Trade Analysis: Short EUR/CAD 07/14/09
Trade Analysis: Short EUR/CAD 07/14/09
This is the first of several trade analysis that I will be doing on a varied basis with the goal of explaining the logic for my entry, my various exit strategies and discussing the fundamentals of the trade.
Asset: EUR/CAD
Direction: Short
Entry Date: 07/14/09
Analysis: This trade was entered after the market broke through support to the downside on 07/14/09 at a price of €1.6014 and a stop loss of €1.6494. The original support level was breached the day before, but I like for my support and resistance trades to move a little beyond their support/resistance levels, so I know the market has conviction about its direction (because we all know the market never maintains its conviction for long).
Prior to the entry the market experienced a period of what I like to call “market noise” from around Jun 26 until around Jul 13. I liken this “market noise” to a capacitor which is storing energy. And like a capacitor, when the market releases this energy in one direction or another, the move is usually stronger than normal. (As evidenced by the strong break through the blue 7-day Bollinger Band which has a 2 standard deviation upper and lower band.)
All my entries on the EUR/CAD are set with a stop loss of a 3% price move against the position entry and the position size is such that a 3% price move against an individual position would result in a 1% loss in my account balance. Additionally, I attempt to add new positions with every 3% price gain. If any one position gets stopped out I close all the positions. (Also because I trade long and short positions in separate accounts, I typically will have partially hedged positions whenever trends are near completion and have broken through support/resistance in the opposite direction.)
I entered the second position at €1.5423 at which point my original position had a gain of 591 pips or 3.83%. In actuality I was supposed to enter the position at around €1.5534, but because my entry was still within 1% of my target re-entry price, it was still within my trading rules to enter the position.
The final position was entered at €1.5201 which was 1.44% or 222 pips from my second entry. Entries beyond my second entry are typically spaced 1.5% away from each other, simply because trends don’t last that long and I want to give myself more room to exit within my rules should one of these “final” entries get stopped out.
My non-stop loss based exit strategy will be to wait for some “market noise” to occur and to place my stop loss for all my positions 20-50 pips above the resistance level.
I will also be looking to enter again at €1.4973 with a position size that is about a 75% to 25% of my current position sizes. That would make a a 3% loss 0.75% to 0.25% of my account balance. But at that point I would already have an unrealized gain of about 1000+ pips just on my original entry which would give me an unrealized gain of 6.5%+.
Regarding, the EUR/CAD as a whole, my current view is that when compared to the European Union the Canadian economy is in a much better position and will come out of its current economic slump at a faster pace than the Eurozone. This opinion is based on the fact that the Canadian economy is more homogeneous in its membership components and is more reliant on export based growth versus the consumption based growth which the Eurozone is much more reliant on. Also, if one considers the fact that the Eurozone is made up of member nations, you have keep in mind that an economic region is only as strong as its weakest link and the Eurozone has far more “weak links” than the Candian economy could ever have. Therefore, it is my opinion that short EUR/CAD will be the overwhelming theme for 2009 and that this theme will remain until mid-late 2010. (I could quote lots of economic numbers comparing the two economic regions, but that is an article for another day.)
Anyway, as this is my first trade analysis article, I am looking forward to your comments regardless of whether they are positive or negative.
Image Source: A.K.
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