Sometimes, the gods smile on a trader most benevolently – and I feel particularly blessed this week. Not only did I take a huge 1,500-pip profit out of my long EUR/USD trade last Friday as I outlined in Monday’s post, but I immediately went short on Monday and that trade is also racking up big gains. It really doesn’t get much better than this.
In fact, Monday’s post was titled: “I’ve made big profits going long the euro – but now you could make money the other way”. So why was I confident money could now be made by shorting the euro on Monday? I was bullish last week; why am I now bearish?
Trader sentiment changed… and so did mine
One of the important factors behind my decision to reverse my position on Monday was the rapid change in trader sentiment. On Monday, I noted that a recent Daily Sentiment Index (DSI) reading was clocking in at a lowly 9% dollar bulls (euro bears).
Recall way back in March when the dollar index was poking above the 100 level, bullish dollar sentiment was the mirror opposite – over 90% bulls. The euro hardly had a friend! That was when received wisdom had it that the dollar was on its way to the moon. The euro appeared doomed for all of the well-known reasons, and the dollar was in great demand – and hitting the media headlines (always a warning sign!).
Chart courtesy www.elliottwave.com
Demand was stoked by the large interest rate differential between the euro and the dollar. Many sovereign eurozone bonds were yielding a negative interest rate, while the T-bonds were at least yielding a positive 2.5% giving a wide spread in favour of the dollar. Bond investors were switching out of the euro to the dollar.
But for forex traders, this was the worst possible time to do that. With the dollar over-loved, further gains were highly unlikely, and when sentiment suddenly reversed, the euro found itself in the mother of all short squeezes. I confess, I love to trade short squeezes!
In just two months, with dollar bullish sentiment having collapsed to the floor at a near-record low of 9%, the market was ripe for a huge reversal.
When my charts matched the sentiment, it was time to go short
On Monday I showed the daily EUR/USD chart. I was expecting a high sometime soon as it completed a large wave 4, which neatly coincided with the C wave high (of the corrective purple A-B-C pattern). I had noted the negative-momentum divergence at Friday’s high and the C wave sported what appeared to be a complete five waves up.
I like to see this negative-momentum divergence between the highs of the final wave 5 and the long and strong wave 3. In fact, that is a normal feature of the motive five up: fifth and final waves are usually weaker than the third wave.
Combined with the extreme sentiment situation, that added up to one thing: an imminent decline – and I was ready to jump on board.
Before I did that, I needed a clear signal that the market wanted to move down – and I got it. I had drawn a trendline (the green line on the chart below) and set my sell top just under that line – and I was short at the 113.80 area as the market fell through my stop.
That was a pretty aggressive entry. I could have set my sell-stop just below the lower (brown) tramline at the 1.1280 area. That was a more reliable entry. But I had confidence, given the sentiment picture, that the move down would be direct with few prisoners taken.
And so it proved! In less than two days, the market has made it to my first target at the meeting of the Fibonacci 38% support and T3. Remember, this was the target I had set on Monday before the decline.
Naturally, if you are trading my split-bet strategy, this target is an excellent place to take a short-term profit of around 300 pips. On some spread betting platforms, that is a profit of $3,000 for every £1 bet. Not bad.
But now the market is entering solid chart support from the congestion zone in late March/early April. It has been straight down so far, but I expect any further declines will be met with counter-trend rallies – and will be much more difficult to trade.
But the ‘easy’ money is in the bank. Now I can add that 300 pips to the previous 1,500-pip campaign – and I still have an open profitable trade working. Now I can move my protective stop on the remaining open short position to break-even.
So even if the gods stop smiling on me, I can walk away with a very satisfactory result.