EURUSD Soars off Channel Support, Outlook and Trades Going Forward
Cory Mitchell, CMT
The EURUSD has bounced off a potential support area based on two trend channels. Short-term we are seeing an aggressive rally after a relentless decline in 2020 so far.
Over the longer-term, the price may take longer to form a bottoming pattern if indeed this is a support area. The formation of a bottoming pattern would indicate a rally back toward the top of a 20-month channel.
Current and Recent Trades
After being short for all of February so far, my short was closed and a long initiated just above 1.0820 on Feb. 21. This was the upside breakout point of a two-day consolidation that occurred near the bottom of a 2-month descending trend channel, and more importantly, near the bottom of a 20-month shallower descending channel.
There is no guarantee that a bottom is in place, but the area is compelling enough, and the upside reversal strong enough, to warrant an exit from my short and at minimum a short-term long.
The stop loss has already been moved to break even as the EURUSD pushed aggressively higher following the entry.
I prefer a trailing stop loss on this long position. This allows me to lock in profit as the price moves up, and gets me out if the price begins to drop too much. I especially like this method on the first test of a support or resistance area. This is because bottoming patterns can be choppy, retesting recent lows multiple times. There is no need to get too greedy too early.
The EURUSD moved close to the bottom of a regression channel. Regression channels, and trend channels, aren't meant to indicate exact lows and highs. Rather, they highlight areas of possible importance. At these areas of possible importance, I like to watch for consolidations, and then breakouts from those consolidations in order to trigger me into trades.
In 2020 the price has declined in a falling regression channel. As mentioned, regression channels are not meant to show exact highs and hows. They essentially show the "channel of best fit," which encompasses most of the price action.
The price has started to move off the bottom of that narrow channel. The top of the narrow channel puts an initial target near 1.09. As indicated, for actual trading a trailing stop loss can also be used.
It is too early to say if a major bottom has occurred in this pair. The price is also testing the bottom of a 20-month descending channel. If a bottom were to form, this would indicate a rise over the next couple of months to the top of the channel near 1.1050.
Looking back to September, we can see that bottoms will often retest the channel low multiple times before reversing into an actual uptrend. This doesn't always happen though, so the trailing stop loss helps us profit if there is a sharp rise without a pullback.
Despite the strong one-day (so far) rally on Feb. 21, this is still an overall downtrend, but the price has neared an area that could result in a reversal toward the top of the longer-term channel.
My EURUSD Game Plan
- After reaching support based on two channels, I am trailing my stop loss on the long to capture this short-term momentum boost to the upside.
- As the price rallies, if it consolidates on the daily or 4-hour chart, I will watch for a breakout of that consolidation. I will likely trade in the direction of the breakout.
EURUSD Trade Notes
The short produces a daily cash infusion into the account, as the EUR has a 0% interest rate, while the USD has a 1.75% rate. The short benefits from the difference.
A long position pays the difference, resulting in a debit to the trading account each day.
Check out Analysing EURUSD Volatility for Day Trading.
By Cory Mitchell, CMT. Join me on Twitter @corymitc.
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage. I may take or have positions in the currencies or pairs mentioned. I don't take all the trades I discuss since prices are constantly are moving and revealing new information, or capital may be better allocated elsewhere.