Monday, August 21, 2006

Rules are made to be broken

This week looks to be a quiet one as far as economic reports is concerned but that doesn't mean there won't be any excitement. The Euro has already made some moves today as it made a new 20 day high against the dollar. Today's move was probably caused by 2 things: the first is that traders' expectations for the Fed to increase interest rates is reducing, and the second is the better than expected trade balance for the Euro-zone. But even with the new high, notice how 2900 still seems to be the level to break. As I write this, the Euro is slightly under 2900 which confirms my speculation that the Euro will have a tough time making any more gains. I mean, sure, the Euro got as high as 2938 today but what exactly constitutes a clean break? You often hear about people talking about how they will go long or short when a price can break a certain level but how do you define a break? To me, a break cannot have a clear definition. You cannot put a set number of pips and use that as your definition of a breakout. It's possible to use a set number of pips as filters for your trades, but a breakout is very tough to pinpoint. In today's example we see that 2900 was broken by 38 pips and yet at the end of the day, the price has settled back to just under 2900. It's obvious this level still is creating strong resistence. So how will I define a break? To me, the real story lies at the end of the day. What does the market close at? If by the end of the day, the Euro makes a clear break of the 2900 level, then I might consider the pair to have broken that level.

What's causing this resistance? From what I keep reading, it seems like the biggest underlying factor as to why the Euro can't make any new ground is because of the overwhelming amount of existing long positions. This is also serving as a take profit level for traders who are currently long. Another reason is still because of the speculation as to what the ECB will do. There is not a strong enough sentiment for the Euro yet as the data hasn't really given a clear fundamental trend although today's strong trade balance does provide a start. In order for the Euro to make a strong move I would look for 2 things: A sharp decline in fundamental US data or consistently strong fundamental EU data. Either of those should give traders enough confidence to take a position.

Across the board, I still don't see any good trade set ups. Everything I look at seems to be in consolidation mode, especially the USD/JPY. Open up a daily chart of the USD/JPY and you'll notice some tight consolidation. I would expect some sort of breakout in that pair soon. Other than that, there are no pairs that I'm excited about and unless something drastic happens, I'm not sure if anything will develop this week.

For tomorrow, the ZEW economic sentiment at 5 am EST will be the report I look out for. If for some reason the number is above 15.1 (which was the previous number) I would expect to see a sharp spike in the Euro. I will also see if any of the Fed presidents say anything that might cause the dollar to drop. The Atlanta and Chicago Fed presidents are set to speak at 1 pm EST.

Now- regarding the title of my post. Many of you know that I am a stickler when it comes to my trading rules. Well today I must confess that I broke my rules. But before you gasp in disbelief, I must tell you that I did it with very good reasons. Today there was an Alba breakout on the long side but the breakout occurred above the 2900 level. If you've been reading my posts recently, you've seen me rant about how I don't see the Euro making any strong moves above 2900. With the lack of strong Euro sentiment and the large amount of existing long positions, my gut was telling me that the Euro was going to drift back down below 2900. Although the price got as high as 2938, there was still a strong resistance all the way up to 2950 (see the daily chart below). With all of these factors, I broke my Alba rules and decided not to take the long trade that was presented to me on the chart. Now if the Euro went to 3000 I would kick myself in the face but I still would've stayed out. I just don't feel right going long right now on the Euro unless it's on a dip (like around 2700-2800). This is why I put the safety on and kept my trigger finger from pulling. This market is so dynamic that SOMETIMES you must bend your rules no matter how accurate your system is. A system is only as good as the trader behind it and that is something I've learned with time. No longer do I blindly follow systems just because of their sexy track records. Everything must be done with good timing and today, the Alba system did not match up with the market. Sure, I wish I could get in a trade and make some pips, but at the same time I know I have to attack at the best possible time. Right now is NOT that time.

Results: +0 pips

That's it for me today. Hope you all had a great day!

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