We met our profit target this afternoon on the EUR/USD short trade I posted earlier this week. You can review the original trade idea by clicking here.

This morning we saw fantastic economic data that helped the Dollar deliver a one-two punch on the Euro.

Pending Home Sales were expected to be down 1% month-to-month for July but came in a scorching 5.3% followed by Consumer Credit posting more than double what was expected.

The result was a swift run to our profit target and now EUR/USD is making its way lower by almost another 100 points.

Update: Oh yeah, I forgot the little bit about the ECB rate and statement, that was just slightly important also!

If your trading multiple lots, here is how I handle these trades. I take 1/2 of the position off at the lower trend line and move the stop to protect the rest.  Right now, I would place that stop at $1.5386 and let it run.

There is little support for the Euro until $1.4950 so hang in there and you might get a nice juicy profit over the next few weeks.

Hope you were able to join me on this one!

Ryan

Following up from last night’s trade idea our EUR/USD short opened slightly before the London session started this morning. Normally I am not up that late to trade but I couldn’t sleep so I took advantage of this doji candle and got short at $1.5486.

The profit target is down around $1.5350 and the stop is at $1.5560.

EUR/USD might offer a nice opportunity to get short the pair on a bounce from the resistance trend line it broke yesterday. An entry around $1.5510 would be ideal if a nice reversal candle stick shows up on the four hour chart.

This trade has about a 150 pip potential if the market fails to close above the trend line and bounces below $1.55 again. The target is obviously the lower trend line.

Keep an eye on it, good luck.

Ryan

This morning I posted a juicy GBP/USD trade but told you I was waiting for a pull back to $1.9720 before I would sell. Not everything goes smoothly while trading and I missed the pull back by 5 pips when the pair rallied to $1.9715 and halted. I hope some of you were able to latch onto this GBP/USD free fall.

At this point I’m not keen to take any trades until after the FOMC statements are digested tomorrow morning so look for more trade ideas from me Wednesday.

Where would my stop have been?

Peter posted a comment this morning that I’d like to respond to. His question is:

I was looking at this trade earlier on my demo account. My question is: trades like this require quite a large stop loss don’t they? Could you tell us where you placed your stop? I am trying to trade on a small account to replicate my account when I go live but the stop looks a bit big.

First I’d like to commend Peter for using a demo account that reflects the amount he actually intends to trade with, I think that is great.

Second, here is a 60 minute chart of what I had planned to do but remember, I missed the entry so I did not take this trade.

My ultimate profit target was around $1.9500, on the daily trend line.

I look to place stops slightly beyond the nearest logical area of support or resistance. Sometimes that means 80 or 100 point stops but many of my setups have a potential profit that covers that risk, although I don’t always get the perfect risk to reward ratio.

If you have a small account there are a few things you can do to lessen the impact of large stops.

1. Lower your leverage, do you really need 1:100 or 1:400?
2. Just skip the trade, there will be others with less risk.
3. Trade a lower volume such as a 1K micro lot or less “units” if your trading with Oanda.
4. Switch to a lower time frame to trade the pull back.  On this morning’s trade I could have shorted at $1.9693 with only a 30 point stop had I been paying attention to the 15 minute chart.

Hope this was helpful.

Ryan

There are four rate announcements on the docket this week from central banks in the UK, US, Euro Zone and Australia. Nobody is expected to change their rates but that doesn’t mean the market won’t be volitile around the releases so use caution this week.

What do you do when you miss the breakout?

When you trade support and resistance breaks your bound to find a nice setup only to miss the entry when the breakout occurs at an inconvenient time. Before you give up on the trade the market usually gives you a second chance in the form of a pull back which is the focus of today’s GBP/USD short trade.

I’m a little late to the party on this breakout and would liked to have sold the pair on the breakout candle. I am now waiting for a pull back to the $1.9720 level to get short when the market tests the resistance level from below. I need to see the market hold $1.9720 before going short because the pair could easily rally to test the trend line from below around $1.9770 at which point I would get short there.

Normally I enter these trades on the 240 minute chart but since I missed the entry and I need to fine tune the entry price I’m watching this on the 60 minute chart right now.

Best of luck,

Ryan

I receive a lot of email asking what books I might recommend so today I thought I’d share one.

Generally speaking I don’t read books about trading because most of them hash out the same garbage on technical analysis covered many times already. I read books about psychology, spiritual inspiration, discipline and military strategy. In my mind the market is nothing more than a battlefield between buyers and sellers fighting to overcome the affects of their own fear and greed. If you study humans you’ll be a leg up on the average retail trader blindly following a cocktail of technical indicators.

I’m currently reading “Simplexity” by Jeffrey Kluger which attempts to explain the relationship between complexity and simplicity. The book explores why simple things become complex and how complex things can be made simple.

The currency market would be a great study for the theory of Simplexity. The forces that move the market are rather simple to understand and range from the anticipation of a fundamental indicator to intervention by a central bank or perhaps even an interbank trader who is looking to fill a big order before their one o’clock tee time. Average retail traders often over complicate their decision to buy or sell by polluting their charts with several indicators convinced that when they all line up the market will move.

