Hello, Friends. It’s helpful to go back over trades from time to time. Reviewing winners is normally pleasant, but I find that I learn more from the ones that got away. The trade that I would like to discuss today was an odd hybrid; a trade that produced a small profit despite some poor trading on my part. I’ve been a student of Todd’s since the spring of 2009, and I think that I have a pretty good understanding of his approach to chart analysis and trading. Psychology and noise can still get in the way from time to time, even when we (okay, I) know what to do.
Every day, I run a scan that’s designed to identify options with prices that are highÂ relative to where they usually trade. That’s based on their implied volatility; the ThinkorSwim platform on which I do my options trading does a great job of providing analytic tools and scans. On August 19, the symbol BBY came back; the scan noted that the September monthly options were priced to yield implied volatility of around 50 percent, in the 69th percentile of its range for the previous year.
As you’re probably aware, volatility in general has been quite low in recent months. In BBY’s case, the implied vols for September were elevated because earnings were due out prior to the opening on August 26. Despite the looming report, I was intrigued; it’s way more fun to sell options with high relative and absolute volatility rankings, and this qualified in both respects. The daily chart was interesting. Following a long decline that lasted until the end of January, 2014, the stock had been trading sideways to up, and since hitting 32.24 on July 3, it had dropped back to as far as 28.85 on August 15. That put it between the 38.2% and 50% retracement levels, and also coincided with the moving averages, which often provide support, particularly in conjunction with those Fibonacci levels.
The stock, by the time I looked at it, had moved higher, and was trading around 30.50. To take advantage of the relatively elevated option premiums, I decided to put on a covered combo, which is sometimes called a covered strangle. This consists of a long stock position, a short call and a short put. Two option premiums are collected, which is nice; the risk is that a rapid decline in the stock will result in being put at an unfavorable level. Nonetheless, in a generally uptrending market, with a rebounding stock, this trade seemed a fair bet. I bought BBY stock at 30.47, and sold September 32 calls for 0.87, and September 28 puts for 0.72. Â Based on option pricing, ThinkorSwim calculated that the September 32 calls that I sold had a 67.5% chance of expiring out of the money, while the 28 puts that I also sold had a 69.45% chance of going out worthless. In these trades, being called away is a good result, as is having both options expire worthless. The outcome that has to be guarded against is a move through the strike price of the short put.
Yesterday, the earnings did come out, with weak forward guidance from the company’s executives. The stock opened up down 2 percent and more or less kept going, reaching an intraday low of 29.76 before closing at 29.80, a decline of 6.8%. I didn’t stick around long enough to take in all of the show, exiting with the stock at 30.38.Â Because of a steep drop in implied volatility (which reduces the value of both puts and calls) following the earnings release, and the benefit of a week’s worth of time decay (Theta) I was able to buy back the short options at levels that enabled me to eke out a small profit on the overall position.
While I wasn’t thrilled with this outcome, I avoided a loss. So why do I feel that I traded it poorly? Because there was no compelling reason to exit. Even at the low yesterday, the stock didn’t even reach the 38.2 percent retracement level; the uptrend remained intact. My concern over the rapid drop wasn’t unwarranted, but the price action as reflected in the chart didn’t really justify liquidating the position. I used my imagination, and my experience, which suggested that a decline of that magnitudeÂ would probably continue for a while, rather than setting up a contingency plan based on price action, and reacting appropriately. I read some reports that painted a pretty dire picture of BBY’s fundamentals, and that no doubt had an impact on my trading. They say that old dogs can’t learn new tricks (which may be incorrect), but old dogs can, apparently, keep making the same mistakes from time to time.
As it turned out, the company today (Wednesday) reiterated its dividend payment, it received some support from the analyst at Morgan Stanley, and bargain buyers jumped in, leading to a close at 31.69, a 6.3% rise. My stock, of course, would have been worth 1.59 more per share; the calls that I bought back yesterday became more expensive, but that was partly offset by a drop in the price of the puts. In short, the chart looks much healthier now, and while I still don’t own a crystal ball, and the stock may just turn south on Thursday morning, I’d be happier if I had continued to hold it. More importantly, I would have been observing my trading discipline, rather than letting emotions win out. Lesson (re)learned.
