Category Archives: trading diary

Trade Review: EUR/USD (-170 pips)

Entered EUR/USD short at 1.3766 on 19 Oct. Stopped out 24 Oct at 1.3936. Result: -170 pips.

Entered with a stop at 1.3936 and a target of 1.32. Greatest open loss: 170 pips Greatest open gain: 110 pips.

It’s frustrating to be right on the macro front but get the levels/timing wrong. That’s what happened with my EUR/USD short.

I entered the trade thinking there would be a European resolution on the weekend, as planned. I was right about the Guardian story being bunk, my read on bank recapitalization plans being ratcheted down was right. Economic news has also been disappointing.

I see two possible trading outcomes from this weekend’s summit. Outcome 1: Discord, disagreement or disarray. Outcome 2: an agreement that falls short of expectations or becomes impossible to implement.

That prediction rings true. (the full reasoning is here)

What concerned about a further stock market rally but I thought 1.3936 and the 55dma would cap the rallies. I was wrong.

What I didn’t anticipate was the round of repatriation that’s going on at European banks. The threat of higher capital ratios is causing them to reduce exposure abroad and bring euros back. They are also said to be holding back on dollar lending.

What I’ve learned: As soon as the story changes, get out. The moment it became apparent that European leaders were changing the timeframe, I should have got out. I also should have recognized that there are/were way too many moving parts in the euro story to accurately forecast everything. It’s not like forecasting Australian CPI or a Fed meeting. I should have been more disciplined with the entry level.

 What I’m happy about: the initial timing of the trade was solid. I was up 80 pips within a few hours. I’m also pleased with my overall assessment of the outcome. I wish I were still in this trade because the euro is going to fall. But this is the first losing trade I have had in awhile so I’m not going to compound it by chasing.

I’m looking at USD/CAD longs once again.

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Selling EUR/USD at 1.3766

I have been on the sidelines and lacking conviction for the past two weeks.

First, I was expecting the US economy to fall harder and faster. More importantly, the Merkozy ‘promise to deliver a plan’ on Oct. 10 generated a 500 pip rally that left me scratching my

The headline risk surrounding this Sunday’s EU Summit became enormous. Yesterday’s Guardian article saying “France and Germany have reached agreement to boost the eurozone’s rescue fund to €2tn (£1.75tn) as part of a “comprehensive plan” to resolve the sovereign debt crisis.”

Aside from the numerous examples of bad grammar in this story (reached agreement?) there has been a wave of denials that has me convinced this story is bunk. The nail in the coffin was a WSJ report saying a bond insurance plan would be illegal under Europe’s no-bailout clause.

In addition, expectations are being ratcheted down for European bank recapitalization. The Greek bailout is fully expected but disappointing periphery growth is not.

It’s very difficult for me to price in what’s expected from the European Summit but betting against European policymakers has been the best trade of the year. Merkel and Finland’s PM today tried to scale back expectations but the market isn’t listening.

In addition, sentiment data remains negative. I’m a big believer in the University of Michigan consumer sentiment survey as a leading indicator. Last week, it was once again near a 30-year low and the lowest non-recessionary level ever.

I see two possible trading outcomes from this weekend’s summit. Outcome 1: Discord, disagreement or disarray. Outcome 2: an agreement that falls short of expectations or becomes impossible to implement.

In Outcome 2, we may see the euro rally on the news. I believe this will be short-lived and an incredible opportunity to sell.

My plan is to sell EUR/USD now with a stop at 1.3936. It’s a wide stop, at almost 180 pips but I’m targeting a drop back to 1.32 – a 560 pip reward. I’m also prepared to add to this trade in the high 1.38s.

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Why I Bought EUR/CHF

Buying EUR/CHF anywhere close to 1.20 will turn out to be the easiest trade of 2011. I bought the pair on Sept. 9 at 1.2066 and with a stop at 1.1945.

The story is well known. The Swiss National Bank pegged the franc to a minimum of 1.20 against the euro on Sept. 6. The result was a 10%, one-day move in EUR/CHF to slightly above 1.20 from 1.1019.

 The press release announcing the decision (http://www.snb.ch/en/mmr/reference/pre_20110906/source/pre_20110906.en.pdf) will go down in foreign exchange history. I spoke to a trade who put on a EUR/CHF long in the morning (with no limit), went to the beach and came home $10,000 richer. He said it was the best day of his life.

The SNB said it will enforce the peg “with the utmost determination and is prepared to buy foreign currency in unlimited quantities.” They are aiming for “a substantial and sustained weakening” of the franc and “will no longer tolerate” EUR/CHF below 1.20.

