Eur/Usd Approaching a Good Selling Point and a Word on Running Stops

It's almost time to add to the Eur/Usd shorts, or enter a position if you are not in it yet. The pair has been rallying strongly for 2 days now, but the overall trend is still down and that is the direction I want to enter my trades. The best entry points are generally located at resistance points during a counter-trend rally (i.e. the pair has been going down for some time and then rallies).

The Eur/Usd is approaching the upper linear regression channel line, which might serve as a good low risk entry point. Here's the 4 hour chart:
Based on the above chart, I'll be looking to add to my short around the 1.3115 area. Notice that the RSI and Stochastic are both entering oversold levels as the pair gets closer to resistance. The major risk with this trade (and any trade where you counter a short-term trend) is that the pair will continue to advance and an all out breakout will occur. This is why you must have your uncle point...a point where you know your wrong and you must get out of the trade. I'm going to set a wide stop (100-150 pips above the upper channel line) because dealers and professional traders know that lots of retail traders will be jumping in around this level and if they see a cluster of stop loss orders near the resistance level (which they can because they watch the order books), they may very well gun for the stops. I'll manually close out the trade if the pair breaks through the channel and then remains bullish by not falling back below the line.

It's usually easy to tell when a false breakout was merely the dealers and pros gunning for stops because they will spike through a pretty well known support/resistance point and then sharply reverse. You can see several of these on the above chart...notice that the last 4 times the pair hit the upper channel line, the pair broke through the resistance but then closed much lower. The reversals are usually sharp because the dealers and pros are taking quick profits from hitting the stops and then entering in the opposite direction...the direction they believe that the pair will go.

All that being said, just remember that just because the pair is heading towards a resistance point does not mean that the market will respect it. This happen back in December with the same pair, as noted in this post. That was one situation where having a stopping point and respecting that stopping paid off. We'll see what happens this time.

Good luck out there.

TLT