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.

[caption id="" align="aligncenter" width="580" caption="ES Futures (e-mini S&P 500)"][ES Futures (e-mini S&P 500)]ES Futures (e-mini S&P 500)[/caption]

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.

[caption id="" align="aligncenter" width="580" caption="EURUSD, 3-hour"][EURUSD, 3-hour]EURUSD, 3-hour[/caption]

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.

[caption id="" align="aligncenter" width="580" caption="EURUSD, 30 min."][EURUSD, 30 min.]EURUSD, 30 min.[/caption]

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.

Posted 29 November 2009 in forex.

EURCHF breaking 1.5100: A textbook perfect breakdown and reversal

Last night, EURCHF finally broke below the 1.5100 zone after weeks of consolidation around the area. See Figure 1 for a daily chart of EUR/CHF. I just happened to be looking at the charts when this breakdown occurred last night so I made a few day trades. These scalps turned out better than I thought because a particular technical analysis phenomenon worked really well on this move. Referring to Figure 2, a 5-min. chart of the move, you'll notice that I've marked some Fibonacci levels on each of the big dive in prices. While there are several Fibonacci levels that are notable and commonly used, I pay attention to the 50% retracement level almost exclusively. A half retracement is easy to spot even with the naked eyes without any technical analysis so even those that don't use Fibonacci can see it. With this hypothesis in mind, I shorted EURCHF a few times last night on the bounce to 50% of each of the move. The first entry was at 1.5048. EURCHF retraced about 50% after that big dive from 1.5080 to 1.5030. Then it formed a descending triangle on the 1-minute with the support at 5050. A nice round number support level. The entry was triggered near the end of the triangle and right when it broke the support. I held on to this short looking for the move to take us all the way down below 1.5000 since there's bound to be lots of stops there (which never happend last night probably because of SNB intervention). Before that though, we made another quick dive and then retraced 50% again. I shorted some more with a limit order placed at the 50% level before hand. So I had two positions sitting from 5048 and 5039. See Figure 2 at the bottom for a chart with the levels marked. However, by the third dive, it is now obvious that the move down is getting smaller and smaller. Then when the 50% level of that last move held for like eternity, and numerous tests of resistance at 5030 failing yet didn't back down by much every time, I took profit at 5027-5028. The reward/risk ratio were impressive with these trades. I risked a few pips to make 10-20 pips. However, one mistake I made which made all these efforts wasted. Simply put, I did not have enough position size to make these pips gained worthwhile. Being used to swing trades with much bigger stops, I merely used my usual lot size for these trades. The reason being that I didn't expect these to go so well since I've always been burned by day trading and was just testing the water with these days. Oh well, these could all have been just because I was lucky last night. In hindsight, I could have saved myself from all that stress and made a lot more simply by betting on SNB intervention as many traders have done. Recall [my lesson on fundamental analysis and the SNB pegging up the EURCHF market][]? Well, last night presented a great opportunity to profit from that open secret again when EURCHF tested 1.5000. The reason why I didn't go long is because it was just too obvious that SNB would come to the rescue. I thought that they would have waited for running the stops below 1.5000 before intervening (note to self, don't second guess). Well, it seems that obviousness works. The optimal entry for a long EURCHF would have started at the point when I covered for the same reasons. I should have eased in a long position around 1.5030 with stop at 1.5000. A reasonable profit target would have been 1.5100. Why 1.5100? Aside from that the fact that it's an obvious resistance, this is just something I noticed while drawing up the chart for this post. In Figure 2, I've drawn the 161.8 % Fibonacci extension levels for those 3 down moves discussed. See that they formed the reversal targets perfectly with equally impressive textbook perfect consolidation reaction afterwards? If the price action adhered to the Fibonacci retracements so well as described above, it's no surprise that a Fib. level would work well for the reversal too. Just because the same people are probably involved with the move down as well as the move up when all these happened within mere hours. So two lessons from last night.

