Risk Off!

There have been some good trading opportunities in the volatile price action across the board today with potential for a reverse in recent risk sentiment on the cards as markets respond to the prospect of an end to central bank easing policies.

Looking at the below EUR/USD chart we saw the formation of a double top culminating in a decisive Bearish outside day.  This could signal the start of a change in the recent bullish market sentiment and a continuation of the longer-term bear trend.  I will therefore be looking to play the short side tomorrow and shall be leaving sell-orders in the market overnight around the 38 & 50% fibs just in case we manage to trade up to these levels.

      

Gold false break!

We've seen a false break of the Bullish Flag formation and clear rejection on the 4hr chart above.  I will be looking for an opportunity to get short with a tight stop above the top of the recent hammer candlestick.  Normally I wouldn't advocate trading against the trend but this is such an obvious set-up with a predetermined tight stop location so I will leave it to your discretion.

EUR/USD

We had an assertive Bull rally in the EUR/USD last week that we were able to profit from.  The pair has since looked over-bought this morning and I would expect a pull-back, however, there must still be some bullish sentiment around this market and I will be looking for some renewed buying interest possibly at one of the fib retracements indicated on the 4hr chart above.  The first retracements coincides with Friday's lows and the 21day moving average while the 38.2% is coming in around previous resistance and the 618 is positioned at the original gap open.  Any Bullish price-action at these pivotal areas would convince me to get long.  

closing out Euro Trade for nice 3:1 profit!

A bit about Trading Strategy

TRADING STRATEGY.

Any trading strategy must necessarily be founded on certain axioms or ontological believes about the nature of the market itself before attempting to develop an approach to profit from this understanding.  Essentially, without going into too much detail, it is my believe that the market is not perfectly efficient or random and very susceptible to irrational behaviour such as panic, fear and greed which will dislocate price from its theoretical fair value.  If we conceptualise the market as a matrix of interlocking feedback loops or cycles within cycles (such is common amongst many Elliot Wave or Fibonacci based theories of the market), then it can be argued that in some cases even the smallest impact or shock to the smaller cylces within the hierarchy of this ecosystem can have magnifying knock-on effects to the status of higher cycles.  In practise, such a phenomenon may occur when a significant market moving event or individual causes a shock to the price at a pivotal point, such as around key levels, that will trigger stops on a lower timeframe and may lead to re-positioning of trades or an introduction of new entrants to the market on the higher time frame.  This causes a cascading effect that can significantly move the price, and in turn people’s conception of value, for very little underlying reason.  It is this constant observation of irrational behaviour in the markets that can lead us to identify certain key pivotal points and price-action set-ups that act as catalysts to induce a magnified dislocation of price in higher level cycles.

This ontological interpretation of the market dynamic is certainly nothing new and has much in common with general theories of Technical Analysis vs Fundamental Analysis or Random Walk Theory.  The key difference is the importance given to the catalysts.  Much Technical Analysis exists independently of volume or liquidity events such as News and in doing so neglects the importance of the catalyst in dictating future price discovery.  Many common Technical Analysis set-ups are actually counterproductive for the ordinary speculator as they often illustrate where the majority of market participants are positioning and anchoring price expectations.  It is common knowledge that the majority of trades loose money and the majority of traders also therefore loose money at the expense of the few!  If we except, as I do, that institutions will drive price in the short-term and are certainly far better informed in terms of fundamentals then other market participants (unfortunately the utopian model of perfect information is as much of a delusion in financial markets as anywhere else in the economy), then it stands to reason that we should be looking to profit by positioning ourselves with the few/ smart money/ strong hands etc.. and profit with institutional money as they consume the stops of smaller trades and continue to drive price expectations in the market.  In the longer-term, there is no doubt that price will be dictated by supply and demand, and there are numerous examples throughout history of attempts by individual organisations to corner the market unsuccessfully. However, in the lower-time frames, such as Daily, many examples can be found of big players stepping in around key levels or after liquidity events such as the News, to re-position and push price in an unexpected direction.  It is these unexpected price moves that cause the biggest impact and catch traders on the back foot and therefore provide us with the best profit opportunities.

