by Eko Prasetyo @ 7:25 AM
Trade 1.
Bought EURUSD at 1.2844
Sold at 1.2550 for a 294 pip loss
This is the first trade in a series for the day, where we will deconstruct unsuccessful trades and try to analyze what went wrong. We will identify some common mistakes and show how to avoid them. In a few days, we will cover some examples of solid entry and exit points on trades. Most of these trades are good in several aspects, but they make one key error in either entry, exit or money management.
The daily chart shows that there is a strong uptrend, supported by the 20 day and 50 day SMA’s. There are also two trend lines supporting the move higher, connecting the low points on the chart. This gives us a general idea of the trend, as well as a possible point where there would be a reversal. If we are waiting to sell, we would likely wait until the price moves below the trend lines. The trend is to the upside, but the price is well above support levels, so it does not appear to be an ideal place to buy either. Let’s switch to the hourly chart in order to find an entry point.
The hourly chart shows that there is not a reason to enter the trade at 1.2844 either. This confirms the daily chart, where there is little reason to get involved in the trade. After the price bounces off support several times around 1.2720, it would be a possible entry point to buy while placing a stop just below the blue line. The other option would be to wait for the price to fall below the support line here and then sell. Once the price falls below support, that blue line becomes resistance, so you could place a stop above the line to cover your short position.
There appear to be two mistakes here. The first is that there appears to be little reason for entering the trade, as we have shown on both the hourly and daily charts. The price is well above support on the daily chart, and there does not appear to be support on the hourly chart, so there is little reason to get involved in the position.
The second mistake is in the exit point. Once you are in a position, you should always identify a point at which you would be willing to exit for a loss. In this case, I would suggest placing a stop below the support level on either the hourly or the daily chart, especially as the strong support forms on the hourly chart and is then broken, as shown above.
In this case, you could even consider a short position. When the two charts are combined, it becomes apparent that support is broken on both the daily and hourly candles, which would give you an entry point to sell EURUSD around 1.2700.
Trade 2
NZDUSD
Bought .6823, 1/09/04
Sold .6588, 1/18/04
The daily chart at the entry point shows a strong up trend, but one that is much steeper in the short term than the long term sustained trend has been. This steep trend line should be considered moderate support, while the red trend line is much stronger. The 10 day SMA also shows that the price is moving higher in the short term. The entry point is not ideal, though, because it comes at a point that is well above the short term support. The entry point also comes at a candlestick that is very close to being a doji, a clear reversal signal. In this case, it may be too soon to sell the pair, but it appears to be overall a bad place to buy.
But the real mistake is not in the entry point. It is bad luck that the long position was taken at the peak of the trend, however the exit can be corrected easily. A stop should have been placed just below the steep trend line or the 10 day SMA. Once the price fell through these two lines, the fall was clearly signaled. The mistake here was in holding a loss too long.
As you can see, the stronger of the two trend lines eventually held though. In an uptrend as strong as this one, it is tempting to just buy at any level and hold on. But patience is key. Buying above support or even selling when the price breaks below support in order to take advantage of a short term retracement is really the best way to go.
Trade 3
GBPUSD
Bought 1.8460
Sold 1.8310
The daily chart appears very similar to the last two trades. The currency being purchased against the dollar is showing a lot of strength on the trend, with several strong support lines connecting low points on the chart and the price above the10 day SMA. The only problem here is that there is little reason to enter the trade at the current price on the daily chart.
I apologize that the data for the hourly chart is no longer available, because I wanted to point out that this was a good trade from an exit standpoint. The loss of 150 pips is certainly not fun to experience as a trader, but it certainly could have been worse. The Parabolic SAR lines were broken, and then the 10 day SMA shortly after. This trader could have waited for the trend line to hold (which it did not ) and lost several hundred pips on the trade before closing the lot. In the end, the entry point simply shows the same mistake as trade #2.
Trade 4
GBPUSD
Sold Short 1.7825
Bought 1.7944
The above chart is the same as trade #3, including the same trend lines and the 10 day SMA. The daily chart shows little reason for selling at this point, so lets switch to the hourly chart.
This was not a bad entry point at all—just the opposite of the previous trades. The downward trend line on the hourly chart establishes that resistance is just above where the lot of GBPUSD was sold. It is reasonable in the short term to expect this line to hold and the pair to bounce off resistance on this trend and move lower. The problem is that once the Parabolic SAR and the hourly trend line are broken, the trade is kept open. It certainly isn’t the worst trade in the world, and if you look at the daily chart, the stop appears to be at the point where the candlestick pattern has created a reversal and the price moved above the high of the previous candle. It just seems that if the reason for entering the trade is based on resistance for the short term chart, then once this resistance is broken, the exit point should be based on the same chart. Once your reason for being in a position disappears, exit the position.
