Here I want to give you a few swing trading examples that will illustrate to you how we are going to trade for this Million Dollar Trading Challenge. The most preferred timeframe will be the daily also known as D1. The advantage of trading on D1 is that you don’t need to stay hooked to the charts. You just need to check the charts once a day and see if there is a signal or not. Once you are into a trade, the trade can continue for a number of weeks. News releases have little effect on D1. Of course when the central banks announce surprise interest rate change that can have a big effect. However we will be in picture for that as interest rate changes does not happen all of sudden. The buzz starts building up in the market before the change so we will have ample of time to decide what to do with our open trade. If there is no signal on D1, we will look for signals on H4 and H1 charts. This is how we are going to trade this Million Dollar Trading Challenge. We are not going to rush into new trades and avoid over trading at all costs. So let discuss a few swing trade examples so that you know how we will be trading in the coming months for the Million Dollar Trading Challenge.
If you look at the above GBP/USD D1 chart, you see a strong downtrend. This is precisely the situation now with GBP/USD. It is in a strong downtrend. Why? US economic recovery is strong. US Dollar is getting strong which is making this pair go down. As long as USD keeps on getting strong, we should expect this downtrend to continue. Now look at the red arrow above. This was the signal when downtrend started. This downtrend is still strong after 2 months. So you can see once we have a valid signal on D1, out trade can continue for quite a long time. Look just above the red arrow, you should be able to identify an inside day candlestick pattern. This pattern is a strong signal for a trend change plus there is bearish divergence on stochastic above so we enter into a trade on the day after the inside day pattern appeared. The entry price was 1.71400 and the stop loss was 1.71950. So the risk was 55 pips.
Now we will be scaling into each trade. Scaling means we open one position. If the position holds and our trade starts moving in our direction we open more position. This way we will be able to multiply our profits 3-4 times plus keep our risk to the minimal 2-3% of the account. The most important thing for us is to avoid taking undue risk. We open second position at 1.71000 and move the stop loss to 1.71450. We again open a new position 1.70000 and move the stop loss to 1.70537. So we build a pyramid. Right now GBP/USD is trading around 1.63000. GBP/USD has lost more than 900 pips. Since we have 3 positions, we have more than 2,000 pips in 1 month 20 days. Our trade is still open.
You can see this is a EUR/USD D1 chart. We entered into a short trade just above the red arrow when price bounced from the slow EMA55. EMA55 often acts as a strong support and resistance and can give us good entries. In this case, it acted as a strong resistance and EUR/USD could not break it. EUR/USD touched 1.37000 and found strong resistance. Why? ECB did not like EUR/USD going above 1.37000. Market analysts were shouting 2-3 days before that ECB will not let EUR/USD go above 1.37000. On that day ECB made a press conference. EUR/USD couldn’t cross 1.37000 level. We entered into a trade on the third day around 1.36600. Our stop loss was 1.37020. So the risk was only 40 pips. Most of the time we will be able to trade EUR/USD with a much smaller stop loss as compared to GBP/USD and GBP/JPY. Just like in the case of GBP/USD we open more positions when EUR/USD starts moving in our direction. Right now EUR/USD is sitting at 1.29550. So you can well imagine it has fallen around 800 pips in 2 months.
Now we were talking of ECB intervention. ECB is intervening alot these days. EURO zone is not performing well. German economy which is the engine that drives the EURO zone showed negative GDP in the second quarter. Market analysts are calling it a recession. Whatever, ECB wants the economy to start performing again. On Thursday just 2 days before writing of this article. ECB press conference was scheduled. CNBC, Bloomberg and other financial media sites were full of opinions on what ECB President Mario Draghi will announce in that press conference. There was some talking of ECB starting Quantitative Easing (QE). But many analysts were of the opinion that ECB President will not make any major announcement. Now take a look at the EUR/USD H1 chart below!
As you can see in the above EUR/USD H1 chart, a few candles before the red arrow market is not moving much. This happens when there is some important news release in the market. The market stops moving hours before the new release. The red arrow is 2 hour before the ECB Press Conference. ECB Press Conference was a surprise. Mario Draghi announced the start of QE program from 1st October. The market fell 250+ pips in just a few hours. We could have traded this news release easily. Our stop loss would have been just 20 pips. But since we were already in a EUR/USD short trade on D1, we didn’t need to open a new trade. So when we will trade news releases we will switch to H1 timeframe. Now most of the time we will prefer to trade D1. But sometimes it happens no strong trend develops. In that case we will switch to H4 and H1 as said above.
This is the case with GBP/JPY. No strong trend on D1 but good trading opportunity on H4. We entered into a short trade just above the red arrow. I had closed the GBP/USD trade at 1.63200. Today is the NFP Report release day. Market did not move much. But GBP/USD H1 is showing bullish divergence. This means GBP/USD will retrace up for 200-300 pips before it starts falling down again. We will open a GBP/USD long trade next week on Monday or Tuesday.
Now this is what happened. Over the weekend, opinion polls showed a strong support for Scottish independence in next week’s vote. UK markets got highly jittery over Scottish independence and as a result when the market opened on Monday, GBP/USD had fallen an unprecedented 150+ pips over the weekend. Take a look at the chart just below the red arrow, you can see a huge 150+ pip Sunday Gap on GBP/USD H1 chart.
But how can I analyse the the news release myself?