Sorry for the delay with the trade sheet. I have added formal gap analysis to my trade entry calculator, and copied it onto the bottom of the trade sheet. I am quite bored of uploading these trade sheets to the blog but it will be another month before I can store PDF files on my website (don’t ask). Charts from IG Index.

TRADE SHEET
Short EUR/USD, 18/12/09
Trade Description

Short EUR/USD from 14372.0

Details

Technicals
Near the top of a long-term range. Strong downside move on 17 Dec suggests breakout level. Good entry offered on 18/12/09 at strong intra-day resistance, offering the chance for a tight stop. Combination of failure of short-term mean reversion, potential for a medium-term trend, and long-term mean reversion makes the trade attractive.

Fundamentals
USD has been anti-risk for the past few months. Recent movements in equity and currencies suggest this may be breaking down. Market focus is on problems of the Eurozone vs. US recovery story which is likely to persist for a while owing to political origins of Euro woes. It is possible that US portfolio outflows (much into EM CP) could resume as carry trades remain attractive — this is the downside risk. Against that, market action suggests a break in trend in several markets — this could be a turning point. USD short is very consensus and may have run ahead of interest rate differentials.

Stop Position
14423.8. Loss-to-stop = 0.5% of trading capital. Stop placed above intra-day highs following wide-ranging breakout day.

Trading Plan
Pyramid at decent resistance level. Fuzzy action around current levels in the past make it hard to see an exact level — wait and see where the market pauses.

Entry Checklist

Are you trading against the trend? Yes — trading the range.
Is there a fundamental story? Yes
Is there a technical buying opportunity? Yes
Is the trade likely to be correlated with other live trades? No
Are you placing your stop at a point where the market would tell you you were wrong? Yes — if it is broken then I expect to get a better entry level.
How much conviction do you have? High
Does the risk accord with the conviction? Yes
Do you have a plan? Yes
If you are wrong, will you live to fight another day? Yes

Risk Analysis

Risk Level Loss

Loss-to-stop 14423.8 0.50%

Gap 0.5% 14443.9 0.69%

Gap 1% 14515.7 1.39%

Gap 3% 14803.2 4.16%

Gap 5% 15090.6 6.94%

Gap 10% 15809.2 13.87%

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