Thursday, January 15, 2009

Update on Currency positions:

** skip to the summary if you don't care about the evidence/support

As the week is nearing, it is clearly apparent that I entered positions with bad timing. However, this can be quite desirable as I am trend trading and I now know the current trend (the week has shown it to be quite bearish for the EUR,GBP, CAD and AUD). Through out the week all pairs I am trading (EUR/USD, GBP/USD, USD/CAD, AUD/USD) all counter trended my positions (B, B, S, B respectively). As you can see, some would probably call me super crazy as fundamentals would never warrant such bullishness. It is at times like this where one walks the fine lines of "loving" his trade and facing more losses.

Quick Reassessment:


This week the GBP/USD is moving counter to my expected overall trend and position, (unfortunately, I only am holding a one normal 200:1 leveraged position so sizing down is not an option, and simulating a hedging strategy would require more time than I can afford), however, BB's are coming to a squeeze and past price movements of 1.46128 in early November 2008 show a piercing of the 2nd deviation lower BB warrant price movements to the upper bands. Confirmation comes from RSI bottoming and MACD cross over of longer average crossing under the shorter average forming better support.

Weakening this technical analysis is the SMA's, cross analysis of 7, 14, and 21 SMA show that there is heavy downward momentum with the 21 over the 14 and the 14 over the 7 SMA. Though probably more experimentation with SMA's is necessary to gauge weather or not these average parameters are an accurate measure for the GBP/USD.

I will maintain my bullish stance as apart of developing discipline and from belief that the longer run (within 1-2 months time) will yield a higher pound. I would possibly see that the pound can reach into the 1.50 levels again. The support comes from my Bullish analysis above, though is still not as strong due to fundamentals and SMA analysis.


Of all the pairs being traded right now the EUR/USD is the most worrying in the shorter term as BB analysis shows a 3 week downtrend. Also BB's are coming to a squeeze along with possible reconvergence of the two averages on the MACD (as i forgot to define the parameters used for the MACD: 12, 26, 9 first two for the averages and the last for the histogram: in the future I will have to tweak the parameters to suit each pair). RSI also confirms possibly prices may have room to be further undersold. Also, the intial drop in volume from the beginning of the 3 week slide has peaked off in accordance with trend continuation.

Despite the bearish analysis above, more compelling to the bullish argument is the SMA analysis. Using the same parameters as before, the 7 SMA has crossed over the 14 SMA. This is a good starting point for trend development by means of support. Unfortunately price movements have not reacted in a bullish manner to this indicator, which may show some evidence disproving SMA anaylsis being relevant to this pair, though some back testing would be required to confirm this. More importantly would be a cross of the 7 SMA over the 21 SMA. There appears to be convergence of the 7 and 21 SMA moving towards each other but further downward moementum could prevent this.

*Quick back testing of SMA convergence divergence shows that at moments of convergences into bullish patterns EUR/USD can take up to more than 3 months of sideways trading before the bullish trend unfolds. When the patter unfolds the initial movements are strong and then leads to the 7 SMA touch the 21 SMA or briefing crossing under for a period of a month before continuing on uptrend. Of moments of crossing of the 7 SMA to the 21 SMA you will see it take a about one week for bullish moves to follow.

Within the next 2 months we will definitely see the squeeze in the BB and depending on the SMA orientation price movements can be determined. I would say in two months time pending on the squeeze of the BB if the 7 SMA crosses the 21 SMA the price movements will be indeed changed to uptrend. By the end of the first quarter we will see possible bullish trends into the second quarter 2009 for the EUR/USD.

Unfortunately I have run out of time to comment on my other positions as I must log in their P/L and get to class. I will comment on my other two open positions later.

Closing Notes:

Further analysis and back testing is required for the GBP/USD though I still maintain my bullish stance and I also maintain a bullish stance longer term for the EUR/USD. Though the current fundamentals worry me. I will have to discuss macroeconomic conditions of each of the regions I am trading pairs in later. If indeed my the bullish argument on the fundamentals can be convincing, my technical analysis would certainly complement this. In order for my technical analysis to be right, there would have be some underlying fundamental bullish signs to be happening. If a bullish movement does indeed occur within the next 3-4 months with continued poor fundamentals this may reflect a move of sentiment.

All in all, I am beginning to have great respect for those who can accurately trade long term charts since it requires lots of analysis, patience, and discipline and a strong stomach to counter trends as they can occur for months.

until then...

1 comment:

  1. Hey Alex. I opened a GBP/USD buy position just yesterday, with the hope that it will return to the 1.50 mark later. This morning when I woke up, it showed a -35,000 on the P&L, the rate fell down to as much as 1.442, I think it must be the effect of this snow, because of which we are (happily) staying home. It's the heaviest and most widespread in 6 years, I think it must have somehow reduced the trading direction of investors.


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