Euro

Where we going from here?

The Euro took a dive the last 2 days and me being in the Euro in my account have to ask myself, where are we going. I'm a daytrader, I know not a lot about swing trading, still I need to, as my account holdings have to be in a currency and I like my holdings to work in my favor not against me. So if the Euro weakens against the USD, I go into the USD, if it is strong, well I remain in the Euro. Or is there another currency, which is even better suited to be in, which is going up against the USD and the Euro. Gold comes to mind, but gold is too volatile, I trade gold, but I don't put my account holdings in gold.

As I said I'm no swing trader, so I stay away from other currencies than the Euro or the USD. Otherwise it gets really complicated and I don't like it complicated.

Which means I just have to answer these questions daily and every weekend:

Shall I switch from Euro to USD or USD to Euro or shall I hold. Where is the point, where I reverse the account from one currency to the other.

Currently I am long from the 1.2570 area, but that might change. Take a look at this daily Euro chart:

There is something about to happen. That triangle will break. To the upside or the downside. Chart analysis tells you that such triangles tend to break to the downside, but before we jump to conclusions, let's take a look at the longer time charts.

A monthly and a weekly chart:

Monthly oversold, the weekly barely out of being oversold and showing a double bottom.

And the 240min chart (below) shows the Euro above the 50% retracement, which is around 1.3100

We might have a good flat top here, but as I'm not daytrading my account itself, I think I will keep the account 66% Euro for a while longer, actually I might go 100% at the 1.3100 level and keep that until that green line is broken to the downside for a 100% USD reversal below 1.3000.

Sanuk

Wikipedia tells you it's the Thai word for fun. A fitting name for a trade setup I recently got introduced to. Trading is fun. The trade will or will not work, nothing you do can change that, once you have committed yourself to be in the market. So why is it relevant, whether this individual trade works? 25 trades should show you a profit overall or your setup has some flaws, but one individual trade...it works or not. Nothing you can do. So be relaxed, have fun and let me tell you about the Sanuk trade and how I understand it. Bruce will correct me, if I got it wrong, I'm sure.

Markets move in waves up or down. If the trend is down, you see lower lows and lower highs. If the trend is up you see higher highs and higher lows.

If in a downtrend you suddenly see a higher high than the previous high, something has changed. The Sellers are no longer able to sustain the constant selling.

If in an uptrend you suddenly see a lower low than the previous low, something has changed. Now the Buyers are no longer able to sustain the constant buying. Here's the chart behind that theory:

Take a look at this CL chart. Prices making lower highs and lower lows. Near the bottom you see a double top in the downtrend and the Low of the current move is formed at 17:25.

The low has been made at 51.72 and prices shoot up to 52.04 trading above the previous high at 51.91.

You missed that nice upmove, but there was no way to distinguish this low from any other previous low in the downtrend. So either you take all green bars forming in the downtrend or you accept, that you will not trade the reversal from the bottom. (Btw: I use Heikin Ashi Bars, which makes it easier to see whether we are in an up- or downtrend.)

But now we have the chance of a Sanuk trade setup forming.

Looking at this chart, what will most likely happen?

Exactly, Sellers will come in and try to force oil down again. But there are now Buyers in oil, which were able to push oil above a previous high and that means there are Buyers left behind, who did not enter the bandwagon and are now waiting to get a good price to enter oil on the long side. At the same time shorts will now be hesitant to push oil further down by just selling it short, as Buyers have shown their hand and their willingness to step into the market in the 51.75 to 52.00 area.

What does this mean? We are now looking for a retracement and will enter on the first green bar after that retracement has been made. Great! How shall I know, when the retracement is complete?

Look at this chart:

I placed a line from the previous high to the current higher high. And I placed a parallel line to it drawn from the low.

We don't go long now, we wait for the retracement to hit that lower violet line and then we wait for a green bar. Using HA-Bars this is the easiest way to tell, when a temporary bottom has been made and prices start going up again.

No hit, but a near hit...you could enter here

....or you wait:

Long 52.08 or 52.05

Now where is your stop and where is your target in this trade?

Stop first: 51.90 should be adequate and most will go for it. Target can be a fixed target of 10 to 20 ticks in oil, or you use the upper violet trend line, or you do as I usually do and switch to a longer timeframe for targets.

