Chops and Whips!

I'm sure I'm not alone in noticing a fair degree of choppiness and volatility around pivot levels (PP, S1, S2, S3, R1, R2 & R3), especially with EUR/USD. Having being whipped out for small losses on a fair share of my trades... I've actually shied away from trading EUR/USD, allowing myself a bit of time to ponder and refine my intraday strategy. But I do so accepting the fact that I may not be able to eliminate being whipped-out of trades completely, and instead I seek to minimise the damage being done.

Let's look at EUR/USD on Friday, 19 June '09 and simulate some trades:


We can see that at the open of the Asian session (which I normally give a miss) EUR/USD opens below the Daily PP indicating that the daily bias is bearish. The immediate trend, indicated by the direction of the MA channels is also bearish. Thefore, my strategy dictates that my multilot trade sizing will favour short positions.

Therefore, I will enter a sell limit order to short 10 lots EUR/USD at 1.3916 (10 pips below the Daily PP which is at 1.3926) with a SL at 1.3946. Additionally, I will enter a buy limit order to long 5 lots EUR/USD at 1.3946 with a SL at 1.3916.

At the 14th bar, my sell limit order would hit. My TP target would be the Daily S1 at 1.3852. We can see that EUR/USD immediately moved down, presenting an opportunity to immediately adjust the SL to break-even AND cancel the unfilled buy order. EUR/USD went below 1.3900 and was met with sufficient support that it immediately started to move back up towards the Daily PP... and consequently scratching out the first trade for break-even.

At the Daily PP, the Parabolic SAR indicator I've introduced (step = 0.01, maximum = 0.1) indicates that the short term trend is up. Therefore, I will key in a buy limit order to long 5 lots at 1.3936 (10 pips above the Daily PP) with a SL at 1.3906.

At the 29th bar, my buy limit order would hit. My TP target would be the Daily R1 at 1.3981. We can see that EUR/USD immediately moved up, presenting an opportunity to immediately adjust the SL to break-even. EUR/USD went up 1.3947 and it immediately started to move back down towards the Daily PP... and consequently scratching out the second trade, ALSO for break-even.

At the 34th bar, EUR/USD broke below the Daily PP... however, I will ignore the move lower and not take the short trade available as the Parabolic SAR is still bullish. Instead, I will enter another buy limit order to long 5 lots at 1.3936 (10 pips above the Daily PP) with a SL at 1.3906.

At the 37th bar, my buy limit order would hit. My TP target would be the Daily R1 at 1.3981. We can see that EUR/USD immediately moved up, presenting an opportunity to immediately adjust the SL to break-even. EUR/USD went up 1.3942 and it immediately started to move back down towards the Daily PP... and consequently scratching out the third trade, ALSO for break-even.

At the 41st bar, EUR/USD again broke below the Daily PP... and by the open of the 42nd bar, the Parabolic SAR is now supportive of a sell, supported by the bearish daily bias and immediate trend. I will then manually go short 10 lots at 1.3916 and my TP target would be the Daily S1 at 1.3852. We can see that EUR/USD immediately moved down, presenting an opportunity to immediately adjust the SL to break-even on half the position and put a protective trailing stop of 10 pips on the other half. EUR/USD went below 1.3900 to a low of 1.3885 where it then immediately started to move back up towards the Daily PP... and consequently hitting the trailing stop at 1.3895 and therafter the SL at break-even.

The break above the Daily PP at the 49th bar will this be ignored as Parabolic SAR is still favouring shorts. On the 50th bar, EUR/USD again broke below the Daily PP... and I will again manually go short 10 lots at 1.3916 and my TP target would be the Daily S1 at 1.3852. We can see that EUR/USD immediately moved down, presenting an opportunity to immediately adjust the SL to break-even. By the next bar, the SL would be hit.

Going into the U.S session, conditions were already choppy... and things were not likely to improve unless the day's range of 1.3882-1.3947 is broken. So, ideally... one would enter two limit order, i.e. buy 5 lots at 1.3955 (SL 30 pips) targeting the Daily R1 and sell 10 lots at 1.3977 (SL 30 pips) targeting the Daily S1. But neither of these trades offer solid Reward:Risk.

So, on this particular Friday and for this particular pair (EUR/USD)... my strategy would not have performed all that well. Notwithstanding, the use of the Parabolic SAR combined with the knowledge of trading ranges merits further testing.

In hindsight, my decision not to trade EUR/USD on this day on account of being whipped out a lot in the preceding days proved to be a correct one. Otherwise, I would have been unnecessarily aggravated.

2 comments:

nils said...

great explanation and as far as we can see pivot do not work all day, on all pairs but even when it dont work (like this day), u had the possibility to let this trades stop at breakeven.

better: when this strat work, it will give high risk:reward trades. i think everybody can see it in your gains.

thanks for your blog!
sorry for my english ;)

MiniBahn said...

Hi nils, thanks dude. Yeah, it's been a real challenging time trading EUR/USD. Will keep on trying. :-)

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