Most traders are stupid and the first thing they thought about was fighting the SNB the way Soros fought the Bank of England. (http://www.investopedia.com/ask/answers/08/george-soros-bank-of-england.asp#axzz1Y4w7gDfD)

This is nonsense. Britain was attempting to boost the value of its currency while the Swiss are attempting to devalue. Weakening a currency is easy, you just print more of it. In Switzerland’s case, they are printing it and buying European bonds. There is no limit to how much they can print and spend.

The second point to consider is credibility. I quoted the strong wording of the SNB because they have placed themselves in a corner. There is no way to back down. If they fail here, especially if they fail quickly, it would take years to restore their previous clout. Central bankers are extremely observant and protective of credibility and they’ve put every ounce of it on the line here. In doing so, they surely considered all the possible outcomes, including extreme turmoil in the eurozone.

The third point is carry. As in the money earned on interest. The CHF rate is 0.25% and the euro rate is 1.50%. Even if EUR/CHF stays precisely at my entry point the trade pays 1.25% per annum. With leverage, it’s much more. Over time, as the SNB demonstrates credibility, the carry trade will boost EUR/CHF.

These three reasons are more than enough to enter this trade. The fourth reason is a theory. The chief loser in this decision is the eurozone yet there has not been a single complaint. Swiss companies are now competing with their European counterparts at below-market rates. The secondary losers are the rest of the free-floating currency world, who also must compete with the Swiss at rate that doesn’t respect the market. Granted the CHF was in the midst of a tremendous rally prior to the announcement but, still, the international community has been silent at a time when rhetoric about unfair Chinese FX devaluation has ramped up.

Maybe there was an agreement prior to the SNB announcement. What would Europe want in exchange? It’s obvious. The SNB buying European bonds is mutually beneficial. It will lower borrowing costs and stabilize Switzerland’s trading partners. Specifically, I expect the Swiss to buy the bonds of neighboring Italy and France. For the rest of the world, an improvement in the stability of the eurozone is a small price to pay for giving up a slight competitive advantage to Swiss exporters.

Another curious event around the peg that raises my suspicions is the leak. It’s obvious that some traders had foreknowledge of the decision. EUR/CHF rallied 250 pips in the two hours before the decision.

It’s certainly possible that someone at the SNB leaked the decision. The knowledge was extraordinarily valuable. Even a small retail trader could have easily made $100,000. In 15 minutes with that information, I could put on trades that would net $1 million. A well-funded trading operation could easily have made $1 billion.

If you think those numbers are outrageous consider that UBS rogue trader Kweku Adoboli apparently lost $2 billion of his employer’s money on the CHF devaluation (http://www.zerohedge.com/news/ubs-rogue-trader-had-been-reduced-watching-fox-news-guidance). His employer? UBS, the Swiss banking giant. If anyone in Switzerland had foreknowledge of the peg it would have been them, and they certainly wouldn’t have lost $2 billion.

I don’t believe the leak came from the SNB. They’re Swiss bankers, people famous for keeping their mouths shut.

But if they discussed and cleared the plan with their neighbours, the secret would have been much more difficult to keep quiet. Perhaps the Italians talked? Perhaps the French? If we could follow the money, we might find out. But instead, let’s make money in our own way – trading forex.

The next question is: how high will EUR/CHF go? The SNB said the franc “is still high and should continue to weaken over time.” This tells me they are unlikely to act in order to drive EUR/CHF higher unless the economic outlook deteriorates or deflationary risks mount.

In this case, the unwind of specs, the aforementioned carry trade and an improvement in the European sovereign crisis will drive EUR/CHF to 1.25 and beyond. Yes, I said and improvement in the sovereign crisis. Greece will receive the next tranche of aid and that will eliminate any risk of default through year end. This alone will help stabilize EUR. Switzerland and other nations buying European debt will further fuel the trade.

Technically, EUR/CHF has bottomed and will continue to reverse. A clear inverted head-and-shoulders pattern is visible on the daily chart. And though the measured target of 1.39 is far fetched in the near or medium term, the direction is certainly up.

I will hold this trade until it hits 1.35 or until mid-December, whatever comes first.

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Trade Review: AUD/CAD (+311 pips)

Entered AUD/CAD long at 1.0248 on 12 Aug added on Aug 15 at 1.0295. Exited 23 Aug (+147 pips) at 1.0395 and 30 Aug (+164 pips) at 1.0459. Result: +311 pips.


Entered with a stop at 1.01 and a target of 1.05. Greatest open loss: 80 pips Greatest open gain: 340 pips.

Technicals were the primary driver for a long AUD/CAD entered on Aug. 12. The weekly chart caught my attention due to the dragonfly reversal. I also noted how rate hikes were overpriced in Canada.

