Paper trade: Short AUDCAD @ 0.9489, Stop 9540

I’ve been stopped out of all my Aussie shorts on the breakout today. But my setups for AUDUSD and AUDJPY are still intact as the resistances are still safe. Having failed so many times in shorting AUDJPY (first try, second try), I am taking a conservative approach on that particular play. Although those setups are ripe for entries, I’ll wait til the test of resistances hold first before entering short again in AUDJPY and AUDUSD. Which begs the question of, why AUDCAD, and why now?

First of all, I still have conviction about my Aussie short because of the setups as discussed previously and the fact that gold price is holding the 40 day ema at 1135 at the moment. That 40 day ema has worked well on the uptrend in the past few months. So it should be respected if gold is indeed in a downtrend now as I surmise.

So why short AUDCAD instead of the popular AUDUSD? Simply because AUDUSD broke out of a short term range whereas AUDCAD is still holding as seen in the AUDCAD 3-hour chart of Figure 1. This shows AUDCAD is weaker even when gold is making new short term high.

AUD/CAD, 3-hour

For the big picture, see Figure 2 for the weekly chart of AUD/CAD. We see that 0.98-0.99 has always been the turning point for a massive 1000+ pips selloff. We’ve hit 0.99 back in November and the slide is already in progress.

Secondly, we see from Figure 2 that AUDCAD bounced off the 40 week ema in late December and ran up to 0.95 from 0.92. 0.95 is a decidedly important round number resistance as it was also a peak in April of 2007. You know, the time before the economy started to crack as shown with the topping in the markets.

AUDCAD, weekly

Now that I’ve established that the trend is pointing down. I still need to time my short entry.

Figure 3 shows the daily chart of AUDCAD. In view of the above discussion, we have a good chunk of resistance above 9550 as marked by the purple box in Figure 3. This is the all important safety net for this short entry. As long as AUDCAD stays below 9600, this long term setup remains intact. And don’t forget the broken uptrend line.

AUDCAD, daily

Lastly, notice the RSI trends in both the 3-hour (Fig. 1) and daily charts (Fig 3.), they are both showing negative divergences. Figure 1 is my timing for this entry, see the current negative RSI divergence marked by the downward trend in RSI versus the toppy price.

In summary, here are my signals for this FTC setup:

1. Weekly chart shows downward trend.
2. Big resistance above current price on daily.
3. Broken uptrend line on daily on retracement from weekly chart.
4. Intermarket relation with gold testing 40 day ema at 1135.
5. Negative RSI divergence on 3-hour chart.

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Paper trade: Stopped out AUD/JPY longs @ 81.3 (+7 pips) and 81.29 (-28 pips)

My AUD/JPY long from yesterday got stopped out after I moved the exit stop to a breakeven price. Then I gave it another try once AUD/JPY had a quick dip and recovered to 81.30 level around Tokyo noon. That has been a time of large moves recently. My entries and exits are shown on the 3-hour chart of AUD/JPY in Figure 1.

The problem with this entry is that the downside momentum is stronger than I thought. While being wrong is perfectly fine in trading, I need to put more thoughts in short-term analysis to improve my probability.

In addition to the analysis which I’ve done as previously discussed for my entry, I am going to take into account yet another shorter timeframe for my trade timing. Figure 2 shows a 30-minute chart of AUD/JPY.

Referring to Figure 2, the two blue triangles are my entries. The two red dots are my exits from stops. In hindsight, my first entry was about an hour early. Short-term resistance was obvious at 81.60 but there is no short-term support shown. I should have entered either above the resistance or when we failed to break 81.10 support the second time.

For the next few hours from 12:00 to midnight, AUD/JPY is testing that long term resistance fChannel as shown in Figure 2. We can see that the trendline is imposing a strong resistance on the pair as it hasn’t been able to hold more than a few bars above it.

The second entry at 81.60 is acceptable. AUD/JPY tested 81.30 again but managed to jump right back up. Particularly if we look at the 3-hour chart of Figure 1, it would seem that this is merely a short-term retracement from the 82.00 resistance. A stop at 81.30 as I have done has limited risk and it would mark the line in the sand.

If I’m to try going long this pair again with this setup, I would use a half sized position only as the setup has failed me twice already. But as can be seen in Figure 2, AUD/JPY is failing 81.30 this morning again. This is an obvious sign of weakness in the pair. So that’s it for me for now to go long in this pair.

A more detailed log of my trades can be found on my trade log page.

