Have you ever said to yourself, “Well, going long (or short) the EUR/USD looked good at the time I took the trade!”

Perhaps you’ve had an experience where for the past several weeks, you’ve been haplessly watching a poor little EUR/USD trade spiral out of control to the point where you can hardly contain pulling your hair out by the roots. You’ve witnessed this innocent little trade morph into a horrifying beast which you are now referring to as the “drawdown monster.”
We’ve all been there, haven’t we? Paralyzed by fear or — if you’re anything like me sometimes — just stubbornly unwilling to admit defeat and close the darn trade. It’s a difficult thing to confess when we’re wrong, but at what point do we say enough is enough?
So, the question is simply this—what should my next move be? How long should I hang onto this trade that just seems to be going from bad to worse to absolute train wreck? Should I cut my losses and consider it a painful lesson learned or do I hang on to this bad boy and hope it comes back? Stranger things have happened, right?
Well, let’s put something into perspective.

Losing Money
Let’s say I have $10,000 in my margin account and I lose $5,000. My drawdown in this case would be 50 percent. Now, what percentage of that $5,000 would I have to make in order to get back my original $10,000? 50 percent, right? Wrong! I would have to make back 100 percent of my $5,000 to get back to my original $10,000!
The point of this harrowing example is this—it’s very easy to lose money and a whole lot harder to get it back.
“But Rob, I would never lose 50% of my account in one trade.” For your sake, I certainly hope not. But for the sake of argument, let’s just say you do. How on earth do you get yourself out of this pickle?
Perhaps this question is best answered through the sad and forlorn tale of my good friend and currency trader, Shasty McButterknuckle, who is actually the alter-ego personality of a member of the marketing department at IBFX.
Shasty has a heart as good as his intentions, but he perpetuates three tendencies that seem to get him in trouble and constantly keep him in the red:

Tendency #1—A little thing called pride!

Shasty has a penchant for hanging on to trades for nothing more than his heightened sense of ego. He is so committed to proving that his original decision was right that he’s willing to stubbornly cling to it until the very end. And interestingly enough, the more pips he loses, the more convinced he is that his original premise was justifiable. Shasty holds on to losers in an effort to prove that he was right—both in his own eyes and in the eyes of others.
Solution: There should ALWAYS be a reason for your trading moves. A decision based on ego will inevitably come back to haunt you. A trader who fails to maintain a strict trading plan won’t know where to exit a trade or how much money he could make or lose. This “fly by the seat of your pants” style trading more often than not leads to disappointment and frustration.

Tendency #2—Adding to losing positions

Shasty sometimes not only holds on to a losing trade but also actually adds positions to it, rationalizing that his targets will be hit when the currency changes direction. Of course, this method is super-terrific if the currency does, indeed, change direction, but if it doesn’t and he maintains that losing position, it simply hastens the painful demise of that poor little trade.
Solution: Adding to losing positions in order to “save yourself” is an entirely different ballgame than doing so because it’s a valid part of your trading strategy. If a trader is adding positions for the right reason, the key to remaining competitive lies squarely within his psychological ability to ride out a big drawdown—a feat that should never be taken lightly—and then allowing the trade to reach its maximum potential.

Tendency #3—Loyalty

Perhaps Shasty’s biggest downfall is his undying love and commitment to a particular currency pair. In this case, his strength is also his weakness. His sense of loyalty holds him back from making sound, educated trading decisions.
Solution: Fundamentally speaking, your feelings about a given currency pair don’t mean squat. The key to remaining competitive in Forex trading is allowing the market to tell you about the currency and then pouncing, not vice versa. Give more weight to what is happening in the market than to your attachment to the pair.
So, we find ourselves back at the beginning—Riding a losing trade and wondering what to do next.
A dear friend once told me, “Wise people learn from their own mistakes, but super wise people learn from the mistakes of others.” So what can we learn here? Firstly, don’t trade like Shasty! Be ye not so foolish. Learn from his mistakes and your margin account will thank you.

Secondly, take heed to these sound trading principles:

° Grasp a bigger picture perspective on the market. Before you begin trading for the day, have a look at the weekly and/or monthly chart. They can often provide you a broader perspective of a particular currency pair.
° Accept responsibility for your own actions. When you have a losing trade, don’t look for others to blame. You made the decision to place the trade. You control your trading destiny. You and you alone.
° Maintain a strict adherence to sound money management. Buying into the “get rich quick” scheme of Forex trading has left countless numbers of traders with dwindled margin accounts. Manage your assets well and you will be a much happier—and much more competitive—currency trader.

We’re experiencing a once-in-a-decade event in the Forex market, my friends, and it isn’t going away anytime soon. An extraordinary confluence of events has thrown nearly every financial market into chaos and, sadly, Forex was not immune. I’m reminded of a rather macabre but ever so appropriate phrase I once heard that went a little something like this—adapt or die.