My full reasoning was here

I noted that my next best idea was short CHF/JPY and that would have also been an excellent trade that was never in a negative position and gained as much as 600 pips in the same time frame.

After the break of 1.03 on Aug 14, we waited for a pullback and doubled our long position at 1.0295.

On Aug. 17 we noted there was no reason to take profits but the pair went on to post its worst one-day performance of the trade, falling 100 pips.

Despite this, we remained confident and felt a bounce to 1.03 (at least) was about to happen.

We went back to the weekly chart on Friday and it continued to look lucrative.

On Aug 22 we were rewarded with a surge to 1.04. We accurately saw this as a great time to take some profits. This allowed us to hang onto the second part of the trade for an additional 60 pips (above where we sold the first unit).

What I’ve learned: I may have rushed into buying the second unit after the break of 1.03. As we saw, there was a deeper pullback than I anticipated and this was the only time I was nervous about the trade. I targeted 1.05 so I may have exited the trade too soon. The weekly chart looks like it will get to at least 1.0550 but I’m nitpicking at a great trade.

 

What I’m happy about: Lots. I saw a lucrative pattern on a weekly chart and hung onto the trade for close to three weeks. The thing I’m most proud of is the way I sold the first part of the trade at the perfect time, nearly nailing the top on the bounce over 1.04 and locking in a nice profit that allowed me to easily wait out the next run toward the ultimate target. Opening a trade with two units or adding a second unit early on is my favourite manner of trading because it gives me this flexibility. I’m also pretty happy about noting that short CHF/JPY was my second favourite idea.

 

 

 

 

 

 

 

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Sold AUD/CAD at 1.0459 (+164 pips)

We’ve wrapped up a great AUD/CAD trade by taking profits on the second part at 1.0459 for a gain of 164 pips. We sold the first part on Aug. 23 for a gain of 147 pips. The combined net gain of the trade was 311 pips. For those with interest earning accounts, this trade would have also provided positive carry for 18 days.

This was our only trade of the month and we loved every minute of it. We avoided the volatility elsewhere and were holding a profitable position nearly every day.

The trade was based on the weekly chart that we posted here and at chart.ly. We pointed out the dragonfly reversal and a noted that it pointed to a re-test of 1.05.

AUD/CAD reached as high as 1.0480 yesterday and has been up for four consecutive days. We may see another 40-60 pips of immediate upside in this trade but we’re now growing more bearish about the global economy and are looking to put on some trades reflecting that. We expect to see some sort of spike higher in risk trades followed by a reversal in the next day our two. Follow @FX_Button for all the trades.

I want to let this trade sink in and I will have a full review with charts tomorrow.

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GBP/USD Breaks Out

Cable broke out on Tuesday. In yesterday’s post, we noted that we thought the bias was to the upside, despite the resistance around 1.6475. When that level broke, the pair rallied more than 100 pips. We talked about buying at 1.6500 and perhaps some of you did, but we did not have a buy order in play.

 

The reason we didn’t have a buy order is because we hoped the pair would come back and re-test 1.6475. It’s an effect called ‘buyer’s remorse’ where the pair will re-test a breakout level. This is generally where we like to pickup breakouts. Sometimes we miss the trade but it diminishes the number of false breakouts.

 

With cable trading at 1.6513 at the moment, we are getting an itchy trigger finger. What’s making us hesitant is that we have had 5 consecutive days of gains in the currency that we believe holds a heavy short interest. The weekly IMM data from the CFTC shows GBP is the only currency held short against the USD. That could mean we have been experiencing a short-covering rally. If that’s the case, it’s probably running out of gas and could reverse.

 

Ideally, we would like to see a day or two of consolidation with the pair generally holding above 1.6450. This would relieve somewhat overbought conditions and give us the confidence to aggressively buy. At the moment, we’re going to wait, watch and stay disciplined.

 

Our AUD/CAD trade was up more than 200 pips on Tuesday but has pulled back to 1.0312, which is still 60 pips above our first unit and 20 pips above the portion we added on Monday. We will stay patient but might trim some of our exposure on a close below 1.0296. We are still very confident in this trade and like how the technicals have progressed.

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Cable at Inflection Point

We are awed by the trading possibilities of the GBP/USD daily chart at the moment. We see amazing opportunities to make money long or short depending how the market breaks.

GBPUSD Aug 16

GBP/USD Daily Since Jan

Cable hit the highest since May on Tuesday but it only exceeded the prior high by one pip before slipping back below 1.6450. The area around 1.6475 has now become a critical inflection point. We see a minor bias higher because the break lower after the first two tries at 1.6474 was rejected so aggressively. What makes us hesitant to buy is the lack of follow-thru above 1.6475 on the break.

