What Markets Am I Going to Trade?

This is a continuation of my trading plan.  I have added a link to the left main menu called My Trading Plan.  You can view the latest trading plan at any time by clicking this link or going to http://www.forexproject.com/trading_plan/ 

The second question I will ask myself is "What Markets Am I Going to Trade?"

I will be trading the Foreign Exchange market only.  Specifically I will be looking to trade the EUR/USD currency pair only until I can develop a consistent trading strategy.  Once I become more comfortable trading the EUR/USD, I will slowly integrate more currency pairs into the mix.  I will allocate 100% of my fund to trading forex.

This year, I want to look further at trading the following:

·         Mini-sized Dow (YM)
·         E-mini S&P (ES)
·         E-mini Nasdaq (NQ)
·         E-mini Russell (ER)
·         Soybeans (S)
·         Mini-sized gold (YG)
·         Corn (C)
·         Wheat (W)
·         Crude Oil (CL)
·         Mini Crude Oil (QM)

Do Interest Rate Differentials affect Currency Price?

I wanted to do a study on my own between the EUR/USD and interest rate differentials so I gathered all historical interest rate data from 1/1/1999 to present.  What I found was that there was no correlation between the actual differential and the price of the currency pair.  What I did find was the following:

We are in the third cycle of price changes.  What I mean by this is that there was an extended period where the USD gained versus the EURO (Cycle #1) and then an extended period where the EURO gained versus the USD (Cycle #2).  Currently there has been another extended period where the USD has gained versus the EURO (Cycle #3)

Here are my estimates of cycle length:

Cycle #1 – 01/1999 – 05/2001   BULLISH USD (29 months)
Cycle #2 – 05/2001 – 12/2004   BEARISH USD (43 months)
Cycle #3 – 12/2004 – present    BULLISH USD (16 months +)

I found that the most defining point regarding the change of cycle was that it happened right after the interest rate differential between the EURO and USD hit 0%.

Here are the periods of time when the differential hit 0.00%:

5/11/2001
11/10/2004 

As you can see, there is a correlation between the differential being 0% and the change of cycle.  Unfortunately we have limited data since the EURO has only been in existence for the last 7 years or so.

If I was to use this information to predict the future direction of this currency pair, I would have to predict that the USD will remain BULLISH for quite some time to come.  Seeing that the interest rate differential currently is 2.50% and the fact that the Fed may increase rates 2 more times, I cannot foresee this differential decreasing anytime soon.   

I don’t know if this study is B.S. or not.  There are many other economic factors that can affect currency prices and I didn’t take any of these into consideration such as the US Account Deficit or the Eurozone’s slower GDP growth.  In addition, with Iran switching to EURO’s for payment of oil, there are other things in play that make it more difficult to predict the future. 

 EUR/USD Interest Rate Diff- Excel (20.50 KB 06.03.2006 11:32) 

The Trend is my Friend

My profit so far this week is $883.  I have felt very comfortable with the flow of the market and when I look at the charts, everything just seems to make sense.  A big reason for this is because of my reluctance to trade a fade or go against the trend.  My trades have been with the trend therefore I’ve been trading the faster time frames.  It’s amazing how much easier a trade can start in your favor by simply trading with the trend.   Even so, my week has not gone without mistakes.

My biggest mistake is exiting positions too early.   I had a short position in the USD/JPY open overnight and through the GDP announcement this morning.  Shortly thereafter, I closed it out for a slight profit.  Afterwards, the pair declined over 40 pips.  The trade was going just fine before I decided to micro-manage it.  I must try to curb this bad habit. 

Waiting for a Yen pullback?

I’m waiting on a Yen pullback.  The price has been hanging around the S2 pivot point all day.  Depending on where the pair is during the Asian open, I may be shorting this pair if it pulls back a little more.   Remember that this pair is trending on the 240-minute and momentum indicators aren’t worth a bit.  Right now I’m watching the Directional Movement Index, pivot points, and trendlines.  The pair will have to pull back quite a bit for my continued interest, at least to the high 116′s.

The chart below shows the S2 pivot point at 116.08, .09 below the price (bottom red dotted line).  The pivot point for today was 116.807 (thin solid black line)

 

 

 

 

 

 

 

 

 

 

 

 

Staying with the Trend

I have started the week on a positive note and sit at +$1000.  I have been watching the DMI indicator to confirm that a trend is still in place before buying or selling a pullback.  Though I have done this successfully today, I have a hard time holding on to these trades and have not followed my own advice on where I’ve been placing my limits..  Once I can net about $300-$400 on the trade, I’ve been exiting.  Now this might look good on paper right now but the simple fact is that I don’t do this when a trade is going against me which means that my risk/reward is poor.  I set a stop but never a stop that triggers when I’m only down about $300-$400.  My stops are usually a minimum of about 30 pips so this would net me a loss of $900.  One bad trade and I’m back to square one.

Call this rationalizing but I feel like exiting now with a smaller profit may be sufficient due to the lack of liquidity in the market until either the Asian or European sessions. 