So how does this philosophical view of the market translate into a Trading Strategy? As previously argued, the edge of the retail speculator is to be found in patience and risk management.  We can afford to wait on the sidelines until the best opportunities present themselves or when the risk reward is firmly in our favour before pouncing.  Based on my explanation in the preceding paragraph, it stands to reason that in my opinion these opportunities occur when there has been a liquidity event and the big players have positioned themselves in an unexpected direction that will catch the majority off-guard.  An example of this would be if there is a scheduled or unscheduled News release which is unambiguously positive but despite numerous attempts for risk assets to rally there is continued selling blocking any upward move.  As a result two things will become evident.  Firstly, the majority are getting long but price continues to get re-buffed as the big-players are re-positioning to either get short or sell out of their longs, either way the underlying sentiment is Bearish.  Secondly, as the majority realise that their long positions are not profitable, they will start to sell-out of them or stops will automatically get triggered and the cascade will begin.  An actual real-time trade that I posted of the NFP release on 3rd Feb 2012 demonstrates this.  Another example would be when we had co-ordinated liquidity measures (30 Nov 2011) and the knee jerk response to the risk currencies markets was unanimously Bullish.  Over the next couple of days, however, price struggled to continue the momentum resulting in a series of rejections or “hammers” on the daily candle before the Euro resided its downward trajectory (you could have simultaneously bought European Bank stocks to lock in some profits). Apart from News catalysts, other opportunities may arise around key chart levels/ obvious Technical Anchors.  We are referring to “false-breaks”.  This may occur when a major level is broken before price eventually migrates back through it again before settlement. On the candle chart this will be depicted as a long wick penetrating the level before re-tracing completely.  This may also occur with trend lines, Fibonacci retracement levels or other obvious price anchors.  As the majority of market participants have traded the breakout and liquidity surges; strong hands step in and price unexpectedly is rejected thus catching smaller traders on the back foot.

As previously discussed in my What is your Edge article, it is important to incorporate this immediate price-action trading approach with other longer-term factors to put the odds in your favour in terms of both trade success probability but also risk reward.  Such longer term factors would include trading with the dominant prevailing trend and considering fundamentals.  When I talk about fundamentals I am not referring to a deductive hypothesis about the underlying state of the economy (as previously discussed, this is not your edge) rather, I am referring to awareness of potential fundamental News releases/ time of day/ time of year etc.. so for example if the week ahead has Fed, ECB, B of E rate decisions and press-conferences scheduled, then we might expect the price action to be uneventful and volumes to be low in the preceding Mon and Tue.  Or if it is Option Expiry today then we would expect futures indexes to be particularly volatile and “noisy” (great for intra-day scalpers, not for position trading), or during a Bond auction we may consider staying out of certain Bond market, or we may avoid selling stocks during the last 2 weeks of the year or during the Budget report.. the list goes on.  I provide a link on this blog to weekly economic calendars and News that will keep you abreast of what traders are focussing on.  Of course, one of the reasons that I recommend using Daily and 4hr Charts over smaller time-frames is to avoid the noise in the market which is generated by constant 24hr news flow and the use of Algorithms that are programmed to trade (often incorrectly) off of Reuters/ Bloomberg, however, it definitely pays to be aware of the larger fundamental issues at play in my opinion.  In terms of trading with the prevailing trend; there are obvious risk reward benefits of running a trend but, equally, many tantalizing price-action trade set-ups, even at key levels, simply do not have the same success rate if traded against the trend.  The reason for the eventual sell-off in the EUR/USD pair after the co-ordinated liquidity injection was due to the dominant Bearish sentiment in the market, manifest as a down trend, which caused the spike to be merely a selling opportunity.  This brings us to the final aspect of my trading strategy which is all about confluence.  For high probability trades with the best risk reward ratios, we need to be trading with the trend; at key chart levels or fundamental drivers; with price-action entry signals.  These three rules along with strict adherence to principles of Risk/ Reward generally constitute what I am looking to trade in the market.  Occasionally I will deviate from these rules, but it is dubious how successful I have been when I do and in the long run it is probably not efficient to do so but as a trader you are constantly searching for the next opportunity to develop new trades.                        

AUS/USD Long set-up

We saw a strong UP day/ bullish outside bar yesterday in the Aussie and I have been looking for an opportunity to get long with the prevailing trend and immediate momentum today.  As illustrated below we have a nice set-up on the 4hr chart with 2 decisive hammers forming side-by-side and a false break of the trend line on the lower time frames.  I have entered a long and if we can break through the daily consolidation area (blue line) will be looking to add more contracts.

EUR/USD continued...

As you can see above, We've had a nice pop to the upside in this pair as hoped for.  As previously mentioned; we really need to be looking for at least 1:2 risk reward ratio for these patterns and indeed one of the main rationales for doing this trade in the first place was to join the prevailing trend and possibly even hope for more reward.  Accordingly I have trailed my stop to break-even for now and will be looking to add more if we can break through the most recent peak at 1.33220. If, however, price comes all the way back to my entry and stops me out this will signify a steep rejection of previous resistance and a possible reversal of direction in which case I will be happy to exit my long.

potential EUR/USD set-up.