On the 100 tick you see 2 resistance levels:

Oil can move fast and violent. So if prices stall in an upmove where you are in and long, you don't hesitate to take profits. The least you do is move your stop up and be sure you use Stop Market orders, not Stop Limits as these tend to get jumped in oil.

Ok, from you entry at 52.05 you got a first target at 52.30 and a second at 52.45. 25 ticks for the first and 40 ticks for the second contract. Not bad at all. As you can see on the 100tick chart oil made the first target but failed to make the second target.

 

And on the 25 tick chart I used for the entry you can see, that you got quite a lot of warning, that the second target might be elusive:

Seeing this you either move your stop up to the 52.10-52.20 area to secure some profits or you close the trade for a nice profit.

Trading should be easy, it should be fun and your setup's should provide you with consistent profits. They don't need to be big, but they have to be consistent. This setup helps me on that path.

The setup is not my invention. As I said, I got it from Bruce and you can find him in the Sanuk Google group, if you interested and take the time to look for him. Access to the group is by approval only.

Markets trade in sync

If you are used to watching multiple related markets, you will notice, that they tend to trade in sync. If the ES is going down, you expect the YM, the NQ, the major European markets to do the same. They usually do, but there are differences and you can profit from these.

First a word of caution: Never trade the lagging contract in the direction of the leading contract. There is a reason it lags.

ES is the leading contract in all my setups. I seldom trade it, I use it to define the major market trend.

Above you see the ES making a leg down. The CAC40 (french index) followed that last leg down, but the DAX, while trading to the downside is hesitant. That's a great example of a lagging contract.

Seeing this scenario the first impulse is: Ha, they missed it, for whatever reason they missed that downtrend in the market and are still holding support on Dax.

You sheep!

I have no idea why Dax is holding up, but that market has a lot of strength. Take a deep breath, you have missed nothing, instead pull up your trading charts for the DAX and wait for a signal to go long. The moment the ES turns, DAX will explode.

Of course, if ES takes another leg down, even the strong ones will follow, but that's what Stops are for.

Indicator

You might have noticed, that my charts have a Stochastic indicator on them. In trending markets I look for pullbacks on the trend to enter with the trend, seen as a sling on the Stochastic Indictor.

Today I added a second indicator, as sometimes I have that dumb urge to jump into a market. We all know that feeling: Hey, that's a great move, it has legs, and again...I missed it!

Depending on the day, I sometimes just click and enter the trade. Usually when the market stalls and reverses, leaving me pondering the stupidity of my trade.

So I added an overbought, oversold marker. If %D of Sto81 + Sto27 + Sto5 is >280 or <20 a marker is shown, reminding me of the danger to open a trade with the trend in this timeframe.

See the red lines above the stochastic indicator.

Tech Spread

I wrote about the Intermarket Spread between YM and NQ, set at a 2 YM : 3 NQ ratio.

Here is a 60min chart of that spread showing the ranges I noticed so far.

In my Sim account I made a nice profit trading that extreme -3400 reading by going long the spread (Long 3 NQ, Short 2 YM) and closed the trade in the morning at -2550 for a 683$ profit.

The assumption was that NQ was already down all day, while ES and YM showed profits until succumbing to the selling after AMEXCO posted that news-item about credit card defaults. So any selling would be done in the financials, while tech, even if it slipped further should already have found a bottom. Meaning the spread should come back to the usual -2200 to -2400 number I have identified as equilibrium for now.

Intermarket Spread

For now I've just looked at calendar oil spreads. But after digging myself into Keith Scharp's book "The complete Guide to spread trading" I tried an intermarket spread yesterday:

1. You look at the market and decide which one is strong and which one is weak.
2. Right now the Technical's are relatively strong, while the big caps, especially the Financials are weak
3. Meaning: If it goes up you can expect the NQ to outperform the other markets, if it goes down the YM will be the heaviest hit
4. Trading an intermarket spread means: You go long one market and short another at the same time
5. But first you need to understand, that trading 1 NQ is not the same as trading 1 YM contract. They don’t move at the same speed
6. Therefore you do a little calculation:
   NQ at 1080 * 20$ (per point) is worth 21600$
   YM at 6625 *   5$ (per point) is worth 33125$
   To make them move at the same speed, your long and short positions need to have approximately the same value
   NQ: 3*21600$ = 64800$
   YM: 2*33125$ = 66250$
7. So your Spreadtrade would look like: Long 3 NQ and Short 2 YM contracts
   Most brokers will recognize that this is a Spreadtrade and give you a very low commission on the whole trade. In case of IB yesterday this trade cost me about 6500$ margin (IB gives the margin advantage for the corresponding 2 long and  2 short positions and adds to that the 1 contract long NQ margin)
8. This trade will show you a profit in rising and in falling markets as long as your assumption that Technical's will outperform the big cap Dow stocks is correct. It will show you a loss, if there is a snap back rally in the financial sector.