Just a note as to Thursday; it will, in effect, be Friday for this week, since no senior market participant who can help it is going to be in the office on Friday. The e-mailed reports of absence will go out late Thursday afternoon; while they’ll all say “reachable by cell in case of need” the junior traders left on the desk know that they had better not need to make that call. It’s late enough in the year that negative impressions can have an impact come bonus time; better to be cautious. Volumes should be thin, and while that can lead to exaggerated moves in response to, say, a surprising headline, possibly creating opportunities, it’s pretty tough to forecast direction. Most professionals in the market are vaguely aware that equity indices are close to highs, and bond prices likewise. Under the circumstances, since it’s still a dangerous world, some lightening up of positions, or placing of hedges, might seem prudent prior to loading up the SUV for the trek to the Hamptons/Cape/Vermont. They’re all pretty nice this time of year.
Here’s hoping that your trading day and weekend will be safe, and pleasant.
Hello, Friends. On August 15, a post here suggested establishing short positions in EUR/GBP around the spot level at the time, 0.8025, with a stop above 0.8050 and an initial profit target of 0.7955. Since that was posted, the high in the pair has been 0.8027,Â Â and the profit objective was achieved earlier today, for a gain of roughly 70 pips. Normally, the next profit objective would be the previous low, in this case 0.7873. That would represent a further gain of roughly 70 pips if and when it is reached.
Frankly, I don’t see it as being worth the bother at present. There is a lot going on in the world, and Todd and Doc have great trade suggestions in stocks, futures and options virtually every day. Given the opportunities available in those asset classes and their derivatives, it’s tough to be enthusiastic about trading currencies with realized (historical) vol levels of 4 or 5% (EUR/GBP is running around 4%), and daily ranges of around 35 pips. I think that this trade will continue to work; the question then becomes “Is this the best use to which I can put my trading capital?”
For those leveraged to the maximum of around 50:1, a trade like this might still make sense, but it seems to me that the odds of being stopped out by noise – as almost occurred in this trade on a couple of occasions – are probably unacceptably high. I spent virtually my entire career on bank currency desks, and this is about the worst stretch of subdued price action that I can recall. Given the changes occurring in the industry, some of the decline in volatility may be more or less permanent, but I suspect that the energy level, and ranges, will expand in the not too distant future. I’ll continue to look for potential setups in currency pairs; in the meantime, there are plenty of other fish jumping.
As always, very best of luck!
Hello, Friends. We have a couple of extra features today, in the form of potentially important, and market-moving, speeches by Fed Chair Yellen and European Central Bank President Draghi. Dr. Yellenâ€™s speech will be delivered at a breakfast, 10 AM EST, while Dr. Draghi waits until the dessert plates are brought in, at 2:30 EST.
Both speeches will be delivered at the Jackson Hole conference, an annual event sponsored by the Kansas City Fed. It is attended by senior policy makers and economists, and has been the venue in the past for major policy statements. This yearâ€™s topic is the labor market, and since employment is believed to be a key to the Fedâ€™s current deliberations as to when to start raising short term rates, it will be closely observed.
The ECB is facing a European economy that appears to be stalling, with even stalwart German GDP moving into negative territory during the second quarter. There may be some hints as to what additional measures to stimulate growth the regionâ€™s central bank is considering; Dr. Draghiâ€™s remarks could have a sizable impact on the Euroâ€™s exchange rate.
In order for all market participants to have access to the remarks more or less simultaneously, even those not fortunate enough to be invited to Wyoming, I expect that the texts of the speeches will be provided to the major wire services. They will be embargoed until the scheduled time, so we should start seeing headlines as the speakers step up to the podium.
Thereâ€™s no way to determine with any confidence what the central bankers will say, or how the markets will react. It is important to be aware that there could be some volatility associated with their comments, and while I may set up trades along the lines that Todd Mitchell teaches as the â€œfirst fifteen minute/half hour breakoutsâ€ to take advantage of sharp moves, I intend to be otherwise flat in the E-minis. With regard to currencies, I plan to remain short EUR/GBP into Dr. Draghiâ€™s speech, with a stop above .9035.
Best of luck today!
