Sunday, May 6, 2012
Euro Trade Update: Taking Profits on Big Gap Down
Friday I said that the EUR/USD would attack the 1.3000 and take it out soon, and it wasted little time launching its assault. The EUR/USD gapped down big at the open today and broke solidly through 1.3000, and then had follow-through to the downside after that. It is now trading near the low. Gaps are usually filled so this is a great trading opportunity since I held short over the weekend and can take some profits and get back in short at a better price. Also note on the hourly chart above that the momentum indicators like stochastics and the RSI are deeply oversold. In preparation for the EUR/USD filling its gap, and relieving its oversold condition, I covered 25% of my short position. I will re-enter that same short position if it rises to 1.3070, about 100 pips away from where it's currently trading. If the euro is so bearish that it just continues lower without filling the gap, then oh well, I still have 75% of my position intact to profit from that decline and I reduced risk with a high probability trade. That's the game, playing the probabilities and reducing risk.
To sum up: the EUR/USD gap will probably be filled soon, meaning a rally to 1.3070 is likely within a few days, if not a few hours. So I took off 25% of my short position and will reshort that same amount when the gap fills around 1.3070.
Refer to my my previous post below for a little more context on this trade, as well as some stock market commments. It's also worth noting that the euro is not tanking on its own, stock futures are down 17 points (S&P), so risk aversion is hitting the markets again. Tomorrow morning will be interesting.
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PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.