After Reserve Bank of Australia raised interest rates earlier in the week, everybody interested in currencies watches what other central banks are doing. Big question is- will they follow RBA. Well, not just yet. European Central Bank left its benchmark rate on hold at 1%. President Jean-Claude Trichet mentioned something about how important strong dollar is, but no action of any kind was taken. Same in UK, where bank of England also left rates unchanged at record low of 0.5%. Frankly, this is no surprise, but one never knows for sure. Now we have to wait to see what banks in Canada and New Zealand do. According to observers, they are best candidates to reverse easing policies.

Meanwhile employment numbers in US improved a little bit. Fewer new unemployment benefits claims were filed that expected. Seasonally adjusted number dropped to 521,000 from 554,000. The number of people continuing to claim benefits declined by 72,000 to 6.04 million. Unfortunately, we don’t know if these people found jobs of have their benefits simply run out and they remain unemployed. These slightly better numbers failed to impress the markets. US Dollar remains weak and getting weaker, albeit without any drama. Moves are small and not inspiring.

Australia was another country where labor market data was released. Numbers for September were better than expected, with Aussie economy adding about 40,000 new jobs and unemployment falling to 5.7%. Clear signs that economy is recovering. Here the reaction was different. Australian Dollar was rewarded and made new highs in relation to other major currencies, which was not all that good for my trade from yesterday in AUD-CHF. It was a sell of that cross.

As mentioned in the last post, I zoomed in to smaller time frame chart, hourly, in order to define my stop loss level for this trade. This turned out to be 0.9211. Normally I like using larger stops, giving trade room to fluctuate, but that is difficult when trading MACD divergences. How far outside of price extreme do you let the trade go? One way to do it is to sit on a trade until divergence is no longer a divergence, and use this for a stop. Problem with this approach, while logical, is that risk is not at all defined at the time trade is initiated.

Here is the chart that was used for trade set up, 4H AUD-CHF. Few candles ago nice divergence was present. Price continued higher, and chart no longer shows a divergence between instrument and MACD. At this point reason behind the trade is invalidated and position should be closed. Unfortunately there was no indication yesterday just how far this could be. As it turned out, it is a bout 100 pips from entry, but it could have been 150 or 200 pips. Now way to know for sure at the time of entry. That’s why I normally look for other ways to define risks on these trades, to make them smaller. Failure rate is a little higher, but there is always a trade off of some kind. BTW, one more technique for stop setting exists for trading divergences, using FIB levels. I’ll try to use it next time this kind of trade comes along.

Most of Yen crosses have been withing a congestion zone for last day or two. I’m looking at hourly charts. Between now and closing on Friday I expect some movement in these pairs. Direction is unclear, breakouts can happen either way. CAD-JPY is straddled with entry orders just outside the zone, looking for about 80 pips move. Similar situation exists in NZD-JPY, CHF-JPY and EUR-JPY. Aussie-Yen looks completely different, so it’s left alone. I would be very surprised if nothing interesting happens here over next 24 hours.

Mike K.