After the initial upward break-out of the trend channel we have seen a gradual tigthening compression of the price action since the beginning of this week as illustrated above with the symetrical triangle formation/ volatility funnel.  There is also a bullish outside candel on this 4hr chart as a potential leader to the break-out.  I will therefore be looking to get long on a break to the up-side and with the prevailing trend.  Patterns rarely have more than a 50% success rate so it is important to get paid off from these trades and I will be looking for at least 2:1 risk reward in the avent of a decisive break-out.  

Long EUR/USD initiated.

Today we saw a break down through the major support at 1.3033 which had formed the low of the recent trading range.  If we can close above this level today it shows that Bulls are still willing to defend this area and we could get some decent upside with a continuation of the prevailing bull trend on the daily chart.  The Bullish outside candle on the 4hr chart at the 50% retracement of this trend gives an indication that a close above 1.3033 may be on the cards and I will try a pre-emptive buy limit on the retracement of this 4hr candle as indicated on the above chart to initiate a long position with a tight stop below the 50% Fib level.

AUSUSD Long entered

We have a clear false break on the daily Aussie chart above resulting in a nice hammer formation yesterday.  The trend is on our side so I will be looking to play the long side and running this trade to new highs.

GBPUSD new long entered.

I've just entered a long position in Cable with an additional buy order around 1.56700 to build into a position with a tight stop around yesterday's low.  We have a nice hammer set-up on the 4hr candle around key support levels including the 38 Fib and if we can pick the low of this swing there is potential for good upside.

Gold - Long position entered.

I've just entered a long in the Gold future.  On the 4 hr chart above we can seen that an inside bar printed before breaking to the downside and then quickly reversing from the lows.  This can be interpreted as a false break which will catch shorts on the back foot and occurred in an area that has experienced repeated buying interest in the past.  I will be looking for a quick 1:2 risk reward on this false break pattern and trailing the stop quite defensively.

What is your Edge?

You may notice that there is a distinct lack of indicators or in fact anything remotely high-tech on my charts as I read them.  I do respect Technical Analysis to the extent that market participants anchor price expectations according to past price behaviour and I often employ simple patterns of compression and expansion, support and resistance or the occasional trend channel in my trading analysis.  I do not, however, consider my “edge” to be in Technical Analysis and I am happy to leave it to the systematic program traders with back-testing skills to utilise mathematical relationships and correlations inherent in the market.  This brings us to an important point.  To have any chance of succeeding as a trader you really need to consider what your edge is.  I am a complete ludite when it comes down to programming or back-testing strategies and so there is no point in me trying to compete in this space.  Likewise, for those of you trading on laptops from the poolside, most probably through spread-betting companies, I can tell you that your edge is not in intra-day trading off of the 15min chart or less.  This is the domain of market depth scalpers with years of experience of reading the ladder or using spread machines.  Speed is of the essence when it comes down to intra-day scalping and even in this space we are seeing traditional forms of scalping give way to the emergence of high-frequency algorithmic models using complex strategies such as flash-orders and micro-structures that are executed in nano-seconds through servers located next door to the futures exchanges.  If you are insistent on trading intra-day (I know I have been prone to scalping one side of the order book if I have a strong directional bias) then you should really stick to the highly-liquid haven of Forex rather than the shark infested waters of exchange traded derivatives. 


As an off-floor speculator, therefore, you should really be looking at the bigger picture and thinking about what your edge is.  This doesn’t mean trying to trade off of a deductive fundamental hypothesis regarding the state of the economy as many Retail trading outfits with their catchy slogans will lead you to believe.  How can you really have an edge in this space when you are competing with entire institutional research departments? Even then it is no secret that the market rarely responds logically to the release of underlying fundamental data.  This is because often it has already been discounted in the price (for various disconcerting reasons) and as a “liquidity event” is simply giving the big players an opportunity to re-position.  Hence the old adage: “Buy the rumour. Sell the fact”.  So where does this leave me you may ask? Well I strongly believe that one of the best ways of trading is as a speculator who doesn’t have to commit any money to the market unless the best opportunities arise.  This is both a timeless strategy based on the unchanging nature of mass physiology and herd-mentality in the market, as well as being far less stressful then other forms of trading.  If you read books by various successful traders including the Market Wizards collection, then it will become apparent that you do have a real edge as a speculator and with patience and discipline you can make money.   As Larry Hite says in Market Wizards:


“In any situation or game, you can define a positional advantage for any player – even the weakest one.  In trading, you can define three categories of players: the trade, the floor, and the speculator.  The trade has the best product knowledge and the best ways of getting out of positions.  For example, if they are caught in a bad position in the futures markets, they can offset their risk in the cash market.  The floor has the advantage of speed.  You can never be faster than the floor.  While the speculator doesn’t have the product knowledge or the speed, he does have the advantage of not having to play.  The speculator can choose to only bet when the odds are in his favour.  This is an important positional advantage.” (2006)


So how do we specifically relate this to trading strategies for the speculator? Well, I think many of the more traditional axioms of trading apply to speculators more than any other form of trading.  These would include; discipline, patience, risk-reward and money management to name but a few.  There have been numerous texts written on the importance of trader psychology, patience in waiting for high-probability trades and discipline in cutting your losses.  These are demons the individual trader will have to address, but in terms of my trading strategies, I can’t stress enough the importance of risk reward.  You have to get the odds in your favour and shouldn’t be taking any trade with less than 1:1 risk reward as a bare minimum.  With 1:1 risk reward you will only make money in the long-run if your accuracy is more then 50% and even then you will not grow your account very quickly.  With a risk reward of just 1:2 you can significantly under-perform 50% accuracy and still make money in the long-run.  Various studies have been done that would even indicate that a totally random entry strategy with 1:2 risk reward can be profitable!  Interestingly, however, this was only the case on a larger timeframe when reasonable risk parameters were used for individual trades.  As you go down the timeframe to the intra-day minute by minute price behaviour, the ratio of noise to direction becomes much higher and the risk reward ratios become skewed to the point of uselessness. This point is driven home by the legendary trader/fund manager’ess Linda Raschke during a presentation at a recent trader conference which can be viewed on You Tube http://www.youtube.com/watch?v=g1hs6-mr6PU.   


To summarise this point; As a speculator trading high-probability set-ups on a daily timeframe we should be able to take advantage of increased directional momentum and the massive benefits of risk-reward at the expense of other market participants.  Put simply, this is our edge and we should only be concerned with trading strategies that maximise this edge.  In my next article I will discuss some of the strategies and techniques that I use to consistently profit from the markets.           

Uncertainty over Greek deal... Buying opportunity!

In the EUR/USD pair last night we saw an initial knee-jerk sell-off following news of an incomplete Greek deal on the wires.  This move down was quickly rebuffed as we saw assertive buyers stepping in and forming a clear rejection candle on the hr time-frame.  This clearly indicates that there remains some Bull sentiment in this market and perhaps something is in the waters in terms of the ECB press-conference later today.  I was long before the news came out and quickly cut my position for a small loss.  It is hard trading at the moment on the lower time-frames as we are in a very news driven market and it is difficult to capitalize on the volatility unless you have Direct Market Access. I will be waiting on the sidelines for now and observing the outcome of today's ECB meeting.

Rumour no Greece Deal..

I closed my EUR/USD trade on rumour no deal for Greece...

long entered in EUR/USD pair.

I've just entered a long in EURUSD.  As we have observed other risk currency pairs selling off today inc Cable, as well as commodities and stocks; the EUR/USD pair has held ground and printed a bullish hammer on the hr chart above.  This is on re-testing resistance of the previous trading range.  With a tight stop this could be a good risk reward trade if the Euro can break out to the up-side!

EURUSD trade update

Unfortunately I didn't get filled on my GBP/USD order during the Asian session.  I am, however, long EUR/USD as illustrated below.  Just a quick note to say that I have trailed my stop on this one and despite some positive sentiment this morning printing a large green candle on 1hr chart seen below; we are not seeing a follow through in this momentum.  I am therefore being quite defensive on this trade and if I get stopped out will be looking for another opportunity to play the long side with price action. 

Major Currencies update.

GBP/USD 1hr chart:

As we observe from the chart above; I was right to take profits this morning at the lows of the day as the major "risk-on" currencies once again attracted buyers at these levels.  My bearish view has now changed on Cable as a result and I have placed a Buy order ahead of the 50% retracement level from today's rally, with a fairly tight stop.  For similar reasons I am buying the EUR/USD pair below except this pair is not as over bought as GBP/USD in my opinion.   

EUR/USD Daily chart.

I have entered a long position in the EUR/USD pair following another steep rejection today of the lows seen at the foot of the recent trading range around 1.3030-80.  The pair have had numerous excuses to trade lower on the back of renewed concerns over the situation in Europe as well as a perceived reduction in dovish expectations with regard to Fed policy.  However, despite attempts to break out to the downside, buyers have persisted in supporting the pair at these levels.  I will be looking to see if we can use this short-term momentum to break the 1.32 barrier this week which would provide an good opportunity to add to this position.  Alternatively my stop is positioned at the lows of today to take advantage of any loss in momentum/ fundamentally driven sell off.