In spreads you need to be right about the fundamentals not about the direction of the market.

Being in a trading hole

Been there, done that, will do it again...

From time to time emails from readers reach me asking me, what to do when you are in a hole. Something which worked last year really fine, suddenly stops working and you find yourself down 50% to 70% of last years profits or worse of your account value at the start of the year.

Stupid example? I don't think so! You can do it with 1 trade, if you are careless and stubborn. (I just proved it going long 30,000 FAS last Thursday in my 125k$ IB demo account, which is now reduced in size by 65% in just 2 trading days...just to prove to myself, that taking a 2,000$ loss on a big position is the correct way to trade... but I will hold it into extinction if necessary)

Being in a real big hole is something, which seems to happen to all traders over and over again. Strategies seem to stop working for no apparent reason and when you finally realize it, you are already down big time.

Question is, how do you stop and reverse the downward slide to climb out of the hole again.

1. You need to have capital, so you have to make sure that you still have an account to trade. Which means: STOP TRADING NOW
   Stop for a day, a week, a month, as long as it takes. The market will be there waiting for you, when you are ready again.
2. Markets change and you have to adjust your strategy to compensate or you switch to a new market which fits your trading strategy better.
3. Something private: From time to time you will find articles about new markets in this blog. Most likely I'm in a hole or I'm feeling no longer sure in the market I'm trading at the moment. It might be that something changed in my trading environment, which causes me to trade at changed times, or I'm occupied with private matters which should take precedent to trading. The result is always the same: My trading system is not working the way I'm used to, I'm not getting the results I expect from trading and that causes me to look somewhere else. Usually when I do that, I write about it to get insight from you through emails or comments in the blog.
4. One thing you know, when you have fallen in enough holes is, that you will come out of them stronger, if you have discipline and persistence. Go back to the basics.
5. First answer this question:
   What has changed, the market or I?
6. If its me, then the first thing I do is: I stop trading.
   1. Maybe my environment has changed and I have to adjust my trading system to the new setup. EG: You had 2 screens and you upgraded to 4 screens. Suddenly you are flooded with information and you need time to adjust. More screen space is great, but you can't process all information presented to you, you need to learn what is important and where to find it on your bigger screen space.
   2. You have less time for trading, but your trading system requires you to be present 100% of the market hours or you will miss your chances.
   3. Something really difficult: You are suddenly dependant on the money earned through trading. It's a huge difference, if you have a regular income and your trading profits are just a nice add-on, compared to having no income other than your trading profits.
   4. Maybe you don't have enough sleep, you drink too much, you don't exercise. Trading requires you to be fit. So take care of yourself.
7. If it's the market:
   1. Question that assessment of the situation as markets usually do not fundamentally change very often. They do, but your trading system should capture quite a range of different market conditions or it would not have been profitable in the past. And that means, before you decide your trading system is not working, it's a lot more likely that something within yourself has changed causing the losses you experienced.
   2. If everything you do is the same you did in the past, then your system might no longer be working. You could try to tweak your system, but usually tweaking a profitable system leads only to an unprofitable system in the future.
   3. Try a different approach: Ask yourself, what is the basis of your system, why is it working, what are its components, what environment does your system need to work profitable.
   4. Once you have answered these questions look for a market which fits your system. No one forces you to trade ES, YM or NQ. There are a lot of markets out there and once you know, what your system needs, you can look specifically for these markets to trade.
8. Once you found your market
   1. Start demo for a week
   2. Learn the movements of the new market
   3. Start trading small
   4. Forget the notion, that you will be whole tomorrow or the day after. You are in a hole and it takes time to get out of the hole.
   5. But know, that once you found your mojo again it will go very fast and you will be stronger and better prepared the next time you fall in a hole.

I hope these points help some of you currently in a trading hole. They helped me in the past and will help me in the future.