Hello, Friends. Currencies generally respond quickly to changes in the market’s perception of future interest rate differentials. My current favorite short, EUR/GBP, had a rough day yesterday as inflation data seemed to indicate that interest rate hikes might be farther off than previously anticipated. All is forgiven this morning, as the minutes from the Monetary Policy Committee (the Bank of England body that sets short term rates) meeting in August showed that two members were already in favor of a hike.
There are nine members, so the vote was still 7-2. The significance is that the votes for many months prior had been unanimous, and so the market is now moving its view as to when rates will begin to rise forward. That’s good for GBP; of course, currency trading is all about ratios, but in this case, there isn’t much positive happening on the other side of the divisor, EUR. Traders involved in the latter should be aware that European Central Bank President Draghi will be speaking at the Fed’s Jackson Hole conference on Friday. The assembled multitudes get Fed Chair Yellen for breakfast, Dr. Draghi for lunch. Quite the day for policy wonks, and potentially for fixed income and currency traders.
For those who trade futures, which is probably most of us here, please also note that the minutes from the FOMC’s July meeting will be released this afternoon. The time is normally around 2 PM EST, although that isn’t written in stone. As the headlines hit, there is the possibility of some random turbulence, and I plan to have positions squared up by then.
That’s it for now; as always, best of luck today!
Hello, Friends. Here’s hoping that everything is going well, and that all of your trades are displayed in green. On Friday last, it was suggested that a short EUR/GBP position from around the spot level at the time (.8025) had a reasonable ratio of potential reward to risk. That view was based on recent economic reports and on an interpretation of the daily chart, following methods taught by Todd here at TradingConcepts. Thus far, the trade is working, reaching a low today of .7983. That’s still some distance from the initial profit target of 0.7955, but it’s enough so that I would suggest moving a stop down to break-even. Thirty pips or so is hardly a fortune, but I find that there are few things more aggravating than watching paper gains turn into real losses. While I’m not aware of any compelling reason for the currency pair to reverse sharply, my capacity for surprise helps to keep me young, and random headlines are as much a danger for currency traders (and more frequent) as are rogue waves for ships. If the worst thing that happens to our trades is breaking even, we should do very well over time.
Best of luck!
Hello, Friends. In my neck of the woods, it’s Sunday evening, a good time to review trades from the previous weekÂ and prepare for theÂ week ahead. Almost all of my trades are taken on the basis of technicals, but a lot of my initial ideas come from reading about fundamentals. That’s the result of years of practice and repetition. I spent the bulk of my career as a foreign exchange trader and salesman for several large banks, covering large institutional investors. Because currency exposure is generally much more important to fixed income managers than to those handling equity portfolios, my largest accounts were, for the most part,Â bond shops, and the people I spoke to every day were theÂ individuals responsible forÂ handling international bond funds, and the traders who worked for them.
TheseÂ clients and their firms remainÂ significant players in the FX market, along with sovereign wealth funds and central banks. Few of theseÂ entities pay much if any attention to charts or to technical indicators. Hedge funds and their commodity trading advisor cousins, another important group, cover the gamut in terms of style. Some of these outfits do use technicals in placing and managing trades, often through trading rules that are executed automatically when triggered, with profit targets and stops preprogrammed.The largest players in the hedge fund space, however, the so-called “macro funds”, typically follow an investment process more akin to that of the bond managers.
So, what do bond managers look at? First and foremost, of course, interest rates, including both the yield curves of individual nations and the differentials between them. Since currencies tend to be highly sensitive to changes in interest rate expectations, this component of the total return of an international bondÂ portfolio tends to be managed in much the same way. Bond managers are always looking to buy bonds that are cheap and sell those that are expensive based on their economic forecasts for countries and the projectedÂ impact on specific bond maturities. They recognize, of course, Â that buying bondsÂ offering a yield that’s 1 percent higher than, say, Treasuries isn’t much of a bargain if the local currency declines byÂ 2 percent versus the Dollar during the holding period. Profiting from both movements in bonds and currencies often seems like an exercise in squaring the circle. Bonds tend to lose value if interest rates are expected to move higher, which is one of theÂ factors most likely to result in a stronger currency.
