Bullls-eye!

After yesterdays sloppy (lack of) target setting, today it was important for me to have clear target levels for all my trades. Here is a trade setup for a breakout short on USDCAD:



My entry was placed one pip below the solid blue line, and my stop one pip above the red line. The solid green line was my target price, placed 5 pips above the light green horizontal line. This last line represents an earlier level of resistance identified on the 4 hour range chart that I posted on my analysis section over the weekend. You can find it here.

Here is the outcome of the trade:



Price moved to exactly the area I had located, giving me a 103 pip profit from a 19 pip risk.

No Limits

A frustrating trading day today. I was using a slightly different exit strategy to lock in break-even earlier, and changed my daily routine to allow me to trade from the office between 7 to 8.30. The result was I took good entries short on EURJPY and AUDJPY, on top of open trades for GBDUSD and USDCHF. In an hour I had taken about 400 pips. But a combination of having a recent emphasis on swing trades, and concentrating on break-even exits resulted in my leaving the last portion of the trade open, even though my analysis on longer time frames had clear target levels that were being approached. End result, the pips slipped out of my fingers and it looks like I will finish break-even for the day.

Another Day Another Currency Pair

... but the same pattern that I discussed on Thursday:

Repeating and Overlapping Pullbacks

As I've mentioned many times now, my common trade setup is to enter a trend when price retraces to the 61.8% fibonacci level. My first exit is between the 23.6% and 38.2% level, to partially protect my position if the price fails to make a new low (assuming a short trade). My second exit is at the fibonacci extension 123.6%. This is the minimum price move I expect, if the pattern completes successfully. My third target is open, or at about 200% extension, to take advantage of a bigger move.

The chart below shows 3 consecutive completions of a pullback to 61.8% followed by a move to the target level at 123.6%.



It makes me wonder if, rather than using the open position to collect the big profits, it would be more efficient to target the 123.6% level more aggressively but also to stack multiple entries for each successive pullback.

Something for me to look out for and test!

Double Bluff

Here is a classic example of price setting up for a breakout:



A long position can be taken if price breaks just above the blue line, with a stop placed just below the red line.

In an earlier post I described a converging breakout. This looks for convergence with RSI and MACD indicators. So here is the same setup with the indicators added:



I've included the standard representation of the MACD, but I really only focus on the blue curve, and remove the histogram and red signal line to reduce clutter. To trade the breakout I want to see convergence of the indicators. In this instance the indicators are weakening (particularly the MACD), indicating that the breakout may fail, so I don't take this type of breakout.

Here is what happened:



Price moves high enough to trigger the trade and get you excited, then retraces downward taking out the stop loss position.

Then to rub salt into the injury, it moves off in the direction you anticipated and probably reaches your target!



This is a pattern of behaviour I see quite often. That green bar that spiked down to knock out the stop loss position - I think it's possible to trade it. So it's a project I'm working on to define the setup rules and then back-test.

Oh, finally, I did take the trade, using another setup that worked. I'll talk about it later in the week.

4 Hour Range Chart Explained

I've been adding a number of charts and analyses under the analysis of currency pair links on the right hand side of the page. For some currency pairs I have included only a 4 hour range chart, with no commentary; so here is an explanation of how to interprete them.

For illustration purposes here is the chart for EURGBP:



I use the chart to determine whether to trade, and in what direction. The green and red lines show the trading range for the currency pair. That is, a technical region where the price is failing to make new highs or lows. If price penetrates the green resistance level, I look for opportunities to go long. If price moves below the red line I look to go short. The blue horizontal line represents the target price, and is constructed by a simple projection of the height of the trading range (the blue diagonal lines where used to measure and project the heights).

Here is another example:



CHFJPY has broken above the green resistance line and I am looking for opportunities to go long: either a breakout or pullback on a 15M chart.

What Next For Cable?

