135.00 (+500.1 pips)

I closed my successful EUR/JPY long just before the weekend with a tight stop. Notice from Figure 1 that EUR/JPY is now in overbought territory. In addition, a negative divergence is developing on the RSI from the recent 2 peaks also at 135.00.

The best thing about this trade was my entry. However, I certainly didn’t chop this setup the best I could. Even though I rode this up for +500 pips, I only had a 50% position size. There were two easily identifiable adding points which I could have taken advantage of.

When EUR/JPY broke above 132.00, which was a clear short-term resistance, a day after my entry I should have added to my position then because of short-term momentum. Another chance came at 132.50 or so. As shown in Figure 2, when the price retested the low end of the channel at 132.50. Both of these opportunities would have survived with my usual stop of 100 pips.

Another disappointment was that my second half of the position was stopped out shortly because I moved my stop up too soon. I was confident enough when I placed the order to enter a full position size. But my over-zealous need to reduce risk got the better of me. I observed on a daily time frame but traded in the 3-hour. To be more accurate in pointing the finger, it was my lack of patience that stopped out my other half of the position.

Anyway, I did rode the wave with a sufficient position size. One thing I just noticed is the T formation in Figure 2. EUR/JPY is back to where it started a month ago. Where it heads now is uncertain. I will keep an eye on this pair and aim to re-enter another long in a few days. The trend is your friend.

EUR/JPY

EUR/JPY, 3-hour

Paper trade: Long EUR/USD 50% @ 1.49212, stopped out @ 1.4875 (-46.2 pips)

EUR/USD looked as though it was going to break through 1.50 when it broke 1.49 (Fig. 1). I waited til it marked a short term top at 1.4920 (Fig. 2) and then placed a stop entry just above it at 1.4921. EUR/USD traded above it for a few hours but failed to break 1.4970. It has now retraced to a short term support. If it continues to decline, the double divergent top will be all written over the wall (Fig. 1) and it’ll be a good short for the next few weeks. Until it moves out of this trading range though, this is still an uncertain trade.

On another note, I have now had a string of 7 consecutive losses. Good thing these are merely paper trades for experimentation. Looking over the history and statistics, it’s apparent that many of these trades were taken to try for the top/bottom just after signs of reversal in the short term (except for this EUR/USD trade, which is with the trend). Thus, from now on, if I’m to go against the intermediate trend (daily), limit my position size by reducing a 50% position size entry to a 33% entry, at most. Furthermore, only enter when the instrument has marked a short term lower top and has broken the immediate support.

After paper trading for a month, my forex trending strategy is finally starting to take shape…

EUR/USD

EUR/USD, 3-hour