The interests and concerns of these portfolio managers dictate the sort of coverage that they receive from their salespeople. A large institution will typically have an FX panel of 8-12 banks, with the bulk of the available business going to the top 3 in the queue. Position in the pecking order is partially based on the overall relationship with the bank, which isn’t something over which a salesperson has much control. Where people such as my former self can “add value” (as the jargon has it) is by alerting traders on the fund’s trading desk, or the portfolio managers themselves, to news that might impact their holdings. If, for example, an account is very overweight in Canadian bonds relative toÂ its benchmark, any news affecting Canadian interest rates or the Canadian Dollar is likely to be important. That of course includes flows from other customers thatÂ come acrossÂ the desk. The first salesperson toÂ pass along the information receivesÂ a point (some client firms keep score more formally than others), and ifÂ first place is achievedÂ consistently, the bank that is represented will likely begin to see more business. That in turn is the sort of thing that will make a sales manager happy, or at least less unhappy.
So what does all of this have to do with what we learn from Todd and Doc at TradingConcepts? Let’s take a look at Friday’s e-mini chart, above. Even if you were on vacation on Friday, as were many institutional managers, you’ll note that the first hour was gently flat to higher. Not a big deal, just another generally positive day, albeit a monthly option expiry. Shortly thereafter, an extended downside vertical bar, somewhat surprisingly (at least to me), appeared at 10:40. This took the price action down to the 61.8% retracement of the day’s range to that point; the next bar pushed through it. The following bar took out the session low. Five points in three minutes, with a trend reversal; not bad, and since I had no position on at the time, I was more curious than upset. Please note that on the chart above IÂ have the session’sÂ initial Fib levels in place.Â had I had been long, I would have been stopped out at the latest on the break of the 61.8% retracement level.
Still, it was obvious that something had changed, and I went looking to see what was receiving the credit, or blame. On the notifications page on my iPhone, I have headlines coming in from Bloomberg, Reuters, and MarketWatch. I find that Bloomberg tends to be quickest, but Reuters is sometimes more accurate, and provides more color on stories. Still, quickest counts, and on this occasion, Bloomberg reported that Ukrainian forces wereÂ firing atÂ a Russian convoy en route to the border with a cargo ofÂ “humanitarian aid” for pro-Russian forces. This is where fundamentals come into play. At any point in time, there are typically two, or at the most three, fundamental inputs that institutions are watching carefully. At the moment, I would say that these are potential changes in central bank policy, the Ukraine, and the possibility of more widespread conflict in the Middle East.
Since the headline referenced one of the current Big Three factors,Â the newsÂ seemed likely to be a game changer for the session. I got short, albeit more slowly than probably should have been the case, and got short twice more on retracements,Â which addedÂ up to a pretty good day, and week. Todd teaches techniques that enable us to participate in strong trendingÂ moves, but I’m usually reluctant to get involved in volatile markets unless I believe that I understand what is driving them. In this case, I was comfortable using Todd’s tactics, as I was ready to cover a short position on any hint that the initial reports of an enlarged conflict were being denied, or that they had beenÂ exaggerated. Of course, it isn’t always easy to tell (as was true in this instance) what’s going on, so it’s important not to delay if a profitable move suddenly reverses. That’s another area in which Todd has a lot to offer, as trailing stops can help to preserve profits even in “V” shaped moves. Parenthetically, it’s often easy to tell if an alert concerning the Middle East is going to impact the E-minis; go to /CL, and see if crude oil is moving. If that contract is quiet, chances are that whatever is going on won’t beÂ influencing equity futures, either.
For what it’s worth, and for those who are interested, most institutional traders and the salespeople who cover them glance over the front page of the Wall Street Journal and the Financial Times every morning, as well as the business section of the New York Times. Those who have Bloomberg Professional terminals of course keep a close eye on those throughout the day; for the rest of us, there are the Bloomberg.com and Reuters.com websites. As noted, I alsoÂ scan MarketWatch, which is part of the Dow Jones empire. Reuters puts out a newletter called “The Day Ahead” that is worth subscribing to, and the price is right (it’s free). It comes out in the evening, and highlights potentially important events in the day ahead. I had forgotten, for example, that the Fed’s Jackson Hole conference is scheduled forÂ this week (on Aug 21-23). Fed Chair Yellen will deliver the keynote on Friday morning, and participants in the fixed income and currency markets will be watching carefully. Also closely observed will be European Central Bank President Mario Draghi, who will deliverÂ a luncheon address, also on Friday. If you have to work on a weekend, I suppose that it might as well be at Jackson Hole. Invitations to this annual gatheringÂ are coveted, and separate the players in the economics and policy making realms from the wannabes.
