School has been very busy lately and that's why I left this blog in hibernation for about a month. Now however, I am back with a EUR/USD trade. The USD has been going downhill for a long time now, but now I am entering a short position in EUR/USD based on the following technical analysis.
If you know the basics of TA you can probably see what I am getting at. The EUR/USD has completed and broken down through a Head and Shoulders formation. The first top is around November 7th followed by the first neckline dip, then follows the head-section all the way until the December 6th neckline dip, then the formation is completed with the last shoulder and finally the break of the neckline last friday.
What a downside break of a HS formation is supposed to indicate is that a long-term trend has come to an end and changed direction. This breaks one pretty basic TA rule which is that following the prevailing trend is a good thing, (the trend is your friend), and I believe this to be true. But a HS-formation is supposed to indicate a situation where an exception should be made. Also that a trend change occurs for technical reasons at this point makes sense because the price action reached a symbolic level of $1.5 per EUR (and symbolic numbers matter more than you might think). The price stopped just short of that point and has gone downhill since, this makes me believe more firmly in a trend change.
Aside from there just being a HS formation, there is also MACD support of a negative break. The first shoulder and head are at the top of the MACD scale but for the last shoulder the MACD-lines have tumbled down in divergence to the market price. This indicates a technical weakness in the price action which is also an indication of future falling prices.
Also the price has broken through the 50-day moving average which is considered to be a pretty strong support, and the bollinger-bands have "opened-up" from a horizontal consolidation which indicates that a strong movement is coming.
This trade could have been entered on friday, but I was unable to access the market and didn't have the opportunity, also I am not always so keen on entering trades on friday afternoons. I entered this trade just minutes ago at the first asian action at a market price of 1.4432. I put the stop right above the neckline (around 1.4540). It is possible that the price comes back up to test the neckline which does happen a lot when a trend turnarounds appear. The stop is pretty big (100+ pips) and perhaps not really optimal, but when you enter a trade on the basis that a trend is changing, you need to look at things in a longer term, meaning that you use a bigger than usual stop-loss level and a longer holding period.
One must not forget to have a time or price goal for exiting the trade, and for the moment I am going to say that the price might move 450 pips from the neckline break (derived from the height of the formation) and that will be my preliminary goal.
There you have it, I will return with updates on this and hopefully other trades in the nearby future!
/H
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