Cable: Slang used among forex traders referring to the exchange rate between the U.S. dollar and the British pound sterling. The origins of this term are attributed to the fact that in the 1800s, the dollar/pound sterling exchange rate was transmitted via transatlantic cable. source

GBPUSD is attempting to breakout of a downward price channel:



I've posted a detailed top-down analysis of this currency pair that you can find here.

On the right hand side of this blog you will find links for easy access to these top-down analyses of currency pairs.

No Break for Kiwi

Yesterdays trade was left open as a swing trade, to take advantage of a potential breakout of NZDUSD through the 5600 level. If the breakout was successful, the target for the move would have been an additional 300 pips to 5900. However, it was a quiet day and the currency pair found resistance at 5625. I've closed the trade this evening at 5600, making the trade worth 165 pips, against an initial risk of 45 pips.

Review of Todays NZDUSD Trade

In my last post I showed the setup for an entry long on NZDUSD based on limit orders to be triggered at a pullback to the 61.8% fibonacci level (adjusted for spread, my entry price was 5435). Actually there were 2 potential swing lows that I could have used to for the identification of the pullback level, I marked them as A and B on the chart. I used level A, although usually I am more conservative and would use the more significant level B. But I did decide to place my stop below level B for added safety (it was still within my money management limit for the trade). One check I did was to overlay the fib retracements for both levels A and B:



Fib levels for A are in blue, those for B in red. the 61.8% level for A coincided with the 50% level for B which gave me more confidence in the selection. And as you can see the entry worked perfectly with a clean bounce beyond the recent swing high from where the pullback began.

As I mentioned in last post, I created 3 trades so that I could scale-out of the trade. I like my first exit to be close to the 23.6% fib level, and subsequent exits to be aligned to fibonacci extensions from the pullback. My trading platform takes stop and limit levels as a relative number of pips from my entry price, which is frustrating because I know the absolute price levels and so have to compute the relative size. So frustrating in fact (especially when I am trying to quickly set up 3 trades) that I use a rule to simplify the process; I use multiples of my stop to define my exit levels: 0.5, 2, 5. The last one is discretionary, I can also use 4 or keep it open. For this trade I used 0.5, 2, 4. However, this should be based on the stop being below A, whereas I used a stop at B and didn't compensate for this, subsequently my exit prices were higher than intended. The chart below shows my exit levels with horizontal lines in blue and green representing intended and actual levels respectively:



As you can see there is a big discrepancy between my actual exit levels (green) and my intended exit levels (blue). And the net result of this is that the trade is still active, whereas it could have been wrapped up by 1pm. This problem resulted because I use multipliers on my stop level based on the assumption that my stop is closely aligned to the 100% fib level, but in this instance I had used a much more conservative stop. However, this stop is below the low for the day and I have exceeded breakeven, so on this basis I've removed the limit exit on my last part of the trade and am allowing the trade to run on to tomorrow (lets swing!).

Another problem with using multipliers of the stop rather than calculating from absolute price levels is my final level was above an important round number (5600) which also corresponded to a historical level I had identified on longer term charts (I did say I was bleary eyed!).

So tomorrow, we'll see whether the price breaks the 5600 level.

Back From Holiday, Back In The Saddle

I'm back, tanned and relaxed. This morning I was keen (too keen? certainly a bit too bleary eyed!) to get back in the markets. Here is a screenshot of the pullback setup for NZDUSD, with entry at the 61.8% fib level. Three long trades, each with the same entry and stop, different exits - I wish my platform would make it easier for me to do this!



The trade got triggered whilst I was on my way to work. I'll review the trade in my next post.

Have A Break ...

Tired of all the pessimism in the news. Make a plan to cheer yourself up:

1. Go short on Sterling
2. Read this
3. Watch this
4. Do what I am about to do, take a holiday :)
5. Have a Kit-Kat
   

See you in a week or so

Pullback To My Price, Please!

