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.

How to use FX futures to narrow down which forex pair to trade

A problem I have is that once a currency pair shows a viable trading setup, other related pairs often show the same setup too. A reason for this phenomenon is that markets don’t operate in a vacuum. When markets really move, everything move together. So the highly correlated markets can scream for entry at the same time. The real question though, is which one should I put my chips in?

There are limitless methods on how you can approach this. The one I’ll talk about in this post is a simple method of comparing your candidates using the currency futures. Why use the futures? Because they provide a standardized platform, which is essential when comparing things. As a bonus, there is a US dollar index futures to help with analysis of the dollar. Not a trivial process on its own.

I will explain my method by way of an example. This morning, I was considering to go long in AUD/JPY, CAD/JPY, AUD/USD, or short USD/CAD according to signals from my FTC setup.

Sure, I could have just choose which one to trade based on the RSI rating or some other indicator. But I don’t put much faith in indicators for various reasons. So a method I typical use is to just go through the charts to manulally identify which has better reward/risk or better support/resistance. As you can imagine, this is very time consuming.

In practice, I only compare AUD/JPY vs. CAD/JPY and AUD/USD vs. USD/CAD, and then compare the winners of those two matches. Like in a tournament. Not that much of a hassle but the issue with this approach is that I’m adding another layer of uncertainty with all these unscientific comparisons. That could have a significant negative impact on my trading.

In a good trading strategy, every step taken should be to improve your probability of success or the reward/risk ratio. As such, it’s better to keep my process simple.

This is where the currency futures indices is of value. They provide a big picture perspective and serve as a standardized data for comparison. Using my example, I needed to choose between shorting US dollar or Japanese yen (I repeated the process for choosing AUD or CAD). Figure 1 below shows the 4-hour chart of both currencies for the past 10 days. It’s evident from the chart that the US dollar is in a range and the Japanese yen (actually it’s JPY/USD) is moving up. 1 point goes to US dollar trade.

Next, I identify the strength of the support/resistance to estimate in the case that the trade goes against me, which would have better cushioning. It’s a crude form of risk estimation.

From the figure below, see that the dollar has a clear resistance just below 76 and it is currently stretched away from the cyan-coloured moving average. Whereas the yen is near a recent top with no prior occurence and it has been sitting above the moving average for a while. Another point for dollar short.

USD 2 : JPY 0. Consequently, I went long AUD/USD this morning instead of AUD/JPY.

This is by no means a vigorous methodology. I’m not saying that shorting US dollar is a good idea from this simplistic comparative process. It’s just that my setup tells me to go long AUD/USD or AUD/JPY, this is just a quick and easy way to help me decide which trade to take. Nothing more.

As an aside, some people may prefer to use currency ETF, UUP and FXY, instead. But I don’t like to use ETF as a data source as the price is noisier because they are affected by other factors.

US dollar and Japanese yen futures indices

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

Paper trade: Long USD/CHF @ 1.009, out 1.0245 (+155 pips)

The U.S. dollar finally picked up some strength last Thursday and I loaded to ride the trend. One of the earliest trade I made in this wave is going long on USD/CHF. Figure 1 is taken today after a full week since the initial move in USD. The vertical line marks the day when I entered this trade on Thursday 22nd late afternoon. Here are my reasons for making the entry:

1. Parity level 1.0000 was a mere 30 pips away from the low the day before
2. Obvious positive divergence on the indicator, Fig. 1.
3. Breakout on the shorter 3-hour timeframe, Fig. 2.

I placed the order just above the resistance and beyond the short term channel. The order was filled the next day in the morning on the 23rd. In hindsight, I should have used a half position only and added to it once it broke the longer term descending resistance as shown in Fig. 2. That’s because a short term break is a low probability move given that the downtrend was strong. However, USD/CHF was testing parity, which is as strong a support as you can find for many reasons.

As you can see from Fig. 2, the entry was rather good overall (could have been better as discussed above). However, I think the exit was also a disciplined move. My original target was 1.026 as noted below. It was just below that horizontal resistance at 1.0267 which I marked on Fig. 1. Yet, there’s also the longer term trendline marked on both Fig. 1 and Fig. 2.

I had 4-5 positions open at the time and this was one of my strongest two (the other being CAD/JPY short), so I tried to add to my position once the pair broke that longer term trendline. However, the line proved to be strong as USD/CHF retraced and took out my stop as shown in Fig. 2 (red dot, 2nd from right). Nevertheless, the pair remained above 1.0200 and my core position was safe (I moved my stop up).

But not all was well. USD/CHF eventually broke 1.025 but it didn’t go far. It printed a couple more bars on the chart while I kept moving my stop closer and closer. Also noting that the pair was short-term overbought, I moved my stop right up to below 1.025 at 1.0245 to lock in most of the profit. That stop was eventually taken out and the pair took a dive as shown in Fig. 2.

Moving the stop up tight in a short-term overbought condition was a good choice. I learned this from my recent trades when I left profits on the table. So I got out against my hope for higher pips even when the talk of USD making a return to strength was ubiquitous. I traded what I saw and not what I hoped for, and against the opinions of other people. If only my entry was a bit more patient, this would have been one of my best executed trades.

Below are the data for my entries.

Position size: 100%

First Entry: 1.009

First Stop: 1.0030

First Target: 1.0260

Reward / Risk #1 = 170 / 60 = 2.8 < 3, but close enough.

Second Position Size: 25%

Second entry/stop: 1.0232/1.0220

I didn’t have a target in mind for this addition because it was only to add on the strength of the existing position.

USD/CHF

USD/CHF, 3-hour

Paper trade: Short NZD/USD @ 0.7520, out 0.7308 (+212 pips)

This was definitely one of my better executed trades recently. Here’s my logic for the entry and exit.

As shown in Fig. 1, at the time of entry (marked by the faint vertical line on 10/23), NZD/USD made a negative divergence with a higher price and lower RSI. There has been a series of false alarm on the RSI overbought entry signals. However, 0.76 is an important resistance because it is where the massive downturn started in July 2008.

I timed my short entry based on Figure 2. We made a lower high just below 0.76 and within the previous channel. Then I waited for the current downtrend to break the ascending support line to place the order. The order was subsequently filled on Sunday night during the Asian open when I was sleeping. Frankly, I wasn’t too happy at first because my fill price was right at the low. I kept my position anyway and allowed the stop to work for me. This is probably the best decision I’ve made with this trade. By remaining patient, I didn’t succuum to micro-managing my position like I’ve done before.

With regard to the exit, I took profit at my target at the ascending support shown in Figure 1. That support line worked well for half of the year in this rapid ascend of NZD/USD. So I didn’t want to risk a bounce by taking profit at this point. However, NZD/USD has traded down to 0.7260 as I’m writing this. Time will tell if the exit is a good one or that I should have left half the position in.

The net gain for this trade is $79.82 because I mistakenly entered a full position instead of half as I should. Here are the R/R that I saw when I entered this trade.

Position size: 100%

Entry: 0.7520

Stop: 0.7600

Target: 0.7300

Reward / Risk = 220 / 80 = 2.75 < 3. I thought I was entering with only a 50% position size because of the R/R not meeting my criteria. However, I read my own forex position sizer wrong and gone in with a full position. Luckily, things have worked out. But I have since updated my position sizer so this won’t happen again.

NZD/USD

NZD/USD, 3-hour