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In most newsletter articles I write, I prefer to talk about techniques and setups that have made me money. Well I’m going to take a different approach here and discuss a recent strong up move on the Euro I have missed. I am doing this for a number of reasons.
Firstly, it is something that we should all do after a missed opportunity; that is, go back and see how we could have traded it differently. This is how we learn and increase our skill level.
Secondly, it goes to show that no matter what level we reach as traders, we still need to ensure we are listening to what the market is telling us, rather than trying to make the market listen to what we are telling it!
While the missed move did not take any money out of my account, as there were no clear signals to go short, it was certainly an opportunity to put more money into my account that I didn’t take.
The move in question is the run up from the August 24, 2010 low on the Euro (EC-Spotv in ProfitSource), as shown in Chart 1 below.
Chart 1
click chart to enlarge
After being short on the Euro for much of the year, and with a forecast of more lows to come, I was happily watching the Euro for any short signals I could find. The monthly swing chart, the major trend indicator, was showing lower swing bottoms and a potential lower swing top, with expanding downside swings and contracting upside swings, as shown in Chart 2 below.
Chart 2
click chart to enlarge
The August 6th top came in on the 50% milestone of the previous bear market range, as shown in Chart 3 below.
Chart 3
click chart to enlarge
After seeing a clear overbalance in price and taking 570 points (which is worth $US7125 per futures contract) out of a 600 point move, my confidence was high and my eyes were focussed on the low I expected the Euro to fall into.
From this point, I was expecting a pull back and then the fall to continue. We’ll get to the actual market action in a moment, but first let’s see if we can make a case for a long trade out of the August 24 low. While I was watching for a bear market, I should also have been paying attention to what the market was telling me.
Chart 4 below shows that the August 24 low came in on two 50% levels. First, we had the 50% retracement of the run up from the June 2010 low, and secondly, the low had come in on the 50% milestone of the first swing down.
Chart 4
click chart to enlarge
This chart is well worth re-creating in your software, using the Gann Retracement tool and the ABC Pressure Points tool.
I was aware of these 50% milestones, however I didn’t expect the market to bounce so heavily from them. Shortly after this low, the market rallied into a nice Double Top with the C point from Chart 4 above and I managed to get short with a tight entry. All was looking well, as shown in Chart 5 below.
Chart 5
click chart to enlarge
A big outside day on September 7 saw the Euro close down 200 points, or $US2500 per contract. I had managed a tight intra-day entry into this trade and moved my stop loss to entry plus commission, which was probably my smartest move for the next few weeks on this market! Gann and David were both adamant that you should not let a profitable trade turn into a losing trade, hence the reason I moved my stop loss to take any risk off the table.
The market then bobbed around for a few days before taking off to the upside, as shown in Chart 6 below.
Chart 6
click chart to enlarge
From the moment it broke those Double Tops, it has given no signal for a potential short trade - even though the bigger picture monthly charts indicate a bearish move is still on the cards, the shorter term ranges are all pointing up.
With the size and strength of this powerful up move, I decided that I would wait for a first lower swing top before looking to enter this market short, and at time of writing this has not yet occurred. Instead, we have just seen higher tops and higher bottoms on the daily chart, as shown in Chart 6 above.
However, let’s look at this chart (in hindsight now, of course) and see how we could have possibly made a case to go long in this market.
It comes back to the August 24 low and the two 50% milestones the market bounced off. Once the market showed signs of strength here, then potential long trades were back on the cards. I have no problem with the fact I went short at the double tops – however in hindsight, I should have reversed positions and gone long when the double tops were broken, trailing stops underneath each subsequent higher swing bottom.
A trader who had entered on the breaking of the double tops would have had the chance to lock in 1000 points of profit, or $US12,500 per contract.
Currencies for the most part have trended strongly in 2010 and it has been a very good year for trading them. Missing one move doesn’t make the year a disaster, but at the same time we should always analyse a move we have interpreted incorrectly, so that next time we can make a better choice with our trading.
Be Prepared!
Mathew Barnes
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