Hi readers, happy Sunday! Another week has passed! Of course, the weekend is my time to review my past week’s trades and analyse the markets to come up with a watchlist and weekly outlook. This has become second nature for me and it’s absolutely critical to have habits like this as a trader.
However, past week was a bit challenging to trade reversals! While the AUDUSD short worked out nicely, the other setups didn’t really materialise. My WhaM system did a lot better this week, with a profit of over 4R. Besides the reversal setups, I am thinking of incorporating some of these setups here as well if there’s enough interest.
The best trading strategies will go through periods where they work less effectively. Ironically, it’s exactly this what makes them robust.
— Felix De Vliegher (@smartfxlearning) July 8, 2017
It did get me thinking about how trading systems perform. I’m of the opinion that even the best trading systems won’t always work very well and usually, that’s a good thing. Because when you try to add filters and parameters and requirements to your system in order to make it lose less money, what you are actually doing is overfitting a system. You might get better performance in the current market conditions, but markets change.
Those changing conditions will then often lead to decreased performance since your system is now very specific to the market environment you tested it on. That’s why often, the best trading systems are the simplest. The systems with the least moving parts – Occam’s Razor in the context of trading systems.
Current market behaviour
But back to an overview of what happened this week. Of course, we had NFP on Friday and the G20 also met up on Friday. Other than that, we could see some of the usual news but nothing too crazy. While the dollar had a good run in the first part of the week, it turned down in the second part. The dollar still ended the week higher, but in the overall context of the larger trend, I’d still say that we could see more downside.
Gold broke a very important upwards trendline with a large move on Monday. Apart from some consolidation, that downtrend persisted for the rest of the week with gold ending sharply lower. Technically, there could be more downside possible and unless there are some geopolitical events that shake the world and push gold back up, my current view is bearish. The daily chart shows this clearer:
Finally, oil reversed it course of last week and made lower lows for the most part of the week. It ends the week lower and I can really appreciate the technical and trending nature of crude lately. The swings are very well pronounced and it seems to drive more on technicals than any inventory numbers or other oil-related news. Have a look at the charts to see what I mean:
This week, I’m going to have a look at a trade on the EURCAD 4H charts. It’s a trade that I had to cut with a small loss so no winner this time, but it might still be valuable to discuss. Here’s a chart shot:
On the left is a bigger picture of the daily chart where you can see that this pair has been through a reversal recently but got held up at an intermediate support level. After a retracement up, the price moved back down, breaking this support level. Also, note the peach coloured gap on the left on the daily chart. This trade was interesting to be because it 1) broke a support level and 2) gaps will get filled often.
On the right pane, you can see a bit more detail of the 4H chart, which is the timeframe I took this trade on. We could clearly see a very bearish price behaviour, and as soon as I saw a strong bearish candle break the support level that until then held, I got in. Stop loss above the previous swing, take profit at the opening of the gap.
The price initially went my way, but then turned around a bit and crawled back up. I always prefer to give trades that are in a profit a bit of room to develop, so I let the trade as is. Suddenly, we could see a larger green candle push up, but still, I wanted to give the trade some space to breathe. Price moved back down but then shot up again, with a bullish candle that was bigger than all of the previous candles combined. This was my trigger to get out.
I cut the trade for a very small loss and it appeared to be the right decision. Price shot up and would’ve hit my stop if I didn’t so even though this trade idea didn’t work out, cutting the trade was the right thing to do. After all, I expected the price to go down once I got in and it clearly didn’t, even though I let the trade develop for a while.
At these points, it’s dangerous to start hoping. “What if the price will reverse down?” is the wrong question to ask. The real question should be: “what if the price will continue up and hit my stop loss?”. I’ve said it many times, but capital preservation is key with trade management and even though it’s not fun to abandon a trade idea, it’s often the right thing to do.
The upcoming week
Next week, while not having too special events, is filled with central bank speak and a fair number of reasonably important data releases, such as the UK’s unemployment numbers on Wednesday and the Canadian interest rate numbers.