I realize that Parabolic SAR had not been covered at the time this trade was placed, so we’re analyzing the trade itself with more knowledge now than we had when it was placed.
Trade 5
USDJPY
Bought 106.88
Sold 105.99
As discussed in several articles, USDJPY is a difficult pair to trade because of the uncertainty of BoJ intervention. However, we can determine from the chart that 106 is a level where BoJ has intervened several times because it has created several sharp spikes. The only problem with this trade is that the buy order was placed too far above the BoJ intervention level of 106, and that the position was closed just below that level. In the case of USDJPY it is almost pointless to place other indicators on the chart, since BoJ controls the price action in the short term.
Consider selling USDJPY at your own risk, as the BoJ intervenes unannounced and sometimes at unexpected levels. But if you are buying USDJPY, try to think like the BoJ thinks. They are reading the same charts as the rest of us, and they have established certain support levels that they try to defend. 106 has been established as one of these levels by the time this trade was placed, so buy as close to 106 as possible. When selling, you may want to watch the past data to see how high many of the spikes go during intervention. Place your limit to sell just below the height of these spikes.
CHF OverviewThe Swiss Franc (CHF)
Switzerland is the 19th largest economy in the world, with GDP valued at over US$240 Billion in 2001. The economy is relatively small, but it is one of the wealthiest in the world on a GDP per capita basis. The confidentiality offered by the Swiss banking system, coupled with the country's lengthy history of political neutrality has created a "safe haven" reputation for the country and its currency. As a result, Switzerland is one of the world's largest destinations for offshore capital. The country holds over US$2Trl in offshore assets and is estimated to attract over 35% of the world's private wealth management business. This has created a large and highly advanced banking and insurance industry that employs over 50% of the population and comprises over 70% of total GDP. Since Switzerland's financial industry thrives on its safe haven status and renowned confidentiality, capital flows tend to drive the economy during times of global risk aversion, while trade flows drive the economy during a risk-seeking environment. Therefore trade flows are important, with nearly two thirds of all trade conducted with Europe.
Indicators for CHF
Gold Prices
The Swiss Franc has an extremely high correlation with gold, as the Swiss government is the fifth largest holder of gold reserves in the world, and the Franc is partially backed by these holdings. The USDCHF chart is nearly the inverse of the chart for gold as a traded commodity. Both the Franc and gold are regarded as safe-haven investments, and both trade nearly inversely to the US dollar, which does well when equities are dominating.
Balance of Payments
Balance of payments is the collective measure of Swiss Trade with the rest of the world, and as such it is an excellent indicator of money flowing into the Franc. When the world economy is thriving, CHF tends to weaken as money flows out of this safe-haven currency into higher yielding investments. At these times, Swiss exports are generally very strong, making up for the weakness in capital flows.
Interest Rates
Like any other currency, CHF depends on its interest rates to affect the exchange rates in the currency. In the past several years, Switzerland has faced the possibility of deflation and a reduction in exports, and to combat both problems, it has aggressively lowered interest rates to a level between that of the USD. This policy has effectively devalued the Franc so that Swiss exports are more attractive to foreign consumers, while inflation has been kept completely in check.
Trading CHF
EURCHF
Most of Switzerland’s trade and capital flows occur with the countries that now make up the Eurozone, and once this single currency bloc was created, EUR immediately surpassed the US dollar in the volume of exchanges with the Swiss Franc. EURCHF surpasses USDCHF as an indicator of CHF strength as well, and spreads on the interbank market are usually narrower. Swiss data releases are most likely to affect the movement of EURCHF, and technical analysis of EURCHF is much more valid because the volume is higher.
USDCHF
Before the existence of the Euro, USDCHF was the major indicator of Swiss Franc strength. Exchanges with the US dollar occurred in a higher volume than with all the disparate currencies of Europe. Because of the secrecy available through Swiss bank accounts, many US citizens deposited capital in Switzerland, and capital flows between the two currencies were very important as well. These offshore account outlets were largely closed in the late 1980’s, and trading volume in USDCHF went into decline even before the emergence of the Euro.
Trading volume in this pair is now relatively light, and USDCHF is no longer considered one of the main currency pairs. At many times during the day, USDCHF spreads are merely a composite of EURUSD and EURCHF spreads, which means that USDCHF prices can fluctuate around the center of this wider spread even when there is little market activity. USDCHF is not an easy pair to trade on its own for this reason, but it often acts in tandem with EURUSD. In fact, the USDCHF chart is often almost identically the inverse of the EURUSD chart. A breakout higher in EURUSD would be a signal that USDCHF will move lower quickly.