GBPUSD update

Cable is continuing to sell off this morning on the back of solid fundamentals eg.. uncertainty surrounding Greece and Portugal along with dollar strengthening after Friday's NFP data.  Technically we can see the lower trend channel has been broken and the market is due a subsequent correction after the persistent rally seen over the last 2 weeks.  Having already trailed my stop as seen above I will now be taking profits here (around the 1st Fib level which also coincides with some support levels across the board in other majors and commodities).  There has continued to be strong buying around any dips in risk esp. EUR/USD which continues to trade in a range.  For this reason I am happy to lock in profits here and will be looking to get back in on the short side if we see some strong price action signals in which case I will keep you posted.  If we see buyers step into EUR/USD pair again today (as we did on Thur & Fri) I will be looking to get long EUR instead.  As ever, watch this space.        

Follow-Up..

Will try and run this for a quick profit going into the weekend. Also trailed my stop-loss down. Will walk away from this now and see what happens 4NDPS2WCKQGA.

Unambiguously strong NFP figure!

Quick trade based on stronger than expected Non-Farms. Cable initial reaction was bullish before sellers quickly stepped in.  sold based on price-action.  fundamentally less chance of Quantitative Easing bullish for dollar.  watching this trade. further explanation will follow...

Trade Update: Cable & Aussie.

Hi All.  Just a quick note to confirm that I have scratched this GBP/USD trade (cut it just below my initial entry).  The reason for this is because it is obvious there is no real momentum currently in this market and everyone is clearly waiting for the Non-Farm results at 1.30pm.  There could be some good opportunities at these critical levels across all majors once the volume comes back into the market.  Once Non-farms is out we should get a good indication of where the strong hands in the market are positioning and I will be hoping for a big Non-farms spike and rejection to the upside as a invitation to get back in on the short side of this market again.

For the same reason I am closing my Aussie trade below for a very small profit and employing the wait and see approach as really I was hoping for more momentum.  

Trading Update.

Evening all from here in London.  So Looking over the markets we can see that it has been quite a choppy session with no real sustained momentum for either side. It would appear that investors are waiting on the side-lines until the Non-Farm Payrolls figure is out of the way tomorrow.  My Cable trade from yesterday is currently on-side and if the bottom trend channel breaks tomorrow with selling price-action then I will be looking to add some more.  Trading break-outs isn't something I would normally condone, but given the reasons that put me in the trade yesterday and the fact that I would be adding to a winning position if the breakout were to occur; I think it would be justified.  I will also trail my stop-loss order down to yesterday's high because if this breaks the picture changes. 

 I have also got my eye on the AUS/USD pair. I've put in a speculative short position as shown below. 

 We are at a significant resistance level on the daily time-frame. Momentum is not on my side and it's a risky trade, however, I think it may be worth having a punt as price repeatedly failed to trade higher throughout today's session forming a head and shoulders formation on the lower time-frames as depicted below.

  We saw Gold break-out to the highs today but the Aussie couldn't follow and this is a clear sign of selling pressure.  As this pattern has coincided with a big level and more importantly I can have a very tight pre-defined stop  I think the upside for this trade could make it worth the risk.  This is by no means a high-probability trade but if we get some downward momentum over night there will undoubtedly be some long profit-taking/covering.  

GBPUSD trade update.

Looking at Cable this evening we can see the trade that I entered at the beginning of the week has benefited from strong Risk-on sentiment in the markets today.  This was after a slightly negative overnight session in Asia which very nearly saw my trailing stop triggered at 1.5703 (the market traded down to the Bid at 1.5706 after the Chinese P.M.I figures were released. I have to acknowledge Lady Luck on this one! Though I definitely think it's about time she graced me with her presence!)  We can see on the 1 hr chart below that a strong rejection candle (signified with the Arrow) briefly piercing the bottom of the Trend Channel, before strong buying stepped-in and establishing the false break which went on to set the tone for the European session.  This would have been an excellent trading set-up if I had been awake to capitalize on it.

 
As you can see from the 2 charts above; I have now closed out my long GBP/USD trade for a respectable 1:3ish Risk Reward. My decision for closing stems from the clear rejection and loss of momentum determined by the hammer on the 1hr chart which has occurred at a significant previous support price level on the daily as well as trend channel on the 1hr (lesser importance). If I can get onside with this trade and some negative news emerges from Europe then it could have some legs.  The market seems to have priced in a positive resolution to the Greece debacle; so any News to the contrary could have real shock value along with the renewed concern over Portuguese yields.  So I think you could do worse than be short this market at the moment.