Just wanted to look at this Sterling Yen chart which really is an amazing pair, and although I am not in any way attached to currencies as in a favourite little friend, this one comes out pretty rock ‘n’ roll in my top movers list. These shocking pink head and shoulders patterns, which we can find on all time frames, contain some serious moves with plenty of momentum and can help in the identification of areas where the big money may be sitting with orders. These areas are where we hopefully can hitch a ride to some important moves whilst keeping our risk in the market at an acceptable level depending on our MM plan.

The simple upward trend line, with corresponding horizontal resistance could have provided a way into the market where our technical analysis had created a high probability entry order with low risk and a potential 60pip first target. Remember there are no guarantees, and our analysis is only zooming us in closer and closer to the trade that is most likely to go in our favor based on historical evidence. The market never makes a false move, I talk about false breakouts a lot of the time, but of course their not false, they just don’t fit into my little trading picture, but they are very real and true.

In this GY chart example our trend line has been tested several times and held. What this starts to create in our trading mind is an idea of what the big money is looking at, are they looking at this same trend line? if they are then the probability of trading with them just increased. The next time the price arrives at the line we can place our trade and have a plan already built-in so as to keep our subjectivity out of the button pushing. We will have certain expectations for the trade and the means to get out quickly if things go against us.

On the Sterling Dollar chart we can recognise how for the last week the price has prefered to stay in this 130pip range with some little excursions higher and lower that have met swift opposition. This is important intelligence to be able to understand the overall feeling traders have of the pair. We can apply S&R lines from higher time frames and look for smaller time frame entry points, only of course for trades that carry a high probability of success. This is the way I trade profitably, I do have losses but they are kept to a minimum because I won’t just take any trade, and this inevitably means that my trades can be infrequent, that’s not a worry for me. I know and believe that good set-ups exist a lot of the time and it’s only a matter of choosing the highest probability ones to end up being a winner in forex. This is what I would like novice traders to know and believe as well.

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EUR/JPY price entering into a heavy resistance zone at the moment that could just cap this corrective trend and keep consolidating the price or alternatively pick up some sellers and accelerate with the overriding trend down as we have seen four times previously. I will be looking to trade the high probability trade for me which would be the sell off rather than the breakout to new highs, at least for the moment. Obviously a very similar set up to the GBP/JPY .

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The USDX also indicates this move away from the reserve currency into more profitable but riskier trades. For the moment I am staying out of the market until I can see some confirmation of a bigger trend formation. It won’t take much to spook the risk takers in my opinion, but the calender is fairly light on important news this week so maybe we could see a short but continuous period of optimism until the next European bombshell.
The reason this is important to know for me is it will have an effect on my trading plan which for most of the year has been seen to buy dollars, with some exceptions, and follow the uptrend which is the secret to those high probability trades. If this is about to change, even for a short time, I need to be aware otherwise I will be trading against the majority and reducing my chance of success with my strategy considerably.

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A nice quiet Asian session in a tight consolidation condition keeping near the Previous Weeks Low. The probability, and that’s what we are basing our trading decision on, is very high for a continued decline in the Euro. We can identify a weak rise in price at the beginning of the European session, but our trading plan has already been made to only short the Euro.
Entry point A is a fading entry point, getting in short after a false break with the SL placed above the breakouts swing high price at around 30pips. Entry B has confirmed price moving back into the range and with this small pullback we could get in here with our SL just outside the range.

Remember, where you position your Stop is where you are declaring your trade void, the point where it’s no longer worth staying with your original plan. Our plan is to short so any movement of price higher beyond the range is out of bounds. Best cut the loss short, and re-plan the trade rather than hang on and hope.

Entry C is a clear cut entry at the break of the low, again we could place our Stop in a valid position keeping our risk of 30pips the same. Entry D is a classic breakout entry on the first pullback after the initial break and here the SL would again be placed where you are happy to quit the trade, somewhere inside the range.

Once we have gotten into the trade which has shown promise with great opening momentum (a good sign) we must try and manage the trade and our emotions to maximize the pip count. I always work in pips and not $’s, for me it’s just psychologically easier to lose 30pips than $300.
The temptation is of course to tighten up the SL so as not to lose those precious pips. It’s a fear driven reaction but one that needs to be balanced with the understanding of how the market moves and to leave enough room for the price to breathe. Occasionally we lose out on pips but the for the majority of trades it is advisable to leave SL space for your profits to run on. This becomes easier with experience and confidence in the strategy.