In my last post I discussed breakout trades. Well, there is really only one other type of trade to think about, and that's a pivot trade based on some form of price reversal. Here is one such trade, which makes up the majority of trades that I execute each month. The trade takes place when price is in a trend (umm, that's probably an entirely separate post to define exactly what that means in a precise way, but lets not worry about that now). I see the trend (or have anticipated it in advance) and I want a piece of the action. But not at any price. Price action always forms impulse waves characterised by moves in the direction of the trend, followed by either consolidation patterns or corrections that pullback against the trend. Below is an example of price moving upwards, but with the start of a pullback.



Based on the recent swing high in price, and the most recent significant swing low, I draw Fibonacci retracement levels (fibs). I set up a limit order to enter long on the currency pair if the price reaches the 61.8% fib level ( price level 8916 on the above chart), with a contingent stop order just below the 100% level (at 8990, so a 26 pip stop for this trade). I use a limit order because price may only momentarily touch this price level, plus I want to take emotion out of the trade.

Now wait and watch. Or better still, don't watch!



So far so good, I'm in the trade, and I'm pleased to see that price broke the entry price level but didn't close below it. At this point I should say that I actually place multiple entries at this price level (i.e. separate limit orders) all with the same stop level but with varying exit prices. Since this is effectively a counter-trend trade (in the short term), there is a risk that this is not a pullback but a reversal in price action. For the trend to continue price needs to break higher than the recent swing high. However, even if it fails to do this, I at least expect a bounce in price to the zone between the 23% and 38% fib levels. So here I place my first exit.



So far so good. At this point price is range bound between the latest swing low (the pivot bar that took me into the trade) and the recent swing high (from where I measured the fib retracement). The price might bounce around here for a short time, whilst it decides what direction it wants to go. If it were to break below my entry price I would be tempted to close out my position without waiting for my stop loss to be hit, and still easily breakeven due to my partial exit. But even if the trade gets stopped out, my loss has been reduced from the initial risk exposure. There is also the possibility that price will move down from the 23% fib level to the 78% level (not shown - lower than my entry but above my stop) and form a bullish gartley pattern. This is illustrated below (for a different currency pair):



This possibility has influenced the way I trade pullbacks as discussed here.

OK, back to the trade in question, and the reason for doing this pullback trade. The expectation is that the price will break above the recent swing high and continue its upward trend. Here it is ...



Sweet :)

Converging Breakout

Breakouts are classic trade setups that you'll find in any text book on technical analysis. Just because it's simple doesn't make it any less effective!



The price bars form a horizontal consolidation level and the expectation is that the price will break out of this level in the direction of trend continuation.

Here is the happy ending - a 180 pip move over a 5 hour period (against a stop loss of 22 pips). The red line is where I had a trailing stop so my actual gain was about 100 pips - significantly less than the full move, but I couldn't justify a tighter technically valid stop level.



Anyone who has traded breakouts knows that it's not always this simple. Here is a breakout that would have failed if traded:



Fortunately I anticipated that this breakout would fail, and placed a short term long position at the base of the spike in price that occurred at 22:30.

The approach I use to increase the chance of success on breakouts is based on what I have learnt from Nick McDonald. Prices can make sharp counter-directional moves due to snap-backs to moving average levels or negative divergence.

The first thing to check is that the break out is consistent with a trend continuation. This can be confirmed by looking at the overall trend on the current chart (15M) and the next time frame up (1H). All moving averages should be aligned and price should not be extended beyond the 10-20 MA zone. Next there should be no evidence of negative divergence. In fact, more strictly, the MACD and RSI indicators should display the same break out pattern as price.

There also needs to be the opportunity to set a very tight stop loss level that is still technically valid (i.e. defined by price action).

Finally here is another illustration of the convergence between price breakout and indicator breakout:



Notice in particular the convergence of the blue signal line on the MACD with price action. It's also worth pointing out that earlier in the day price was setting up for an upward breakout, but there was divergence with the indicators indicating either the breakout would not happen, or it if did then there would be a high possibility of it being a false breakout.

Welcome!

Hello and welcome to my thoughts and tribulations on my trading activities. I'll be using this blog for organising some of my thoughts on trading, and to review some of my trade setups, as well as maintaining some links to external reference materials.