Take the rally we have seen in Dollar this week. The Government’s weekend bailout has continued to reduce fear in the market on top of last week’s comments that interest rates should be raised sooner rather than later. Oil and the VIX had fallen and finally fundamental data this week has been positive for Dollar. Attaching yourself to pro Dollar price action was a pretty good idea Tuesday and Wednesday.

Despite this I’m sure there is a trader somewhere convinced Dollar rallied because the 10,5,3 Stochastic crossed down on their 30 minute chart followed by bearish MACD divergence on the four hour chart.

That is crap and you know it.

Why do we make a marketplace of buyers and sellers more complex than it really is? “Simplexity” explores the desire to over complicate the simple which is something traders do with great skill.

I prefer to keep things extremely simple. I use two short term trading systems, one uses price action alone while the other uses two trend lines to make trades. I keep my finger on the pulse of market sentiment by reading news and knowing the fundamental landscape. Combined with price action that is a powerful trading system.

If you want to use indicators use only one or two at the most but in my opinion price action and market sentiment rule the roost. If you remove complexity from your charts you’ll be amazed how simplicity wins.

What do you think about this? Share your comments by clicking here.

Best of luck,

Ryan

While Dollar pounded the majors for hundreds of pips this week USD/CAD was content boring me to tears waiting for our profit target to be reached. Click here to see the original trade idea. I was long the pair at $1.0082 on the 4 hour breakout candle.

Your primary job as a currency trader is to protect your capital first and make a profit second. Making a trade that results in a loss is fact of life for traders but what you do when things go bad can make a big impact to your profitability. If you followed my USD/JPY short from last week by now you know it didn’t work out. I was stopped out but how I managed my stop is the subject of today’s post.

Managing stops usually fall into two schools of thought. Traders either attempt to trail the market by moving their stop or they leave their stop where it sits until they either take profit or are well in the money. I fall into the second group of traders.

Many traders live and die by the adage “never let a winner turn into a looser” but this kind of zero tolerance thinking can hurt long term traders because the market needs room to breathe.

Stops are there to predetermine the risk your willing to accept on a trade, not limit your profit. If you trail too closely you may be taken out moments before the trade runs in your favor.

Some people probably think I’m crazy to not protect a trade that was 50 points in the money but if I had a pip for every trailing stop order “ticked” out just before the market moved in my favor, I’d be a NetJets customer by now.

When things go horribly wrong however there is no reason to stand there and wait for the train to run you over. This morning U.S. Treasury Secretary Henry Paulson and Philadelphia Fed President Charles Plosser dropped two comments that tanked my short position. Paulson said the U.S. Government supports a strong USD and Plosser said the FOMC should raise interest rates “sooner rather than later”.

This is a perfect example of market sentiment changing on a dime. The Dollar rallied smartly and it was clear my short was going to lose its shorts. I bailed on the trade early with only a 20.5 point loss rather than a 60 point loss had I stuck with my stop.

The point is managing your stops is a personal preference. I like to leave them where they sit until I’m well in the money because long term trades need room to grow but when things go horribly wrong fast don’t be afraid to dump the trade early.

What are your thoughts on stops? Share them by clicking here.

Best of luck,

Ryan

Following up on last night’s trade idea I like the last 240 minute candle enough to place a small position short on USD/JPY this morning. I don’t expect much to happen today being Friday so be patient with the pair or just wait for next week if you want.

This descending channel could be considered a bull flag pattern on the daily chart but I don’t think this pair has the strength to break out just yet and institutional folks are still net short.

Have a great weekend!

Ryan

Since my interview on Trader Radio I’ve enjoyed reading emails from a number of traders. Many of them have similar questions and I thought everyone would benefit if I shared my thoughts over the next few posts.

Keeping Your Profits

Many traders seem unsure whether or not they are “over trading” which makes sense because everywhere you turn for education on trading you are warned to avoid “over trading”. But what does that mean? What if your averaging 5 trades a week, or 50 trades a day, is that “over trading”?

I would submit to you “over trading” is really a warning to avoid taking unnecessary risks once your profit objectives have been met for the day, week, month or lunar calendar year.

Personally I shoot for 400 points a month or 100 points a week. Knowing my monthly goal allows me to pace myself each week and keep my profit. I have traded only one day this week because I’ve had a good month thus far and I’m ahead of my weekly pace. I don’t feel like giving that profit back by over trading. Think about what you want to make and shoot for that goal. Once you achieve it, do not expose your profit to losses with trades you didn’t need to take.

This may sound like obvious advice but a lot of people struggle with limiting their trading activity once they have some profit and end up giving it back. I was one of those traders until I focused myself on a set monthly and weekly goal which is achievable for my style of trading.

A Plethora of Trading Ideas

Tonight I am watching a number of support and resistance opportunities for your consideration.