There are plenty of on-line news aggregators out there, but by definition they’re unlikely to get the macro headlines out first. For those who use ThinkorSwim, there is an additional resource in the form of the “Market Cast” chat room, which offers expert commentary from the S&P pit in Chicago. Just go to “Support/Chat” from the main page, select “Chat Rooms” and then “Market Cast”. From the right side of the page, click on “Watch” and you’ll get four updated futures charts and, more importantly, the well-informed voice of Ben Lichtenstein of TradersAudio.com. For those who have a ToS account, it’s certainly worth checking out, as the broadcast does an excellent job of pointing out when locals are just playing catch with each other for a couple of ticks, and when “paper”, customer orders,Â is making an impact.
Just some thoughts for a Sunday evening. TheÂ most critical form of preparation, of course, Â is to have a good grasp of the principles of trading. Going through any of the TradingConcepts Inc. courses, and following Todd’s or Doc’s webcasts,Â are great waysÂ to acquire and developÂ the necessary skills. We’re trading against institutions, however, and although we have some important advantages (we have no benchmarks to constrain us, and we can actÂ quickly when conditions dictate, instead of scaling in or out of a large position), it’s still important, it seems to me, to have an understanding of what they look at, and how they are likely toÂ react to news or other changes in fundamentals. It’s their activity that creates the patterns that we follow in the charts, so knowing a bit about how they work can put us a step ahead.
As always, best of luck tomorrow, and in the week ahead!
Happy Friday, Friends. My daughter is interning at a money management firm in Boston. She reports that the office is more than half empty, and that all of the brass have already departed for the Cape or other weekend spots. That’s pretty typical of all asset managers in August, and it’s one reason why reactions to news can be exaggerated. Today, for example, the E-minis were knocked down, hard, by reports of intensified conflict in the Ukraine. I know of no way to handicap what’s going on in eastern Europe; all we know is that the market in all likelihood isn’t as long now as it was earlier today.
Wednesday saw economic reports out of the UK that suggested that the Bank of England might need more time before beginning to raise rates than Sterling longs had anticipated. I suggested holding existing short positions in GBP/USD, and establishing new ones around the 1.6890 area. Thus far, Cable hasn’t been anywhere near that level; after dropping to 1.6685 on Wednesday, it sagged further (to 1.6656) on Thursday, and thus far today is basically treading water just below 1.67. With the additional push lower, the Fibonacci levels have been redrawn, and in the daily time frame 1.6860 now looks like a reasonable level for those not already short to begin scaling in.
EUR/GBP reached .8035 yesterday, a retracement sufficiently far from the recent low at .7873 to warrant a new short, even at today’s slightly lower .8025. This would, of course, be a long GBP position, but the outlook for the UK economy relative to that of Europe is still fairly rosy, and while a hike in interest rates might be more distant than seemed likely on Tuesday, the European central bank may well be forced to adopt additional easing measures, given poor GDP reports this week. A potential risk is the September 18 Scottish referendum on independence. If that vote proves to be in favor of separation (which is not widely expected to be the case), Sterling is likely to get crushed, and even the potential for deflation in the Eurozone probably won’t matter much.
Nonetheless, based on the charts, using methods taught by Todd Mitchell in his courses here, EUR/GBP looks to be a reasonable sale. A stop above .8050 looks prudent, while .7955 could serve as an initial profit target. A move to retest the previous low at .7873 wouldn’t be surprising, and would be a secondary profit objective. Of the major currency pairs that I’ve looked at, short EUR/GBP appears to have the most favorable ratio of potential reward to risk. There are never any guarantees, and a reversal is certainly possible. Still, at current levels, a stop would be roughly 32 pips distant, while a resumption of price movement in the direction of the overall trend, and a touch of the initial profit target, would represent a gain of roughly 70 pips. Guaranteed to work? No. Aligned with the trend on both the daily and weekly charts? Yes, indeed. Close to a viable entry point? Again, yes. All we can do is put the odds in our favor, have realistic profit objectives, and manage our risk in case things don’t go as we expect.