AUD/JPY, 3-hour

AUD/JPY, 30-minute

Paper trade: Long AUD/JPY @ 81.22, SL 80.99, TP 82.50

Several major pairs are testing their support on this market correction with a 20 points drop in the S&P500 before 10 am. This is a short term capitulation scenario.

From looking at the major pairs, the long term trend still seem to be intact. In particular, I am interested in shorting Yen because I’m seeing FTC setups across the board in JPY crosses.

I compared AUD/JPY, CAD/JPY, EUR/JPY, GBP/JPY, and USD/JPY pairs to decide which one to go long with. Seeing that I already have a USD/CHF long position, USD/JPY is out. Then EUR/JPY is out too because of recent Euro weakness from my observations of intraday price actions. I haven’t had much luck with British Pounds, so GBP/JPY is out too.

That leaves me with my two favourites, CAD/JPY and AUD/JPY. So I checked with USD/CAD and AUD/USD charts to see which has better support/resistance. USD/CAD has a lot of resistance above 1.06, so going with CAD/JPY long seem like to be less risky. However, from looking at the 3-hour chart, I changed my mind to go with AUD/JPY long because it is showing a positive divergence there.

From the daily chart of AUD/JPY shown in Figure 1, we can see that the up-trend is losing steam. The price action is expected to be choppy. Long term condition, up and choppy.

AUD/JPY

Figure 2 shows the 3-hour chart of AUD/JPY, this is where things get more clear. Notice that AUD/JPY is testing the lower fChannel the third time in a month with the lowest RSI. This is a clear positive divergence.

AUD/JPY, 3-hour

However, the strong short-term down move is making this long entry very dangerous. Thus, I am using the NYSE intraday sentiment (Fig. 3) to pin point my entry. Notice the extreme negative open and then the intraday positive divergence as shown by the S&P500 and TICK.

NYSE intraday sentiment

As part of my analysis for this trade, I compared the current scenario with earlier this month. Figure 4 is the hourly chart of AUD/JPY when I entered this trade. Figure 5 is the hourly chart of AUD/JPY from Nov 1st – 4th, when AUD/JPY last tested the lower fChannel. I noticed that AUD/JPY had a tendency to break below my fChannel by about 50 pips before reversing. With the fChannel at 81.80 today, AUD/JPY should fall to 81.30. I watched that level closely this morning and timed my entry with the intraday sentiment as described above.

AUD/JPY, 1-hour

AUD/JPY November 1st-4th, 1-hour

Position size: 100%

Entry: 81.22, entered based on intraday sentiment.

Stop: 80.99, below round number support.

Target: 82.50, previous congestion and near top of channel.

Reward / Risk = 128 / 23 = 5.57 > 3. A risky trade with great potential.

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An example of how trading in fear is bad for your account

Having had a hard time day trading the EUR/USD last week, things haven’t been well for me this week either with the market in a gridlock. My one and only viable setup so far is built for a trending market. So this range-bound market is new territory for me as I experiment (in hindsight, haphazardly) to come up with more profitable forex trading setups. As you can imagine, trading without discipline is a recipe for diaster.

I have given back all the paper gain from this month by the start of this week and is treading on thin ice with my demo account dipping dangerously close to the November opening balance. Needless to say, I do not want to see my account in the red for this month.

But that is what happened after today’s string of failed trades. I am officially in the red for this month, for now. While there are several mistakes I made resulting in this mess, I think it all boils down to one flaw in my trading this week. Yes, those day trading stints I did surely have put a dent in my demo account, but what’s worse is that I’ve unconsciously have let those losses affect my trading mentality.

These losses were stuck in my mind and my mental “goal” for this week was recovering from them. However, I have approached the problem in the wrong way by not wanting to lose anymore in my account. In other words, I was afraid of losing.

So how did that materially affect my trading? Here is a simple example as illustrated in my order history on the GBP/JPY chart attached at the bottom of this post. The 3 yellow triangles are my short entries and the 3 red dots marks the stopped exits.

According to my setup, my original entry at 149.50 had a stop at 150.50. But I moved my stop closer to 149.80 in the morning because I didn’t want to risk more. That got taken out easily as 149.80 is within the congestion zone. Then I tried to short it a couple more times with tight stops because I see the downside potential to be still intact. Those were eaten up alive too and now I don’t have a position because it would have been more foolish to keep trying in vain.

While just 3 trades wouldn’t have done much damage, I was doing the same thing across the board in shorting CAD/JPY and EUR/CAD. A few here and a few there. They add up to a bad day.

