Today was one of those ‘once in a blue moon’ days where the market got it wrong, big time.
Ahead of the session the market knew there could be fireworks in the shape of a larger than usual trading range as there often is when the ECB Governing Council meets.
Going into the interest rate announcement I was long both EUR/USD and EUR/JPY on my multiday systems and long USD/JPY on my intraday system. In anticipation of a pick-up in volatility on and after the announcement I reduced my positions by half so that if things got crazy and I was going to take a hit, I would have much less exposure than usual while still keeping something on the table as my systems dictated.
The ECB decision to cut interest rates caught the market off guard and EUR/USD collapsed from 1.0966 just prior to the announcement to 1.0821 over the 45 minutes before the speech started. The decline stopped out my long position for a loss of just under 50 pips, although it was negligible as it was only on half of my normal position size. Good defensive action! This was a news-related sharp decline which saw a knee-jerk reaction to a ‘shock’ event in what I call the ‘break’ phase of my ‘Break and Retrace’ trading methodology.
My theory goes that if a market makes a fast move (a ‘break’) which is reversed completely (the ‘retrace’) then those who participated in the ‘break’ move will have become ‘trapped’ and will be looking to exit their positions as the market gets closer to their entry price. As they bail out of these stale positions the move in the opposite direction to the original ‘break’ starts to accelerate as it seems the whole world wants to get out of the market, at any price. This type of set-up can produce some very good opportunities for the patient trader, particularly when the move is news-driven, as it was today, which often means some large positions have most likely been put on in line with the ‘new reality’ which surprised the market.
As the speech got underway EUR/USD started to trade higher and within thirty minutes the ‘Origin’ price of 1.0966 was reached, slamming the trap shut on all of the news-related sellers. Having been stopped out of a long position earlier my EUR/USD MD system now re-bought (this time in full size) placing a stop loss below the low of the session. The move unfolded in line with the ‘Break and Retrace’ methodology, EUR/USD seeing an acceleration of gains to just shy of 1.1200 as we speak as the short sellers bailed out of losing positions creating a ‘short squeeze’. As the system makes partial exits at pre-defined distances away from the entry price a significant profit was banked on around half of the position with the balance to be carried overnight as this is a multiday system.
As I like to say, ‘Break, Retrace and Watch This Space!’
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