Transcript of Video
From Forex Traders Daily, this is your daily analysis with Ross Mullins, live from Richmond, Virginia.
Hello everyone, this is today’s video analysis for May 16, 2018. Today we’re taking a look at the Euro versus the US Dollar [EURUSD] for today’s trade analysis.
Today of course we could see that the currency pair is in a downtrend. That’s the black trend line here on the chart showing a clear downtrend here for this currency pair. Over the past few days, we’ve made a retracement from the mid to low-1.1800s, down to 1.1855, 1.1820, the purple-shaded area, back to the orange zone, 1.1920, 1.1950. And for the past two days, a significant fall off, back in the direction of positive USD movement, pushing back through the purple-shaded area, 1.1820, and now sitting underneath it and a new low being made.
Remember a downtrend has lower highs and lower lows, and that’s what we’re seeing here along the black trend line. Lower highs and now a new lower low. But the question is: when do we get into it? Do we just see the downtrend and just start selling it? I don’t think so. We’re looking for lower risk and higher reward. So, what we need to understand is to do that, you need to remember that old motto. Buy low, sell high.
If you’re going to sell something, you want to sell it at a higher price and not the lowest price. Right now we’re close to the lowest price that the EURUSD has been in several months, going all the way back to 2017. Look back to the left-hand side of the chart. You could see the two blue circles on the left-hand side showing resistance into the purple-shaded area and support at the blue-shaded area, the bottom of the blue circle.
So, we know historically where the decision zones have been. Purple zone and the blue zone. So, if we’re going to make a trading decision whether it’s to buy or sell, but in this case selling the downtrend, I think it would be much more prudent for risk-reward wise to sell as close as possible to the purple zone because if you, again, look at history, that provides lower risk and higher reward.
What’s the risk? Well, if we sell under the purple-shaded area, the risk is the market pushes back above the purple-shaded area. Let’s zoom it in one more time on that. So, selling under it, the risk is it pushes back above it. So, stop losses or whatnot would be above the purple-shaded area. So, if your stop loss is above the purple-shaded area, how do you make your risk smaller? Do you just simply bring your trend line closer, or in a logical situation, you let the market retrace, rebound back to the purple zone to become your short or sell opportunity?
So, often what we’re looking for with a breakout strategy is that the market gets underneath a support or above a resistance, but in this case a support, rallies back to it, and I’m just going to change the color of that real quick. It rallies back to the purple-shaded area, providing lower risk because now your stop loss is getting smaller because it’s gotten closer to that stop loss, and then you look for it to fall back off again.
So, a classic breakout strategy is yes, it gets underneath, but maybe even rallies back to the historical support as resistance, and then you target back down here towards the low-1.1700s or even into the upper-1.1600s. So, that’s what we’re looking for. A clear breakout. Now, we don’t want to fall prey to a false breakout. We don’t know what this current candle is going to look like by the end of day today.
This could look like a big blue candle. Big bullish candle by the end of day today. So, we need to be cautious and wait for the right opportunity to take the short. Not just selling because it’s a red candle and under the purple zone, but the right opportunity. Low risk, we need the retrace, but we also want to be sure that this is a real deal breakout. Not a false breakout.
Take it down to the four-hour timeframe. And as you could see, even here on the four-hour timeframe, we are just now testing underneath that purple zone. We don’t know with any confidence yet that this is going to be a real breakout. The current candle could suddenly turn into a big blue candle. Let me draw it out like this. It could suddenly turn into a big blue candle, pushing back above the purple-shaded area, and then we’re going to wonder why in the world we took a short.
So, what we actually need to see is for the market to sustain a hold underneath this purple zone for maybe another four-hour or two four-hour candles to increase our confidence that this is a real breakout rather than a false breakout. Even the daily candle closing under here will increase our confidence, but that’s what we’re looking for. The breakout. The retest. Stop loss above targets the lower levels in the downtrend for the EURUSD.
Forex Traders Daily, this has been your daily analysis with Ross. If you would like to get Ross’ analysis on all the currency pairs he’s watching and all the trades he takes today, join him in his live Trade Room by clicking on the link below. Please leave any comments you have about today’s video in the comment section below.