As of this writing, it looks like these pairs are finally moving in my direction. But instead of being patient with reasonable stops, I thought I could do better and micro-managed my positions to end up taking multiple small losses and with nothing left on the table to ride the move.

So what is the correct way of following up on a dent in the account? I should have done the following instead:

1. Reduce risk exposure by limiting trade size or overall opened positions until I am back up.
2. Focus on what I did wrong last week and stop doing that, i.e. no more day trading.
3. Recall my best trades and do more of that, i.e. my one and only finalized setup, FTC.

Not so coincidentally, now that I’m in the deepest drawdown ever, this is as good as ever to put this emergency recovery procedure into practice.

GBP/JPY, 1-hour

An introduction to my Forex Trend Continuation Setup (FTC)

After many trials and errors with paper trading the forex market for a month, the first of my trading setups is finally taking shape. So I would like to document this approach here after a well executed trade this week (illustrated below).

This trading setup is based solely on technical analysis. Here’s an overview of the steps:

1. Define a long term time frame for identifying setup.
2. Draw the major supports and resistances.
3. Add a momentum technical indicator.
4. Add a trend indicator.
5. An entry is signaled by an agreement of the trend and the indicator at the support or resistance price level. Do not enter yet.
6. Define a short term time frame for timing, use this for the following steps.
7. Draw the supports and resistances on this short time frame.
8. Place an order when the price breaks the short-term trend to be aligned with the trend on the longer one.
9. Exit when the entry conditions are gone (not necessarily reversed).

This is very vague. So here’s a real example in practice.

Figure 1 shows steps 1 to 5 on the daily chart of CAD/JPY for a short entry. The entry point is the bar before the marked vertical line on Oct 21. See that CAD/JPY tested the descending resistance line (step #2) with a negative RSI divergence (#3). The trend as suggested by the moving averages is a choppy downtrend (#4). Thus, the conditions were met and a short entry is signaled.

CAD/JPY

For timing the entry, Figure 2 is a 3-hour chart of CAD/JPY with the entries and exits marked. Yellow triangles are entries and red dots are exits. I entered a full position after CAD/JPY made the initial dive and then retraced to the previous support (now resistance) line. It bounced right off that line strongly (left side of figure). I entered at market price once we made a hammer candlestick (negative signal) the bar before. Stop was placed at 88.0, near the recent high and at a round number resistance.

CAD/JPY, 3-hour

For the exit, I had a manually adjusted hard stop to be a couple of resistances away. I kept it loose on purpose because this position was my biggest winner. (Let your profits run). But once the RSI on the daily passed below 50, I took a more conservative approach on the exit stop. Then once CAD/JPY tested 84.50 and hung around 85.0, I tightened my stop and was taken out at 85.30. Note that my original target was 84.0, so I thought testing 84.50 was close enough.

Also note that this setup is expected to be executed recursively. It is meant to be run so that you’re stacking up your winning position if the conditions and the trend is in your favour. This is actually where the power with this setup kicks in. I’ll continue with the CAD/JPY example to illustrate this point.

Notice in Figure 2 that I added to this CAD/JPY short at the (second from the right) yellow triangle point on the chart at 86.3 for 50% more units. The down move was still intact as shown in Figure 1 at the time. Using the same setup, I added more units to this position. And by adding 50% more to my position, I was able to ride that last wave down for +200 pips on these extra units. Otherwise, I would have exited at 85.30 on the consolidation around 85.0 and left with nothing on the market for the last big wave.

The timing as shown in Figure 2 for this addition isn’t the same as for the original entry. But it’s obvious enough on the figure with the same markings which I used. Simply refer to Figure 2 for a visual explanation on the timing for this entry.

In case you haven’t noticed on Figure 2, but I just re-entered this position with half the size using the same setup. Since this third entry is still in progress, I can’t comment on it just yet. We’ll see how it goes.

Finally, for ease of referencing this trading setup later on, I will call this particular setup, FTC (forex trend-continuation). Right now it’s version 0.1, a first publication release but still in beta testing with my paper trading. Once the setup has proven itself, I will use it in live trading with real money. Then I will christen it with a version 1.0, and perhaps a better name. In the mean time, I expect more refinement to this setup as I continue to try it out on paper trading.

Check my FTC tag for more sample applications of this trading signal.

Update Nov 18, 2009: I’ve changed the name from FTCS to FTC as I now have a FTR setup.