TRADING STRATEGY
Chart 1.2 shows the EUR/USD futures on a 5-minute time frame on March 7 when the ECB leſt interest rates unchanged. No action on the rate announcement but in the press conference
aſterwards the market
interpreted comments by Draghi as bullish for the Euro. When trading the ECB, FOMC and NFP our initial setup is the same as for trading the London open off a test and rejection of the overnight range. For the ECB we pencil in the pre-ECB range which will serve as a pivot for the remainder of the day. As we saw the lows get tested and rejected we stood ready to enter the market long if it powered back up to the top of the range. Our initial stop was at the low of the reversal candle. Te risk in putting on a long trade before the end of the press conference is the possibility of another comment which could have reversed sentiment once again. Potential reward could be huge if the message was interpreted as a shiſt in monetary policy.
CROWD PSYCHOLOGY
A trade is just a trade but two trades in the same direction could be the start of a trend. Once the ball starts rolling it will attract fresh blood as new money joins the fray. Te move will get the attention of more traders wanting to participate, driving prices even further. Eventually the market will hit an area where stops are triggered thus extending the trend even more and perhaps even exhausting it. On a philosophical note, there is really no such thing as a queue. Tere are only individuals standing in line
FX
Chart 1.3 EUR/USD futures shaded red as the market reacts to the strong NFP on March 8, 2013
one aſter another. Standing outside a bank to withdraw money they may be referred to as a queue but what happens aſter all but one leave? And just as a queue is nothing but a line of individuals who happen to show up at the same time, a trend is really just a bunch of trades executed in the same direction on a time line and will end as soon as everyone is in and there is no one leſt to commit more money.
Chart 1.3 shows the EUR/USD futures on a 5-minute time frame on March 8 when the NFP numbers were released. We stood ready to buy the market if the initial move lower was reversed but on this occasion the market continued to make lower highs. Our focus shiſted from playing a reversal to figuring out how to get short with a risk to reward that still made sense. Most of the ATR had already been covered but with the data beating consensus by a huge margin and momentum usually preceding
price we sold 1.3024 with a stop at 1.3066. As more money piled into the short side and traders stuck long started liquidating, the selling frenzy kept feeding on itself. Te volume bar coloured red is where the selling climaxed as positions were squared and fortunes made and lost.
To further understand what drives EUR/ USD we will explore how FX is a zero- sum game. Well, actually it is a negative- sum game when you factor in spreads and the occasional commission but that is beside the point. Te bigger picture is that your gains come from someone else’s losses. Speculators take opposing sides of the trade and like any contract based market a position is kept open until offset by an opposing transaction.
Chart 1.4 shows EUR/USD on March 7 (grey on the chart) and March 8 (blue on the chart). March 8 has everything we look for with regards to tests of the overnight range, reversals and
FX TRADER MAGAZINE April - June 2013 41
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92 |
Page 93 |
Page 94