Todd spends some time in his course discussing preparation for the day’s trading. One of the key elements of that process is knowing what potentially market-moving news is on tap, and when it will be released. I often trade numbers that are released at 8:30 EDT in the same way that I do Todd’s first half hour breakout, but the 10:00 EDT releases often create better breakout opportunities than are present on “regular” days.
Sometimes it’s necessary to dig a bit deeper. It was widely known that the European Central Bank would be announcing its decision on rates this morning. The more important event, however, was ECB Pres. Draghi’s press conference. He had promised during a speech last week that the ECB would do everything in its power to support and preserve the Eur0. Market participants were eager to learn what policy changes might be in store.
My desk saw aggressive buying of EUR/USD even before the rate announcement by hedge funds, including some that seem to have consistently good information. From a low of 1.2256 at 7:33, an hour later the pair had reached 1.2405, and lots of stops had been run, and done.
From there, it was downhill. Paul Newman as Luke Jackson famously observed, “Sometimes nuthin’ can be a pretty cool hand.” That is typically not the case for central bankers, however, and what Dr. Draghi offered in the way of policy initiatives was trivial. There were numerous headlines reporting his remarks. They were characterized by “may”, “will be addressed”, “possible”; in general, conditional and uncertain responses to a real crisis rather than a clear view of steps to be taken.
This was a day during which stops almost certainly hurt; anyone short Euro would have ultimately been on the right side of the trade, but I personally wouldn’t have had the intestinal fortitude to hang on above 1.24. That would have been the correct moment to sell, however; over the subsequent hour, EUR/USD dropped back to 1.2174. That’s roughly 1.8%, a big move for that time span.
From a trading standpoint, the prevailing mood in the market was already that EUR bounces should be sold, and that the Emperor of the ECB has little or no clothing to stand in. Those views are now reinforced. On the hourly chart, the area between 1.2270 to 1.23 looks capable of providing some resistance.
Best of luck!
I had a stop on the EUR/USD at 1.2351, which got hit. OUCH. Surely th CORRECT place for a stop was above the upper Keltner band.
Please comment Kevin
Sorry, Alan; not that it’s any consolation, but a lot of people in charge of a lot of other people’s money got stopped out yesterday as well, and many of them were left watching, enraged and frustrated, as EUR/USD resumed its downward path. Today, of course, it’s higher again, as there seems to be a growing sense that if Draghi hadn’t raised expectations so high, the announcement yesterday might have been a positive development.
The question, it seems to me, is how much pain you can tolerate. A stop above the upper Keltner, depending on where precisely you left it, might still have been triggered. Something at 1.2405 would have been done, while a 1.2408 would have been safe. I certainly don’t have any definitive answers; there are times when the market is just really tough. I can offer a couple of suggestions, with the caveats that this is art, not science, and that hitting the trifecta – which yesterday would have been a buy at 1.2265, a reversal at 1.24, and a flattening at 1.2135 – will remain pretty tough to achieve. I know one hedge fund that got the first two parts correct.
Anyway, one suggestion if you are profitable going into a major event, and you’re going in the direction of an established trend (e.g. lower EUR) is to lighten up ahead of the release. The pattern in EUR/USD has been a grind lower, with sharp and painful reversals as the market gets progressively shorter, and more vulnerable to headlines or other surprises. Yesterday’s move was different in terms of its size, but not its shape. If you do lighten up, you have the flexibility to throw in an off the wall order to add to your reduced position at potentially much better levels. There’s always the risk that the market will just continue to move in the established direction, and you’ll have left some money on the table. Still, if the trend is mature, the odds that it will just spike (lower, in this case) and continue without a pause or a correction are usually pretty slim.
Another thought is to keep your stops tighter ahead of events rather than looser. I’m less sure about this one, since moves like yesterday’s are pretty unusual (thank goodness), and it’s annoying to have a tight stop that proves to be unnecessary. Rather than a hard and fast rule (or rules), I think that this has to be considered in relation to your position size and profitability. If your position isn’t large relative to your portfolio, you can afford to keep stops looser, and perhaps look to add at better levels. If you’re already well in the money, a tight stop probably makes sense, as you’ll be preserving profits. If you’re mildly under water, or barely profitable, it might make more sense to close out the position, and take another look after the smoke clears.
Sorry that I can’t be more definitive, but there are probabilities rather than certainties, and again, the variables are how advanced (and aged) the trend is, where you are in terms of position size and profitability, and how close a logical stop can be. With EUR/USD in the 1.2260s prior to the ECB announcement, I would have considered something above 1.24 to be unacceptably distant, although I agree that relative to the Keltners it might have made sense, and depending on where precisely it was placed, it might have enabled you to survive and profit.
At the blow-off top, 1.2405, the stochastics were already coming lower, a nice divergence that would have made selling (with an extremely tight stop) viable. Still, it would have been a tough move to make, which brings me back to the point that there are some occasions on which it’s just tough to be short or long. Or, as a philosophically inclined friend is fond of saying, “Some days you’re the windshield, some days you’re the bug.”
Sorry to be so long winded; I’ve been pecking away at this for a while between other chores, and hopefully it’s coherent. If not, just give me a shout. Best of luck.