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I played the breakout, but in retrospect the trade should have been a range trade, entering where I placed my SL. This is a mistake and a point I need to keep an eye on.
Two lots have been traded as usual, and the first now closed out @0.8313 to cover our SL which remains @0.8375. This is now the breakeven point for the trade.
Normally I don’t trade NFP Fridays but I’m in this trade now and the worst case scenario is I’ll get stopped out for zero. It’s 9.00am here in Europe as I write and all the pairs are consolidating for the moment.

Quick update on this one, Euro falling again now down in the 1.20′s which is pulling our trade down much more than Sterling is pushing. Sterling is also suffering from the Dollar Yen buying. This is good news for the trade which is maturing nicely in the right direction.
NFP is about to hit as I type so lets see what we get there………..

Ok not as good as expected, but still a good figure, unemployment down to 9.7% . I’m hanging on for the moment to see what the big money are going to do once they have crunched the numbers, if anything, and probably bring the SL up again to 8290 (+50pips) and leave it to sort itself out.

This should have gone up yesterday but I ran out of time, anyway as I always point out this blog is about learning not signals. As time moves on we are building up a proven history of how this breakout strategy keeps on working, and the reason it keeps working is because we are following the big money. They decide, we follow.

A pretty straightforward breakdown of support from a ranging condition, the attempts at a move higher in price not hooking us in, as the overall trend is most obviously down. On a 5min chart you could have gotten in a little earlier trading a breakout of a smaller range within the larger 15min chart, in both cases the risk is manageable and the potential reward high, a great trade to take on.

Quick look at our currency strength meter to give us an idea of the movers today shows clearly a weakening Pound & Yen and a strengthening Cad. The money will be made on a long CAD trade which has high probability , the money will struggle trying to win on a GBPJPY trade, the worst probability out there at the moment.

One to keep an eye on towards the end of this NFP week is the USD/CHF, currently at a major resistance and consolidating in a 175pip range. Breakdown of support @ 1.1447 or breakout higher from 1.1621.

The bigger trade picture is centered around import and export figures, that in turn lead us to look at flows of money between countries and therefore get a feel for potential longer term trading opportunities. Construction materials like steel and iron for example, are heavily exchanged and play an important role as a construction indicator, where there is construction there is investment. Construction output is up by 7.6% in Europe and industrial new orders are up by 5.2% (eurostat). Spanish construction has of course slowed dramatically but that is in a bubble of it’s own, I’m interested in a more general view of the whole Eurozone.

The graphic below shows the USA’s trade with the EU from the beginning of this year. As you can see the balance has been widening quite quickly. www.census.gov

Trade with European Union : 2010

NOTE: All figures are in millions of U.S. dollars on a nominal basis, not seasonally adjusted unless otherwise specified.

The US and Europe between them make up half of all world trade, but what is becoming increasingly frequent these days is to see trading restrictions coming into play, thus moving the idea of protectionism clearly to the forefront of economic thinking. If unemployment keeps increasing as shown today (10.1%) this protectionism could really take political hold and slow economic recovery.

“In the business world, the rear view mirror is always clearer than the windshield.” – Warren Buffet

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The Euro has taken a bashing recently losing 16% of it’s value since the start of the year, but is it really a problem? Lots of European countries have just crawled out of recession and with the ever present threat of a double dip just round the corner a cheap Euro is in my opinion not such a bad thing. In fact many see the currency as over valued by as much as 7% against the dollar, the Euro is far from being a weak currency, the problems seem largely political.
The advantages are in a countrys exports which typically become cheaper, creating demand which helps the job market which eventually helps the deficits, a real boost for economic growth in the Eurozone. Europeans will however pay more for imports, especially energy sources like oil. There is no fixed rate now so all currencies fluctuate, it is the nature of the beast, it was only last year that the funeral was being prepared for the dollar but that didn’t happen, and the Euro will recover as well, it may be a slow recovery though as some countries need to get their house in order.

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I’m now out of this one for over 300pips. Looking at other pairs today it would have been another day without trading.

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When trading it is important to diversify your trades and have some longer term positions in your portfolio. For example I still have an open position in gold from this time last year and I also held a long AUD/USD trade for 9 months in 2009 which was one of my best trades ever in terms of pips. What these longer term trades do is smooth out the losses of your intraday trading over the year and provide a financial cushion of security.
Anyway, I have stayed with this pair this morning as I believe it still presents the best probability, and grabbed another 200pips from the overnight range breakout.

That’s me for the week, happy to walk away at this point and not get tempted to over trade and give it all back to the market. Hope you have a great weekend, it’s my birthday this week and my wife has bought me a balloon ride which will be a first for me…….. hope it’s not the last lol

Good trading everyone.

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