I’ll continue to work on holding on to my positions longer when the pair is going in my direction.  I should learn my lesson after exiting my USD/JPY position last week right before the big 100 pip move down.  I could see using my exit strategy if I was trading the 15, 30, or 60 minute charts but I’m usually trading the 240-minute (my favorite period.)

Rob Booker Analysis Today

This information is already stale but good for those of you who want exposure to Rob Booker’s style. 

GBP/USD 1 Hour Chart 

Friday, the pair broke below the redline, and created a really nice short trade.  Here’s what I would consider now: a short trade on a break below the low of Friday, with a target of EITHER of the blue lines shown below.  The lowest blue line is the more aggressive target.  One way to handle this is to initiate the position immediately on a break below Friday’s low, then move the stop loss to break even when the pair hits the FIRST blue line below.  Then use the lowest blue line as the profit target.

 

 

 

Dollar Strength and EUR/USD Channel

I’ve been trading the EUR/USD since yesterday evening and caught the breakdown below 1.1855.  The USD has not been able to push below 1.1827 though and until then the price may remain in a 60 pip channel.  

 

 

 

 

 

 

 

I’m up a little more than $400 to start the week in realized gains but as of now am only in a short EUR/USD position that I entered on a pullback last night.   There haven’t been any major developments since the Asian trading session set most currency pairs in motion except for the USD/CAD which has broken down nearly 75 pips from yesterday evening.  I was actually long on a USD/CAD position yesterday and decided to get out after hearing that some favorable economic reports were expected from Canada this morning.  This demonstrates some good behavior on my part with an exit of the position with a $100 loss.  I didn’t see the pair doing what I would have expected from my technical analysis and wasn’t aware of the economic reports coming out of Canada when I entered the position.  What good would it have been to stay in the position?

My performance per Currency Pair

I decided to take a look at all of my trades since day one and find out which currency pair has been most profitable for me.  The results were interesting:

USD/JPY: +3720
EUR/JPY: +2400
GBP/JPY: +1370
USD/CAD: +890
NZD/USD: +470
USD/CHF: +420
EUR/GBP: -70
AUD/USD: -130
GBP/USD: -$410
CHF/JPY: -650
EUR/USD: -$1430

History says to stay away from the EUR/USD pair.  I had a feeling that the USD/JPY was my best friend.

USD/JPY 2006-02-21

UPDATE!!!  The pair has dropped another 70 pips since I exited.  That is why I am far from reaching my goal.

TRADE

Date: Tuesday, February 21st

Entry: Short USD/JPY at 118.78.

Reason for trade/setup: This trade was mostly based on the fact that resistance was up above at 119.00.  Furthur confirmation was obtained from the crossover of the Stochastic (9(3),3) from overbought territory. 

Initial Stop:  119.06, which was 6 pips above the high of the entry day.

Initial Target:  118.00 which is the top of the Ichimoku Kumo or cloud.

RESULT 

Exit: 118.35

Reason for Exit:  Profit taking.  I needed to get back on track this week.  I couldn’t leave $1000 on the table

Profit/loss:  43 pips / $1070

Trade executed according to plan? no; early exit

Outcome: After trade entry, the pair played with the 119.00 resistance level for the entire U.S. trading session before finally finding more sellers than buyers at the Asian open.  The pair then stalled at 118.40 during lunchtime in Japan on Tuesday evening.  The pair retraced almost back to the 119.00 mark on Wednesday during the European session before heading back down.  There is solid resistance at 119.00.  I exited the trade before my target.  The main reason was for my need to get back some of my losses from the week.  I didn’t want to leave $1000 on the table.

 

 

 

USD/CHF 2006-02-21

TRADE

Date: Tuesday, February 21st

Entry: Short USD/CHF at 1.3082

Reason for trade/setup: Using the 240-minute chart, there was the presence of a downward trend line above.  In addition, a momentum indicator that I created and am currently testing indicated a short opportunity.  Furthur confirmation was obtained from the 3-period, 5-period Price oscillator using EMA and the continued downward movement of the 8-period, 21-period Price oscillator.  Stochastic crossover and a decreasing rate of change since early February provided double-secret confirmation.

Initial Stop:  1.3121, the high of the entry day.

Initial Target:  1.3050 then 1.2950 which are horizontal support lines.

RESULT 

Exit: 1.3121

Reason for Exit:  Stop Loss triggered

Profit/loss:  -38 pips

Trade executed according to plan? yes

Outcome: After trade entry, the pair had remained close with the downward trend line.  Volatility was non-existent during Asian session.  The USD was bullish going into the European session and the pair went as high as 1.3153 stopping me out of the position between 3 am and 7 am.  This trade never moved in my favor by more than a couple of pips.

Thoughts:  All the indicators in the world can’t predict the future.  I seemed to have multiple confirmation, felt great about the trade, yet it didn’t turn out well.  I feel good about executing the trade though because I didn’t go against my plan.  I saw a possible setup and pulled the trigger.  If I could do it all over again I would make the trade again but may have waited for an increase in volatility.  In addition, I probably set my profit targets too high considering the lack of price action this week.

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