The week starts off slow but then picks up with Wednesday being the busiest day of the week. Thursday and Friday have quite a few data releases as well. Here is the overview of next week:
- Monday: nothing special
- Tuesday: GBP BoE Haldane and Broadbent speaking, USD JOLTs Job Openings, USD FOMC Brainard speaks
- Wednesday: GBP Average Earnings Index +Bonus, GBP Claimant Count Change, USD Fed Chair Yellen testifies, CAD Interest Rate Decision, USD Crude Oil Inventories, CAD BoC Gov Poloz speaks
- Thursday: USD PPI, USD Fed Chair Yellen testifies, USD FOMC Brainard speaks
- Friday: USD Federal Budget Balance, USD Core CPI, USD (Core) Retail Sales, USD FOMC Kaplan speaks
For this weekly forex outlook, I’m keeping an eye on the following pairs:
Follow my published ideas on TradingView.
This week is slightly different in the types of setups, in a sense that most of them are on the daily charts. We can’t choose the opportunities for reversals but instead, have to take what the market offers us and this week it’s mainly daily setups! Let’s dive right in!
What I’m attracted by in this setup is the massive resistance level, which you can see on the daily charts on the left. Last week, the price was almost ready to reverse around the 87.500 level. However, fuelled by very good Canadian economic data, the price shot up. To me, this is the exhaustion move into the resistance which is typical for a pair that is about to make a reversal.
As you might see on the 4H charts, there’s not much of a reversal yet, but I keep an extra eye on setups that run into such a strong resistance. So basically, I’m in waiting mode until we see signs that this pair is ready to make a move lower. This could happen fairly quickly but could also take a couple of days. The best thing you can do with such setups is set an alert at some level that makes sense and wait. My alert is set at 87.700, which is not an entry trigger but just an area that, if the price retreats to it, I want to be notified.
The next setup is fairly similar to the CADJPY setup above and you could actually play this on the daily or the 4H charts. It’s similar, in a sense that this pair is also moving into a very strong resistance and supply zone. The price is already showing signs of slowing down after that strong uptrend of the past couple of weeks.
So we have a nice trend that is quite overextended, flattening of the trend (notice the RSI divergence on the 4H) and a pin bar as the Friday daily close, right at previous resistance. Exactly what we’re looking for! The most important thing is now to have patience and not let FOMO take control. We don’t want to call tops here and instead want to see confirmation that the trend will actually change.
For this, we need to wait until the price breaks not only the trend line but also the 146.000 significant number level. Trading these setups is quite easy in that sense. We just wait until the price moves down with good momentum and only then, we get in.
Another daily setup! And a beauty at that, GBPNZD is a pair that has been trending in very nice swings recently and it is currently right in the middle of a reversal. We have a nice, long downtrend, bounce at the up sloping trend line and an initial move up. As I describe in my reversal trading guide, I don’t like to get into reversal setups too soon and instead prefer to wait for the second or third phase of a trend reversal.
This has proven to be a good move since the price has been struggling to break above 1.78500 level. But now, I do get interested. There are basically 2 scenarios that I keep in mind:
- the price moves further down for another trendline test, before moving up
- the price breaks the 1.78500 level relatively quickly with good momentum
Both scenarios require a different approach, so I will be monitoring this setup during the week. If the pair starts to move higher, there is very little structure in the way of a move to the previous swing high. An alert has been set at the 1.78500 level in order to be notified once the price breaks out, but I’ve also set an alert around the 1.75400 level in order to be notified of a possible retracement. Now we wait.
The final setup for this week might sound familiar. We’ve had this setup last week as well! We never know how a setup will develop and especially on the daily charts, it’s not uncommon to have to wait for a couple of weeks before a setup actually materialises. But NZDUSD on the daily is starting to look really good 🙂
Basically, it’s the same as last week, but a nice resistance-turned-support zone has now developed and the trendline has been broken. This was still not enough to get me interested in taking a position, as the price still seems to struggle around the 0.72600 level. On Friday, the pair did make a really nice pin bar. This only adds to my feeling that this pair could break down really soon but as always, we can only wait.
Very simple: I’m waiting for a momentum break below 0.72600 (which, if it happened on Monday, would incidentally also give us a pin and drive entry).
Good luck trading!
What setups are you looking at? Share your thoughts in the comments!
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