Have a great weekend!
Good Morning (EST), Friends. There was a fair amount of data released overnight, and therefore at least the possibility of some significant movement in currencies. On balance, the response was disappointing from a trading standpoint. While Eurozone GDP growth for the second quarter came in at flat, versus expectations of a 0.1% gain, and Germany’s GDP shrank by 0.2% Â (-0.1% was expected), EUR/USD appeared unconcerned. The numbers themselves aren’t all that important, as the second quarter is already firmly in the rear view mirror. Still, with Eurozone consumer prices declining by 0.7% in July, the odds that Dr. Draghi and his European Central Bank colleagues will have to reach more deeply into their bag of monetary policy tricks seem to be growing.
The chart, however, suggests that either market participants were already looking for some form of additional easing from the ECB (very likely) or that they didn’t see this data as being anything worth responding to. For the moment, EUR/USD appears to be finding support around the 1.3335 area (the low has been 1.3332). There has been enough congestion there that it might just be worth putting a sell stop underneath, say at 1.3325 with a limit at 1.3320. This is by no means guaranteed to be a large winner, but the area just above has provided support for more than a week now. Some follow through selling on a break lower would be expected. Something around 1.3500 (you’ll recall that 1.3502 held as the low for what seemed like forever) strikes me as a very reasonable place to enter a short position, but of course, the price action first has to retrace that far. Waiting for appropriate entries in times of low volatility can be frustrating for people like me who are chronically short of patience. It is less annoying than is losing money, however, and while EUR/USD may not offer a lot to do at the moment, Todd and Doc show potential setups in equities, equity futures and their derivatives every trading day.
Overnight, NZD/USD was a nice winner, as retail sales were reported to have risen by 1.2% in the second quarter, up from a 0.8% gain in the first. The push higher today doesn’t move it out of its current downtrend, but it does put it closer to a reasonable short entry around 0.8570. This could be the piece of news that turns the trend around, but that doesn’t seem likely at this point. I would expect the 0.8621 level to offer decent resistance if the pair does continue to move higher. Â Another approach could be a long position in AUD/NZD, with an entry around 1.0865. A reference point for a stop would be not too remote at 1.0835.
There are, of course, plenty of potential macro flash points, including most obviously the situation along the Russian-Ukrainian border. Currencies, however, Â are trading at present in quiet and narrow ranges for the most part. It will probably take a surprise to create some large-scale movement, and the direction as well as the timing of those are notoriously difficult to predict. That, of course, is one major reason for our use of charts. They can’t predict, but they can help us plan appropriate responses to any headlines. That includes both entry levels on trades and, critically, risk management, since the key to long term success is remaining in the game in the short term.
My former colleagues report that institutional clients have been taking advantage of the low cost of carry to hedge their currency risk at unusually high levels. For example, cross-border equity managers with investments in European equities can sell Euros forward with virtually no funding costs. If in the past they generally hedged 50 per cent of their currency exposure, they might instead have 75% hedged at present. The strategists anticipate that hedge ratios will be reduced in the coming months, and this unwinding could, for example, provide EUR/USD with some lift. That’s because a hedge involves selling EUR forward; unwinding it involves a purchase. That may provide some better opportunities, but it will take time; as noted above, this is one of those periods when patience is required, and when expectations of potential returns need to be realistic.
As always, no matter what you’re trading, best of luck!
Good Morning, Friends. The Pound has taken a bit of a tumble this morning, with Cable (GBP/USD) losing roughly half a percent, a large move in these placid times. There was a flurry of employment data this morning; while most of the figures came in close to the market’s consensus expectations, wage growth was weak, and the Bank of England, while still expected to begin raising rates, is now widely believedÂ to be on hold until early 2015. Institutions tend to buy currencies when they expect the associated interest rates to rise, and with the upside momentum in GBP/USD weakening of late, today’sÂ news has apparently moved some discouraged longs to throw in the towel.