If cable does break above 1.6475 we don’t expect 1.6547 to offer much resistance. Instead, we anticipate a straightforward rally to 1.6747 and a likely test of 1.7000.

We are in no rush to jump in here. We may see a slide all the way down to 1.6325 before we get the conditions to rally. We will buy on a break above 1.6500.

Alternatively, if GBP/USD falls below 1.6300, we will sell on expectations of a move back to 1.60, or lower.

In either case, we expect to make upwards of 200 pips, so we can afford to be patient.

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Adding to AUD/CAD Ahead of RBA Minutes

We like the Australian dollar ahead of the RBA minutes for a short-term trade and since AUD/CAD has acted as we expected, we’re going to add to our longs here at 1.0295.

 

We bought AUD/CAD on Friday at 1.0248. Read about it here:

 

Our catalyst for buying now is today’s release of the Aug. 2 Reserve Bank of Australia meeting minutes at 0130 GMT . If we remember back to the previous meeting minutes, the RBA came out more hawkish than expected and it led to a 500 pip boost in AUD/USD and 400 pip boost in AUD/CAD in the next two weeks. We expect to see something similar, albeit not as dramatic.

 

We like the trade because we believe there was a lively debate about hiking rates at the meeting. The discussion took place one week after Q2 CPI hit 3.6% y/y (compared to 3.3% in Q1). Officials in the statement emphasized that inflation had peaked but we don’t believe this was a universal sentiment. We also believe upbeat talk about the domestic economy could give AUD a boost.

 

The downside risks relate to offshore activity. The RBA was incredibly smart/lucky not to hike rates ahead of the wave of risk aversion that hit markets just hours after the decision. They noted external risks and, of course, some of those have come to pass. The risk to our trade is that the market will ignore upbeat comments on inflation and growth and recognize that some of the downside scenarios related to offshore developments have come to pass. Any discussion about cutting rates would cripple our trade but we see it as a less than 1% chance.

 

On balance, even if the main downside scenario comes to pass, we don’t see a large scope for AUD to fall.

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Bought AUD/CAD at 1.0248

Technicals were the primary driver for a long AUD/CAD trade I entered Friday. I announced the trade on twitter via FX_Button.

 

Every Friday, shortly before the market close, I take a look at the weekly charts and see if anything jumps out. This turnaround, along with probably reversals in CHF crosses caught my attention. The reversals in CHF look convincing but I’m reluctant to fight the huge upward trend in CHF.

 

Let’s have a look at AUD/CAD weekly chart.

 

AUDCAD Weekly Aug 12
AUD/CAD Weekly One-year

The dragonfly doji reversal pattern is what jumped out. AUD also looks strong against USD but with this trade I minimize the difficult risk on/risk off trade.

 

Breaking down the fundamentals also creates a convincing trade. Despite the furor about the soft AUD jobs data and potential rates cuts this year, we are not yet convinced. The RBA took a small step toward HIKING rates at the last meeting, while warning about potential downside risks off shore. It appears as though some of those risks are coming to pass (esp. in US and Europe) but that, alone, will not be enough for the RBA to cut rates. At the same time, Chinese and Japanese data has been stronger than expected.

 

The same risks apply to Canada. What leaves CAD more vulnerable is that the market is pricing in rate hikes in Canada in the coming six months. With US growth faltering, we highly doubt those hikes are still on the table. If fact, we see the BOC as more likely to cut rates that the RBA.

 

With this trade, we will look to add around 1.03 for an initial target of 1.05. So far the early Asia-Pac trade has been good to us after a curious rally in CAD in the final 30 minutes of trading on Friday but us behind 35 pips almost immediately. Those losses have been recovered with the pair gaining 80 pips so far this week.

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July Trade Tally +281 pips

July was a good month of trading. My losses were small and my gains were big. I haven’t made any trades in August. The closest I came was on Aug. 4 when I was on the cusp of buying JPY.

I wish I could have took my own advice and sold USD/JPY. The tweet came at the absolute peak on Aug 4 and this trade would have never been down more than 20 pips. Four sessions later, USD/JPY was down more than 350 pips.

Anyway, in July I made seven trades and earned 281 pips. For the details of the trades, click the hyperlinks. All my trades are done live on twitter. Follow @FX_Button.

July Trade Tally

July 27

USD/JPY – -30 pips

USD/CHF -30 pips

July 26

AUD/USD +92 pips

July 18

AUD/USD +108 pips

July 4

USD/JPY +168 pips

June 30

NZD/JPY -26 pips

June 30

NZD/CHF -1 pip

 

Tally: +281 pips on 7 trades.

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