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February 23, 2008

Like printing money

Posted in: Trading

It’s a rare trade setup that would cause me to take the affirmative step of blogging about the setup and suggesting a course of action for other forex players. The setup on the EUR/JPY charts is such a great opportunity to make a little quick cash with limited downside, I thought it worth an entry.

You’d be smart to take ‘investment’ advice from any layman with a grain of salt – even if the layman in question is up 300% in just 4 weeks, and 1100% since September 1. My only regret about my trading in the last 6 months is that I didn’t start with a bigger bankroll….. but I am wrong on occasion. If you’re going to trade this pair based on my analysis, make sure you do the homework for yourself.

With that disclaimer, let’s take a look at this setup.

EUR/JPY Hourly

This first chart is the hourly. The pair broke through resistance of the 50 and 100 MA at point 1, bounced off the 50 as support in figure 2, and finally blowing through both support points in figure 3. We threw a pin at the 200, bouncing all the way back to the 50 before being rejected right into the Friday close.

Generally, in the time that it would take to prep the charts and write the narrative, the trade would have played out. Since this setup was near textbook right at the close, it afforded me the time.

As you can see from the chart, we’re trading between the 50 and 100, having just been rejected at the 50. The 100 has proven to be little in the way of support, with the 200 requiring at least one more try to see if we get the breakdown I’m expecting. That support level would come in at about 158.25.

This hourly setup, in and of itself, wouldn’t necessarily make me salivate. But we have further confirmation on the daily charts:

EUR/JPY Daily

After the breakdown below all three support levels in late December (a great short ride), we dropped about 1000 pips in just a few weeks. I did very well on that trade, but bailed a little early. We’ve rallied from the lows on that move (about 152), threw a pin at the declining 50 on Thursday, and confirmed the reversal in Friday’s close. I am short 12 contracts from 159.02-159.51 (ave 159.33), and am targeting 156.30 as my first cover zone (partial – probably 6 contracts). From there, I’ll be looking for a bounce, getting short again on rallies of 156.60-157. Only a breakout above the 100 (which has proven the most solid support/resistance level on the daily chart) will invalidate my thesis about the direction for this next move.

EUR/JPY 15

If I’m wrong about this trade, I won’t be losing 200+ pips waiting to see if we get rejected from the 100 on the daily chart. Looking at the 15-minute chart above, you can see that we’ve been flirting with the band containing all three levels (50, 100 and 200 moving averages) all day Friday. We tried several times to breakout from the 200, but got rejected at trendline resistance each time, failing to close above the 200. We’re sitting right on the 100, below the 200 and above the 50. The red trend line along the top of the spikes on the 15 minute chart will be my main indicator. If we spike convincingly above this level, I’ll start to get out and look for another re-entry point for this trade. If it does go against me, I’ve got stop-losses ranging from 159.17-159.55. I don’t expect to see any of them tripped. I think the downside action will be fast and sloppy when the market reopens on Sunday.

Happy trading. May we all be $250 bucks a contract richer before we wake up on Monday!


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