Today’s ECB meeting coincided with a breakout setup on the daily chart, which I noted in last night’s Swing Trader’s Insight. This combination allowed us to anticipate a potentially explosive move today and gave the setup to take advantage of the move when it occurred.
I keep track of news events and report releases for my trading. I don’t generally use them for fundamental analysis; there’s always someone who has better information earlier than I get it. However, the effects of these events are reflected in where a market goes after the release and this often makes for good trading opportunities.
The European Central Bank met today. This was a highly anticipated meeting whose outcome was uncertain, as there was a lot of disparity of opinion as to whether the ECB would look to expand its quantitative easing. The divergent opinions before the meeting meant a large move was likely afterward if it appeared they leaned strongly in one direction or the other (QE or not QE?, to borrow Shakespeare’s phrase.)
The market’s uncertainty was reflected in the price chart of the Euro, which had a number of patterns that suggested a large move was likely today. Yesterday was an inside day, a doji bar and it had the narrowest range of the previous seven sessions. These patterns told us that traders didn’t want to commit to a direction ahead of the report.
Yesterday’s uncertainty and concurrent breakout setup meant a large move could be anticipated after the ECB meeting as traders reacted to perceived policy changes. As we knew to anticipate a likely move, we knew to watch for a trade opportunity after the meeting.
Much of Swing Trader’s Insight is based on the Taylor Trading Technique (TTT). For a large percentage of trading sessions we look for a price reversal around a previous session high or low- either a break below a previous day low followed by a reversal and rally, or a failed move above a previous day high, followed by a selloff.
With breakout setups we anticipate the opposite. Rather than looking for a reversal after a previous high or low is exceeded, we anticipate that a move beyond a high or low will serve as the springboard to a larger move in that direction as the market momentum feeds on itself in a positive feedback loop.
Normally we would use the previous session high and low as our primary reference prices for a breakout move. With today’s setup for the Euro, we would start with Wednesday’s high and low, but we could also use this week’s high (1.3197) and low (1.1314) as secondary reference prices for a breakout move.
I brought up the secondary breakout levels for two reasons. First, while we normally use the previous day high and low, sometimes there are price levels that are obvious reference prices. Second, in this case the market was already below the previous day low before the ECB meeting ended, so we needed to find a lower breakout level for our reference price. We wanted to enter this trade when we had proof the market was heading in a direction, the proof being the move beyond the reference price. We take a trade when we have confirmation the market is doing what we anticipated- no confirmation, no trade.
The Euro’s move came just before 7:30 AM as ECB President Draghi began his press conference. I wasn’t watching it at the time but I didn’t need to; the market’s action more or less told us what he said. The move below 1.1314 (Monday’s low) was our trigger for the short entry. The initial stop loss went either above the 6:45 AM high of 1.1335 or Wednesday’s low of 1.1343.
The remainder of the morning was classic price action for a breakout day as the market continued to move in the direction of the breakout. There was a quick, sharp initial move lower and then it continued to trend lower as the session progressed. It often pays to stay with breakout trades beyond the initial move as both time and the momentum of the initial move set up a positive feedback loop, resulting in a trending move for the session.
Essential Guide for Futures Swing Trading
In this guide, experienced trader and broker Scott Hoffman explains the trading methods he uses to analyze and trade the futures markets and to publish his trade advisory, Swing Trader’s Insight.
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