Drawdown is a painful reality in Forex trading and despite how much you punch, kick, and fight, it will undoubtedly happen to you at some point. It’s up to you to decide how you’ll handle it. It can make you angry and vengeful or it can make you wiser and more disciplined. I can’t speak for you but I most certainly prefer the latter.
As fellow currency traders, we always welcome your thoughts, comments and questions. We’re always here to help.
Happy trading!
by Corbin Layton and Rob Booke

Directional Bias:
Nearer Term –Bearish
Short Term –Bearish
Medium Term –Bearish

Weekly Range:
High -1.3298
Low -1.2330

Eur/Usd Loss of momentum at the 1.3298 level leaves euro aiming for a recapture of its YTD low

TheLFB Nov 03 08 EuroAlthough a first weekly higher close occurred the past week since EUR tumbled off its Sept 22’08 high at 1.4867 to hit a low of 1.2330 on Oct 28’08,that strength waned Thursday and Friday ahead of the 1.3259 level(Oct 10’08 low) pushing the pair to as low as 1.2668. This is coming on the back of a failure at 1.3298 and subsequent hammer candle pattern (top reversal signal) formation. We maintain that the pair’s corrective recovery started at the 1.2330 level has halted and opened up downside weakness back towards its YTD low at 1.2330. A clearance of the latter is now envisaged to trigger its medium term decline towards the 1.2134 level, its .50 Ret (its 0.8231-1.6038 high, monthly chart) followed by the 1.1827 level, its Mar’06 low and then its Nov’05 low at 1.1640.Longer term charts remain supportive of this view.

Resistance levels are located at the 1.2728 level, its Oct 22’08 low and the 1.3005/58 area, its Oct 23’08 high/.618 Ret (0.8231-1.6038 rally, monthly chart) with a break through there targeting the 1.3259/98 level, its Oct 10’08 low/Oct 30’08 high. On the whole, having reversed its corrective recovery off the 1.2330 level, risk of a decline retargeting that level and beyond is now expected.

The dollar made a powerful start to the new week on a lot of the major pairs, albeit that most of it came via gaps in prices. Usd/Cad made an unexpected move higher as the market initially signaled for possible lower prices in this week, after we saw the triangle structure in the past week. The reasons are probably in the U.S. Rescue plan, which should have a high impact on the dollar strength in the future, either way. Investors are slowly looking to build up their confidence in the dollar, some because of need, other out of speculative interest, especially after sentences like this one from the Nancy Pelosi, the speaker of the House: “This is not a Bail-out of the Wall Street it’s a Buy-in for taxpayers to rescue the economy.” If this is true, and the markets buy into it then we can expect a stronger dollar in this and the next few weeks, which could mean for the Eur/Usd to new yearly lows. If the markets reject it, and they might, the dollar may be looking at having a hard time against the yen and the swissy. Time will tell, and in the 24 hour forex world it seems that time is a resource that many are not prepared to wait for, but these are patient times.
Today’s Charts

EUR/USD

Prices broke through a very important support line on the euro chart, which could have an impact on the euro over the next few days, either as a test of resistance or reversal point. Traders noticed a breakout point exactly at 1.4400 which could be the first resistance if the pullback appears. The support zone with the possible next target at 61.8% retracement level of the red wave B may be next. Elliott wave traders are currently searching for the bottom of wave iii which is probably in process right now. Traders that missed this short opportunity in wave iii should stay aside now, and wait for a pullback near to the trend line for the possible bounce lower in the future, as the support line should now be reacting as the resistance for new lows in a long-dollar environment. They will also need oil going under $100 a barrel and holding there, equities pushing higher and forcing Treasury yields up, and the ‘Bail-out/Buy-in’ being accepted. Tough fundamental call there, but it is technically ready it would seem if the dollar finds buyers in quick time.

USD/CHF

On Friday the Usd/Chf came onto the radar with a possible move lower, but the pair bounced higher from the support area around 1.0660 on Sep 22 08. After todays move above 1.1000 on the swissy we have moved to the swissy daily chart. The current price structure is signaling for higher prices in the next weeks, especially if we are right with this double zig-zag correction which could currently be developing in the huge blue wave 4. The markets also hit and bounced higher from the daily RSI trend line support, which could be the important signal for a possible “over-bought” area in the future. If the Bailout rescue package ‘works’, then traders can certainly expect that move.

Report written by TheLFB Trade Team, LFB Services, LLC.

U.S. New Home Sales is a leading economic indicator used to measure the annual number of new single-family homes that were sold during the previous month. While this is a monthly figure, it is reported in an annualized format. This report predominantly helps to validate trends seen in other forward-looking housing indicators, such as the Existing Home Sales.

If the Survey Comes Inline with Market Forecasts

Expectations for this month are suggesting that the U.S. New Home Sales will reach 510K in August, reflecting a 5K decrease since July. Such a result could demonstrate a shrinking housing sector in the U.S., which has been one of the U.S. economy’s greatest concerns. It is widely known that this crisis was initiated as a result of the non-covered mortgages that dropped mortgage banks one by one, and have just recently taken the 160-year-old Lehman Brothers bank to the point of filing for bankruptcy protection. A decreasing figure will most likely be interpreted by investors as yet more proof that the American people are avoiding buying new homes, and that the mortgage banks are reluctant to offer mortgages as freely as they used to. Such a scenario will probably extend the greenback’s bearish movement, and the EUR/USD might rise to test the 1.4800 level.

If the Survey Will Surprise With Bullishness

When the actual figure is higher than forecasted, traders are likely to see the USD appreciate against its currency pairs and crosses. The radical trading week we have just experienced, which included an extremely volatile trading session, concluded with significant weakness for the USD. Investors are now following the opportunity to make profits out of their open positions on the USD, and a better-than-expected figure on the New Home Sales survey, such as 540K will possibly provide them that exact opportunity. Such a figure is good because it will ease global market concerns regarding an expanding mortgage crisis. U.S. citizens feeling confident enough to purchase new homes is the best news that the American leadership can hope for, and the USD will rise in accordance. In this turn of events, the EUR/USD might correct itself down to reach as low as the 1.4400 level.