By Steve Misic, Online Trading Academy XLT-Forex Trading Instructor
One of the features of the Extended Learning Track (XLT) program is the trading and analysis session. The XLT - Forex Trading has this trading session at different times on different days in order to take advantage of the volatility spikes caused by the release of economic data from different parts of the world. Short term trading and analysis sessions can be very exciting at times. The week of August 21, 2009 was one of those weeks. On Sunday, August 16, 2009, China's main stock index fell over 5%. This panic led to a sharp sell-off around the world on Monday, August 17, 2009, and a flight to safety into the US Dollar. The S&P 500 Cash Index closed at 979.75 on Monday, from a close of 1004.00 on Friday, August 14, 2009. This drop was one of the largest single day drops since the start of the March, 2009 rally. By the middle of the week, the Chinese Shanghai Composite Index officially fell into bear market territory dropping 20% from the highs reached in August, 2009. What was the reaction in the equity markets in the rest of the world? The S&P 500 was back testing 1000, and the sell-off was viewed as a buying opportunity. Sharp sudden drops and going from a bull market to a bear market in a month are not events that a short term trader can plan for. The best that a trader can do is to plan the next trade from start to finish.
On Wednesday, August 19, 2009, the Bank of England released the minutes from their August 4th, 2009 meeting. The nine-member Monetary Policy Committee said it voted 6-3 to raise the total they will spend by 50 billion pounds to 175 billion pounds in the bank's bond purchase program. What was a surprise to the markets was that Bank of England Governor Mervyn King, Timothy Besley, and David Miles had sought a 75 billion pound increase. "All members agreed that substantial further asset purchases were needed over the next three months," the minutes said. The GBPUSD initially spiked higher, and then collapsed from a high of 1.6489 to a low of 1.6373 within the next hour. This news is obviously very bearish for the Sterling. However, Forex traders around the world might view this as a buying opportunity similar to the equity traders and the China sell-off.
A breakout trade from a channel that formed on the 30 minute chart was planned to take advantage of either a trend continuation trade, or a reversal. The steps are to find the highest high of the channel, and the lowest low of the channel, and place an order to go long 5 pips above the high, and to go short 5 pips below the low.
GBPUSD 30 Minute Chart 8-19-09
Figure 1
The initial stop loss once entry is met is the opposite end of the channel. Many Forex traders will reverse their position if the stop loss is hit. On certain breakout trades, this is a viable strategy, but since the initial reaction to the news had happened a few hours before, the next move was likely to be either a continuation of the downtrend or a reversal. The targets on a long trade were new turning points and prior turning points from earlier in the week above, while the initial targets on a short trade were previous turning points from the prior week below. The short trade targets below current price were much closer than the long trade targets, but since they were previous turning points, the odds that willing buyers would still be interested are reduced.
The breakout was to the upside around 6:00 AM Central time, and the 6:30 candle closed above the channel at 1.6419. The breakout trader who entered at 1.6405 has a small gain of 14 pips. The risk in the trade is still larger than the reward at this point in the trade. This is where most breakout traders lose money. Some traders who planned the trade will stick to the original plan, but others will sell if the momentum stalls. The early sellers may make a small profit. Their selling will trigger more selling, and often, the remaining breakout traders will panic out of the trade at the bottom letting the small gain turn into a loss. So what does a breakout trader do if they miss the breakout, or the breakout trade stalls or fails?
GBPUSD 30 Minute Chart 8-19-09
Figure 2
The XLT - Forex Trading session began at 6:30 AM Central on August 19, 2009. Since the breakout had happened before the start of the session, the XLT students had to look for another opportunity to enter. The next best opportunity to being a part of the actual breakout is to buy a retracement to the origin of the breakout. This entry is the mechanical strategy that we teach and apply in all the XLT classes.
The XLT students will enter close to where the majority of the trading took place prior to the breakout, with the initial stop loss below the lowest low of the channel. The first target will be the highest high prior to the retracement. The next targets will be the new and prior turning points above.
GBPUSD 30 Minute Chart 8-20-09
Figure 3
The pullback entry happened during the 7:30 AM Central candle. The first target was reached during the 9:00 AM Central candle. The trade reached the higher targets on 8-20-09. If the breakout trader misses a breakout, the next best entry might just be a pullback. Adding this type of entry to your arsenal may increase your opportunities while at the same time, keeping your risk low.
Steve Misic - smisic@tradingacademy.com
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