FX Outlook for 7/8/11: Pre NFP

I'm expecting tomorrow to be the biggest trading day of this week, notably because of US employment and payroll data. CAD also has some important employment data, so there should be some fireworks early on tomorrow morning in all markets.



Last time the NFP came out in May we saw very disappointing results (added 54k with expectations of 170k, unemployment rose to 9.1%). Afterwards, just about everyone sold dollars for the rest of the day. This time around, were expecting an increase of at least 100k with some expecting the number to be as high as +175k. Since there has been a string of good US data lately on top of recent strength in the US markets, I believe the markets have already accounted for these payroll and unemployment figures, so in order for the data to be bullish for the dollar they must come in significantly higher than expectations. Sure, we will probably see a nice pop even if they are in line with expectations, but it may not carry through the day. On the other hand if we see data well below expectations, I'm expecting a hard dollar selloff. The SPY and IWM are both near significant resistance and have just seen strong runs in the past two weeks. There could definitely be some panic selling in US markets if bad numbers come in. I have a hard time seeing either the SPY or IWM moving through resistance unless we see some extremely good numbers, but I'm not expecting it. The dollar index, which is still in a very long term downtrend, looks to be flattening out a bit and showing a little bit of strength.



Some predictions for dollar-denominated pairs:



The EURUSD has been consolidating on the daily's for some time now, and off line data could set us off in one direction or the other. The euro has been struggling to stay afloat as the ECB raised key interest rates and Portugal received a downgrade earlier this week. If the numbers come in at expected or higher, I think we’ll definitely start selling off. The next support looks to be around 1.4140, so that could be a good initial target.



The AUDUSD has moved higher in the past two weeks due to US market strength and investors seeking higher yields. If dollar strength continues, this move higher could very well continue. We’ll definitely be running into some traffic on the upside though, so keep that in mind. If data comes in weak, there are at least 100 pips of possible downside that we could see today, depending on how much we come up short. Short-term downside support looks to be around 1.0725, then 1.0680, then 1.0650.



Another pair I’d be interested in in the long term if we see good US data is the USDCHF. This pair has been trending down forever and while it hasn’t quite broken out of the downtrend yet, it may have found some support near 0.8325. This is a very well-defined and obvious trend that people will be looking at, so I think there is nice upside potential if we can break out. Strong NFP numbers may be a perfect catalyst for this to occur.



All of the dollar denominated pairs will be in play this morning; these are just a few I will be following a little bit more closely. I always try to avoid any exposure before huge data like this, and I like to wait 15-20 minutes at least to let any type of kneejerk play out. Don’t chase moves you’ve missed, just be patient and wait for pullbacks. And finally, remember to listen to the market and take what it gives you! Be flexible, because it’s easy to get burned if you’re stuck on a particular idea. Any questions, please feel free to ask. Happy Trading!

EURUSD 6-8-11

I haven't been trading too much lately, been working on an algo and studying for tests.  Tonight I briefly placed a couple trades in the EUR/USD.  I typically play ranges during the evenings, so I initially identified 1.4600 and 1.4567 as range levels.  1.4600 was tested twice but 1.4590 wouldn't drop support.

Pair soon after broke 1.4600 convincingly then found support at the level.  I like this play during the day, and I've found it usually also works in Tokyo, so I got long @1.4603 with stop at 1.4596.  Covered half above session high at 1.4609, moved stop to break even and let the rest ride moving my stop as pair moved up.  The move started looking steep and it couldn't hold above 1.4625, so I got flat.

Unfortunately I accidentally made this trade on a demo account.  Took a quick, stupid frustration long above the 1.4625 level and was quickly stopped out for a small loss.  Other than that, I was pleased with this evening.  I have trouble letting my winners run, but I was pretty patient on this play.  I'll be looking for this move more often during this session.  Its easier than range trading and its fairly low risk.

Trading an Economic Report

           Since plenty of traders including myself look for spots of increased volatility to make a quick move, I figured I’d put together a post about to set yourself up for a successful trade after an economic event or report.  On the eve of the May NFP’s, it seems appropriate.