  1. I should pay more attention to the 161.8% level in my analysis along with the 50% level in the future.
  2. and more importantly, don't think the central bank (e.g. SNB) will not intervene just because everyone is milking them out.

[caption id="" align="aligncenter" width="580" caption="EURCHF"][EURCHF]EURCHF[/caption] [caption id="" align="aligncenter" width="580" caption="EURCHF, 5 min."][EURCHF, 5
min.]EURCHF, 5 min.[/caption]

[my lesson on fundamental analysis and the SNB pegging up the EURCHF market]: http://www.quantisan.com/a-lesson-on-the-importance-of-fundamental-awareness-for-a-technical-trader/

Posted 26 November 2009 in forex.

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.

[caption id="" align="aligncenter" width="580" caption="Account balance Nov 10-14, 2009"][Account balance Nov 10-14, 2009]Account balance Nov 10-14, 2009[/caption] 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.

[caption id="" align="aligncenter" width="580" caption="EUR/USD, 5m"][EUR/USD, 5m]EUR/USD, 5m[/caption] 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.

[caption id="" align="aligncenter" width="577" caption="intraday sentiment"]intraday sentiment[/caption] 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).

[caption id="" align="aligncenter" width="580" caption="EUR/USD, 30-minute"][EUR/USD, 30-minute]EUR/USD, 30-minute[/caption] 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.

Posted 14 November 2009 in forex.

Dabbling in day trading again on this historic day

[caption id="attachment_334" align="aligncenter" width="500" caption="ES Setup"][ES Setup][][/caption]

I mentioned previously about avoiding volatility. But with VIX about 75 now, I couldn't help but to take the opportunity to day trade. I know, I know, I said I wouldn't do it again. So I'm only trading an account withpaper money.

To illustrate the abundance of day trading opportunities these days, I just launched my trading screen and within minutes I can see a viable setup.

On the 1 minute chart on the left, notice the small doji at \$844 with a high volume. Also off the chart is a low of \$837 for the day in the morning. So \$840 is an effective support for the moment. Since the doji at \$844 is above \$840, this is a good sign for the time being.

So I placed buy orders around \$845 for the next few minutes and exiting below \$850 (obvious resistance), with intent to get back later in if it breaks \$850 strongly. This went on for a few minutes, and I traded in the range taking small profits twice, until the price broke to \$841.50, which I stopped at a loss at around \$842.50.

However, noticing it's in a steady climb from then on, I entered a long at \$845 again, with stop at \$841, for a longer trade. The price rose to \$853.75, bounced back to \$850, and started dropping. I exited my long at a small profit at \$849.50 on a retracement.

ES keeps dropping for those seconds until \$845.75 and bounced right back to \$851. That was a good sign. I believe the initial \$850 break and retracement was just a technical bounce. So I went in again at \$851 a bit later intending to ride it up to \$860.

That trade went as planned and I exited at \$858. I reversed and went short at \$861 with a tight stop at \$863. The stop got hit and the price went up to \$866.

I decided to stop there since the trading screen didn't lean much to on-the-spot analysis. I'm not asking for a full charting screen though, that would be overkill for day trading. Simplicity is key. I'd be happy if they had 1-min and 15 min candlestick charts with 2-line EMA, MACD, Stochastic, and volume information. In the end, I'm \$162.50 richer in paper money after 12 trades.

Although it's a profitable session, I think I took way too many trades to reach that.

Since my trading platform is very basic and isn't meant for day trading, I didn't even have a chart on the trading matrix. I just looked at the price movements and occasionally flip back to the chart. However, I do have one good indicator for use... which is the price of Goldman Sachs (GS). Long story short, we're in a financial driven crisis and GS (along with MS and others) is one of the two surviving investment banks (of original 5) in this mess. GS were off the lows of the day and moving up very slowly throughout the few minutes which I day traded. That was a good enough bullish sign for me to go long.

[ES Setup]: http://traderpau.files.wordpress.com/2008/10/2008-10-10-es.png

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