*Changing trade plans and day trading the U.S. earnings data release*
Welcome back to the blog. I apologise for the delay in content this week, I have been extremely busy for a change and I have only just managed to finish writing this today. In this blog post I am going to use the technical analysis I shared on Monday to give you all a lesson on why it is important to be disciplined and stick to your strategies when trading the financial markets. I will also show you why nothing is guaranteed in trading and you should be willing to stay flexible when analysing the markets.
Let’s get right in to it and look at the current price charts for GBPAUD and USDCAD FX currency pairs that I shared with you on Monday.
As you can see right away, neither of the 2 potential trades I had planned for this week became trade entries because price did not move the way I wanted it to. One of my main strategies that I use a lot revolves around the trendline break theory to get in to a reversal of a trend or the breakout of a pattern structure.
The USDCAD trade set up was a trendline break to take advantage of the reversal of a short term bearish trend and buy in to the bounce and continuation of a medium term trend. This style of trend analysis is highly effective and some of the best technical traders I know use these trade entries.
The GBPAUD trade set up was a trendline break used to determine the breakout of the bearish wedge pattern. Wedge patterns often produce great trades if broken because momentum is strong after price has been squeezed for so long.
However, it was not meant to be and I did not take any of the trade set ups I showed you on Monday because they did not tick my rules of my strategies. Discipline is key.
Updated FX Analysis.
I am still waiting for a bullish trade set up on both GBPAUD and USDCAD because I believe there could be profitable trades to be made once these lower timeframe trends are reversed. The chart below shows a current basic analysis of the USDCAD FX pair.
USDCAD is currently testing and rejecting a previous intraday support zone at 1.38600. Buying at these levels could return some good profit if the lower timeframe bearish trend is reversed.
Instead of trading the USDCAD and GBPAUD setups I was expecting on Monday, I was flexible and looked for other trading opportunities. These came in the form of trading the market volatility surrounding the much anticipated U.S. stock earnings reports that were due to be released on Tuesday afternoon.
Market Volatility Trades.
I have previously written a whole series of blog posts on trading market volatility which you can find on my blog site. Once again, I used the Chicago Board Options Exchange (CBOE) Volatility Index along with the Dow Jones Index (spot pricing) to trade the volatility and uncertainty produced from the U.S. stock earnings data that was released on Tuesday this week.
The U.S. Q1 earnings season is a period of time when a high volume of US company’s all announce their quarterly earnings. This is usually in January, April, July and October. As we all know, the 1st quarter of 2020 has been pretty mental and highly volatile to say the least. We avoided WW3 between the US and Iran, we have had the global lockdown from coronavirus and also the Saudi-Russia crude oil war which has seen the price of oil fall below $0 for the first time in history.
Therefore I was expecting bad news and high volatility and we got both!
Trade 1 – VIX May 2020 Futures – Long @ 32.994
I bought VIX futures around 3 hours prior to the first earnings data was released on Tuesday afternoon around 14:30pm GMT. Price had closed with a nice 15minute bullish candle showing some daily support at the 33.00 level and after I entered there was low movement until the earnings data was released.
As you can see on the chart the market volatility came in like a hammer. VIX shot up almost immediately and went on to gain almost 7% in just over 1 hour of trading. This was purely a day trade, quick and simple and taking advantage of strong momentum.
I closed 90% of the long trade positions when I began to see price rejections of 34.500 level around 6 hours after entering the trade. At that point it appeared daily buyer momentum had died out and the move up to this point was very strong so I wanted to take profits. Remember, it is always good to not be greedy. Locking in some profits keeps you in the game longer.
I held the remaining 10% of my positions and removed exposure by bringing a stop loss order to my entry price. I was hoping for VIX to consolidate before making another leg upwards but it continued to sell off overnight in to Wednesday and trigger my stop loss order.
Trade 2 – Dow Jones Index (Cash Spot Price) – Short @ $24,501
I actually shorted Dow Jones after it started moving. The chart above is showing the movements on the lowest timeframe I like to use (5 minute) so you can see how quickly price moved when it started selling off. I entered on the closed of the first decent bearish candle @ $24,501 and then rode price down nearly 400 points to $24,106 where price closed above the $24,000 key level with a big bullish candle.
400 points represented over 2:1 reward:risk ratio from my initial risk on the trade so I was happy to take these profits as they were achieved in less than 1 hour of trading. This is a benefit of trading high momentum moves like this, everything happens so quickly and if your analysis is correct then you are correct fast!
I closed 80% of the short trade position @ $24,106 to lock in profits and left 20% to run with no exposure. Price actually began to consolidate (much like the VIX trade) so I thought it might continue downwards but unfortunately price reversed and went on to make new higher highs and trigger my stop loss order.
Why did I trade these 2 instruments?
When uncertainty in the stock markets increases, VIX increases. This usually coincides with a sell-off on stocks and the S&P500/Dow Jones Index and the VIX have a strong inverse relationship that has proven itself over many decades.
The chart below shows this over a 10 year period.
I had a strong belief that Q1 earnings would be bad and as I have been banging on about for weeks, US Stock markets are being propped up by heavy quantitive easing and fiscal stimulus when we have known very little about the actual financial and economic damage caused by coronavirus.
Bad earnings were almost guaranteed to send stocks selling off in the short term and this would send market volatility upwards. I could have just shorted stocks or just bought VIX but I wanted to trade both to capitalise on what could happen.
The 2 things I want you to learn from this blog post is that if a trade doesn’t meet the rules of your trading strategy then don’t enter a position and to be flexible with your trading. If I would have entered long on USDCAD or GBPAUD before the entry setups appeared then I would have entered 2 losing positions.
Once I knew these trades would not be playing out I moved on to look at other instruments that where showing potential trades that suited my analysis. This happened to be the Dow Jones short trade and VIX long trade. I DID NOT try and make the price action visible on charts fit my current bias and force a trade entry.
If you are interested in learning how to trade market volatility then I suggest you read through the market volatility series on this blog. I explain the products I trade, what they do and how they work in relation to the financial markets.
If you want to take your trading to the next level then perhaps think about purchasing my Mastering The Markets – Retail Trading Course by clicking on the image below.
All my technical analysis is done using the TradingView platform. You can get access via the link below.
My preferred broker of choice is IC Markets. Low spreads and trading costs really help long term profitability. A link to their site is below.
FTMO Trader Funding Programme.
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DISCLAIMER: None of the information posted on this site is to be considered investment/financial advice. Trading is high risk and you should only trade with money you can afford to lose.