           In my opinion one of the most important things to gauge before an event is the expectation of the markets.  Just about anywhere you find an event calendar, you can find a value economists have determined to be the ‘expected’ result of an event.  Tomorrows NFP number has had a general expectation of +170k, but many have already agreed that there’s a good chance the report will come in much lower than that.  Many estimates have already been updated to reflect a lower expectation since this week’s poor ADP numbers (probably closer to +125k or less), and the market has been processing these expectations.  Now let’s say that the actual number comes in around +100k.  While this is much less than the originally anticipate +170k, you might not see the reaction you’d expect when a number as important as the NFP’s comes in that much lower than expectations.  This is because the market has already accounted for much of the difference.  By understanding the true market expectations, you can prevent yourself from getting on the wrong side of a freight train.

           Another thing that’s almost guaranteed to rip you up is trying to anticipate the market’s reaction and get in before the event.  This is basically gambling in my opinion, unless you have some sort of strategy for doing it.  Even if a report comes out exactly how you expect it to, the market doesn’t always act accordingly.  It’s much safer to let the initial kneejerk pass before trading.  Even if you miss the initial move, there usually are plenty of opportunities to safely enter and profit.

           Understanding the event is another key to success.  Different events often have different types of reactions for different pairs.   Some events cause pairs to take off within seconds of the release and never look back, while others take 10-15 minutes to really pick a direction.  For example, the most important part of the RBA minutes is the last sentence, so you might not see a real reaction until the report is fully read.  Also know what pairs will be in play after a report.  You probably won’t see as much volatility trading a yen cross when the BoE announces new rates. 

           Identify your key levels before hand, prepare for all possible scenarios, and understand overall market sentiment.  Be patient and get good entries, but don’t be hesitant or you will get left behind.  There is plenty of quick money to be made trading off events, so you have to know how to take advantage of them.

          Below is a 5 minute chart showing how the EUR/USD reacted to the April NFP's that came out last month.  HUGE move.  I'm pretty excited to see what happens tomorrow morning.  Good luck to everyone trading it!

EUR/USD, 5 min, 5-6-2011 

Trading the EUR/USD Friday 3/26

Sorry, this is a little bit late, its been a crazy weekend.  Friday morning I traded the EUR/USD a little bit from the short side and did okay, so I'll go through what I did and what I could have done better.

The EUR/USD caught my eye Friday night for a number of reasons.  One, it was trading up near 1.4250, which is around the high for the past few months.  Another reason is because of Portugal's economic troubles.  The nation was teetering on the edge of needing bailout, and a new austerity plan was just rejected.  A bailout request from Portugal would spell trouble for the euro, and I knew that it would be in play for Friday morning.  Also, some fourth quarter US GDP stuff was coming out in the morning.

Preparation:
I sat down Thursday night and Friday morning to study the EUR/USD chart as well as the dollar index.  I identified the 1.4150-1.4140 region as an important level to determine how the pair would trade for the rest of the day.  It had provided previous short term and long term support, so I was thinking that a lot of traders would be looking at this level.

Plan:
After finding this level, I came up with my if/then statements

If the pair drops support @ 1.4150-1.4140, then I'm getting short 1 lot with my target near 1.4075 and looking to add beyond that price

If support holds @ 1.4150-1.4140, then I'll do nothing.
-I wasn't expecting this to happen, so if it did I wouldn't have felt comfortable getting into it until it got above       1.4250.

It just so happened that the 1.4140 level broke, so I got short from 1.4135 1 lot.

Patience and Discipline:
The trade immediately went for me, and I always get tempted to take profits too early.  I showed patience by not taking profits, and I also didn't panic and close my position when this initial profit disappeared and the pair rallied a little bit (this may have been due to the positive US GDP release).  I need to continue to work on this, because its one of the biggest problems I have.

Hard Work:
I did plenty of reading and research before I placed this trade, so I felt well prepared and in a position to make a good trade.

Communication:
I tweeted my idea Friday morning, and I'm sharing the details of my trade right now in this blog.

This was a profitable trade for me, but I did close my position be fore the majority of the move.  I always expect things to happen faster than the actually do, so I need to focus on just setting a stop and letting things unfold on a trade like this instead of staring at every tick.  The EUR/USD eventually made it down to 1.4054, so my target would've been easily hit if I would've gave it more time.  It's good though, this blog is helping me become more and more aware of that issue and I've been letting things trade longer.  I want to continue getting better in the coming weeks.

Okay, I'm definitely going to be watching the EUR/USD throughout this coming week.  We're toying around near a longer term level, and there's plenty of fundamental fuel right now to push this pair around.  Specifically watch out for eurozone CPI on Tuesday, eurozone unemployment Thursday, and US NFP/unemployment/manufacturing on Friday.