On theory, economics, and charting I always look for a way to use these…and in this case to apply them to trading profitably…
…I think the Euro is over-valued and contrived and I’ve read enough great points of view to back that up.. from leading experts, backed up by data, theory and historical examples.
However this will not pay the rent or put food on the table…and more so.. is dangerous to my capital. As a trader …who trades for a living..I need more definitive stuff…
My point of view.. guessing about tomorrows action is as dangerous as playing the lottery.. now throw in Non Farm Payroll Friday…and the trade becomes more difficult.
Thursday night, I listened to a Pro video with a decent size following, a big company behind him …and of course all the right contacts ..recommend what I believe to be… the wrong approach… based on the Thursday close.. I called it as a mistake on Thursday night…and what I called ..held up. This explains that thinking.
One of the best advantages a small trader has is being able to move in and out.. or not play at all. Why position yourself beforehand ..if you are not a big player? What’s the edge? …Especially on a COUNTER TREND TRADE.. when probability shows it is at best 50/50..
..I use charts..not to guess but to put probability in my favor before I risk capital.
It is like a surfer guessing what the waves will be like the next day because todays were great. So he waits in the water the whole night to be first to the party. Sometimes he is early and right and sometimes wrong.
50/50… not good odds.. So now in a position early…you are wasting energy and attention..when the real action starts you are out of position ..so you sit there ..second guessing ..your plan. ..and you should ..it was a poor one.
..Throw in trading costs, slippage, volatility and it will be hard for you to do your best, and therefore make money ..as you are competing in the money Olympics…everyday.
I call this expending emotional pips..and those are expensive ..as they drain you keeping you from being able to be responsive as opposed to reactive. Also even if you trade your way out of a mistake or get lucky with your guess it was still only a guess ..and if you trade like this as a habit ..probability will eat you.
And also expecting a hurricane (2008) every time it’s a bit windy makes for many false alarms.. (Top pickers)..
This is the way I use charts and tools to view the market action in this case the EURO.. well guess what?
I hate the Euro..but.. the trend is UP..I’ll start with a look at the weekly past and present and try and make some sense.
Here’s the tools I use…
- 5 period ma – pink smaller broken lines
- 20 period ma – green larger broken lines
- AMA – solid blue line
- Trend lines – blue large unbroken outer up trendline, blue broken inner trendline, blue broken 2nd inner trendline ..
- RSI and a Stochastic
Nothing revolutionary… simple is better ..especially if you understand how to use these tools ..what they do..what they mean.. I also use bollinger bands w RSI as a guideline and confirmation on my trading platform.
So the weekly chart.. $EURUSD
On the previous multi-year bull market in the Euro ..there was an outer up trendline, an additional 2 additional inner up trendlines. Notice the increasing angles of ascent on the inner trendlines.
4 things to notice when the Euro was ready to correct and or topped
- Volatility increased – look at the size of the weekly bars orange box left, red box top
- Inner Trendline – Angle of ascent became to extreme which could not be maintained and then subsequently was broken
- Price moved to the 5ma first, then the 20ma and notice the direction of these ma – up down or flat – ..and whose on top (more on this later)
- A range of consolidation was created (left orange box and the top) …it did NOT just fall off the map.. plenty of time to enter long or short..
Why? Because the EURUSD pair is a monster ..BIG bulky and hard to change direction quickly …as price trend represents belief …and belief is hard to change.
So what’s important to me to understand trend or signs of possible trend change.
- Trendlines – (all) – plus – angle of ascent /descent of ITL’s and breaks or bounces on these
- The direction (moving up flat down) of the 5 20 MA .. also when (if) the 5 crosses the 20 on the weekly..and how far the 5 is away (stretched) from 20 (note the pink bars I put on the chart just to highlight the extremes) ..and… How far is price stretched from AMA..for how long..and where are the candles ..above or below
- Price levels – and previous price levels (floors and ceilings) all the matching colored boxes are showing price level memory
- Candle formations
- Indicators – least important- note the stoch crossed late on the big drop.. (price candle formation and MA’s tell more sooner) … RSI was finally under 50 and the move started to accelerate
Notice I didn’t say sentiment ..why? …the best truthful record of sentiment is the direction of the 5 20 MA’s and price in relation to them. (or whatever ma’s you find useful for you these work for me)
What I see about EURUSD present price
- The 5 20 MA’s are sloping up… not even threatening flat – yet..
- 2. There is very little relative volatility – yet
- 3. The left orange box shows 16 weeks of BELIEF that this range is fair value price…the drastic down in July 2008 tried to slow thru this area (middle orange box) but kept going ..the market believes this area important = possible fair value = right orange box
- 4. Price eventually bottomed and PROMPTLY rebounded to this price area (pink circle) ..tested the bottom and now is moving back up in a much more sustainable uptrend
- 5. Bulls scored a point made a new high above this pink circle and is now pulling back
- 6. Euro still above 5 ma and is trying to establish this range as a floor
Conclusion: The Euro is in an uptrend ..there are only a few not so great reasons to short here (except if you are a volatility scalper this does not apply)
- Shooting star
- Price level – naturally inclined to pullback after breakout and up off the two strong weeks of bull candles
- Stochastic crossover weekly ..however on a daily this is oversold crossing over at the bottom..so this level needs more test up and failure to be a good short imo plus RSI is still well over 50
- Sentiment – the contrarian contrarian sentiment ..which starts to remind you of the smart evil guy poison in the glass scene in “The Princess Bride” film .. “I know you know that I know that you know that” …which means from what I have read and heard.. everybody is short the dollar..but also everybody knows the USD is a value trap mired in structural and fundamental weakness with a just don’t understand.. and can’t count either Congress and President ..sentiment is a guess at best.
Good reasons to short the EURUSD..like last time at the top..
- Candle formations showing bear – long sticks constantly failing at 1.60- yellow areas
- Stochastic, RSI – look at yellow areas
- Full Candles closing below 5 ..then the 20 then the AMA
- ***** 5 20 MA crossing over on weekly
- Candles breaking and falling below blue AMA = sell zone
- Breaking uptrend lines …
- Volatility increase
Now about entry
..I showed on Thursday night a daily chart where I believed the correct entry was… entering down near the low of Thursday.. has no respect for the major trend ..on the weekly.. which is up.
And even with that big ugly bear candle from Thursday Friday’s move was tested …UP.. to the hilt..why? ..because the weekly is in a strong uptrend, bounced and held the 5 ma…
Also and maybe most importantly …you will find few big bear candles that are not tested on the daily offering some kind of better entry and signal ..than a lottery play before NFP.
I’d bet that 70% or more daily candles overlap ..meaning test.. up on a bear or down on a bull…especially on the EURUSD pair ..this isn’t a low volume cross.
This Thursday candle was a 565 pip bear ..I went back to March 2009 Daily Chart and could only find 6 times a clear bear candle wasn’t tested next trading session..and all of those times were reversed less than 5 days later…Why imo ..because this was an uptrend..and also tests of candles is the action of market price discovery.
And even on crosses I don’t understand chasing entries ..you just don’t do it..bad plan..
Most of all ..none of this is original ..I am just passing on what I was lucky enough to learn from some really great people … Rev Shark, pokerface, beaky, FxChief, yoda, and bigdog..wherever you guys are ..thanks
@Brasil61 on Twitter
**Disclosure: No positions as of this post**