The chart directly above is the daily version, my normal point of reference when assessing a currency’s technical position. In the case of GBP/USD, the move lower has covered almost five big figures, from 1.7190 to 1.6698. That’s 2.9% in a month, not bad considering the leverage available in currency trading. There doesn’t appear to be any compelling reason to reverse short positions, although maintaining a trailing stop to capture profits before they erode is almost always a prudent approach. My sense is that with institutions still likely overweight GBP, a fairly aggressive approach to fresh shorts is warranted. Anything above the 38.2% retracement level, say 1.6890, looks like a reasonable short entry.
As always, it’s important to have a stop in mind, since trends have been known to halt, and reverse. In this case, the 61.8% retracement level, currently at 1.7000, looks like a decent reference point for a stop on long positions. That’s a fair distance from 1.6890. My own approach, for what it’s worth, would be to put a partial position on at the 1.6890 level, looking to add around 1.6945, the 50% retracement level. That would create a position with an average price around 1.6915, making something just above 1.70 a more acceptable stop level, roughly 0.5% from the combined entry.
If, given leverage, half a percent is still too much to risk, the position can be smaller, or once the position is established, an hourly chart can be used to set profit targets and stop levels. The key is to limit losses, and to remain in the game. It’s important to remember that even with a perfect setup, once a position is entered, the probability that the next move will be in a favorable direction is 0.5. We just don’t know what the future holds. Consequently managing risk, including moving trailing stops as appropriate, as Todd Mitchell teaches in his courses, is always a close step behind picking solid entry levels based on clear setups.
As this morning demonstrates, “new news”, otherwise known as a surprise, can make a difference, and the largest currency players, when nervous about the outlook for a position, typically don’t spend a lot of time examining charts before pulling the trigger. As I always reminded my junior associates when I was a desk manager, even the most predatory hedge funds tend to be very polite when entering and building a position. When they’re watching profits evaporate or losses mount, on the other hand, they want out right now, and if their own mothers get in the way the nice ladies are going to get run over. That goes double, at least, for the rest of us, so quick reflexes and a willingnessÂ to get out of danger’s way are very helpful. The last one to take profits frequently won’t have any remaining.
As always, best of luck!
Good Morning (EST), Friends, and Happy Friday. It has been great to get some volatility and two-way action back into the equity markets, and there have been pockets of interest in currencies. There was some news out of Asia overnight; China, which has the ability to move currencies with its economic reports, released balance of trade figures. The trade surplus for July was $43.7 billion, with exports up 14.5% year on year, while imports grew 7%. That is pretty bad news for the Australian Dollar (AUD), since China is an important destination for Australia’s natural resources exports. If China is exporting more, but importing relatively less, that’s good news for China, but it’sÂ less positive forÂ Australia.
In addition, the Reserve Bank of Australia, the local central bank, revised its economic outlook; it now expects GDP growth from now until June 2015Â of 2-3%, down from the previous 2.25-3.25%. It indicated that it expects unemployment to remain high, and complained that AUD “remains elevated”. The foreign exchange market can, of course, take a hint, and with many longer term investors, as well as traders, long AUD due relatively high Australian interest rates, charts are indicating that the downside may be the easier path. The Bank of Japan, meanwhile, kept rates and policy unchanged, which didn’t help those long of AUD/JPY, a popular carry trade.
Both the daily and hourly charts of AUD/USD suggest that a short entry taken around the 0.9290 – 0.9300 level offers a good ratio of risk to potential reward. If the downtrend is to have any legs, the pair should remain below 0.9325. while a retest of the low would be expected.
AUD/JPY is in a more pronounced downtrend on the daily chart, and a short entry around 0.9520, with a stop above 0.9550, looks reasonable. The hourly chart below, however, indicates that might be a little ambitious; starting around 0.9490, looking to add if and when the retracement takes it back as far as 0.9520, will make getting involved more likely. While it isn’t as bad as losing money, missing a move because the entry wasn’t placed properly is, as I can attest, pretty annoying.
It’s difficult for me to imagine that equity traders and investors will be looking too aggressively to get long ahead of a weekend that seems likely to offer some potentially negative news from the Middle East, although there may be some short covering in the early going. The market always offers surprises, though, even when our analysis is correct, so it’s important to remain flexible, take profits at appropriate times, and avoid large losses that take us out of the market. Both Todd and Doc offer a host of ways in their blog updates and (particularly) in their courses to help us achieve those complementary goals.
As always, best of luck, and have a great weekend!