Thankyou - amazing learning - didn't fully understand the alternate trade if you couldn't access XAUEUR on your platform. Where would SL & TP be for EURUSD?
You can't really stop out of just one side of the trade. If you do XAUUSD and EURUSD separately, you normally would have a P&L stop loss. If you NEED a EURUSD stop .. below today's low is perfect. 1.1364
Thank you for sharing your thoughts, and the structure behind your trading. A great piece. Looking forward to reading the next note.
Do you ever include alternative trades you have considered and rejected on your sheet? For example, would you think about short silver versus the euro instead?
Yes I try to go through this when structuring trades. What asset class, what product, spot or derivatives, etc. Will definitely cover that in future. For example, if you're bearish AUD, is it better to sell AUDUSD AUDJPY etc. Or if you're bearish tech do you buy AMZN puts, or go short ARKK etc.
Great start, I'm totally on board for this and I think it's going to be great fun! :-D
I'm also glad to see your TP is set more or less where I had an interest in buying Gold (It adds to my confidence if we get there)! There's a good chance it spills into the October '12 top at 1380'ish € if it goes to your TP, but yours is a safer target for sure.
Ah, and the sheets!... Thank you so much, I've been meaning to revamp my trade checklists (technicals only) by incorporating more robust elements that explain the actual moves and will be taking inspiration from the the Idea/Filters section. I also need to be more disciplined about skipping high cortisol temptation trades taken on a whim ("because they kinda look good") and this will give me an incentive to get to work on that – I do like 2 or 3 trades a week at best, so I have no excuse to not study a setup properly.
Thanks again for your generosity and quality content, Brent!
Yes my biggest problem has always been over trading. Having a big pain in the butt checklist and framework to fill out means those impulsive trades make no sense because when you go to fill out the sheet you have nothing to write !!! So then you close the trade and wait for a real idea. 😎
I have a fantastic journal, but it requires me to add at least 3 screenshots (HTF entry, execution time frame entry, exit screenshot) on top of the usual data. Taking those trades means I have to go through the whole process and that makes me face the price of temptation in clicking buy/sell. :-D
Thanks Brent, a superb start to your series. You break down everything so well. Just re-reading your previous book - The Art of Currency Trading - and will buy Alpha Trader this week. I hope you don't mind me asking a further question on the XAUEUR trade - do you have any fears that a Russian invasion of Ukraine may send gold temporarily higher and hence, stop you out of the trade? It's the one cross wind that's making me stall on this trade as XAUEUR pumped up by around 40Euro on Friday. Look forward to the next edition Brent, much appreciated.
Great post - thanks for doing this, Brent. I tried to come up with a way to implement this trade via ETFs if that would help anyone who can't trade it as you presented it. I think selling 250sh of GLD and buying 400sh of FXE does the trick (~$40k USD notional). Looking at the GLD/FXE ratio, stop loss looks to be 1.71 and profit taking at 1.42. When I was looking at this last night, the ratio was 1.61, so I think these reference points would produce similar risk and return amounts.
(1) On narrative: I agree that central banks globally have pivoted from accommodative monetary policy designed to cushion economic contraction to tighter policy aimed at inflation. The market interpreted the ECB 03FEB meeting as hawkish and your chart on 2yr Schatz showed this. Subsequently the ECB officials seem to be quite taken aback by the market reaction and have tried to reign back expectation of an accelerated monetary tightening. I was watching the Lagarde press conference (which happened on the same day BoE voted 5-4 for a 25bps rate increase with the 4 votes being 50bps hike). Someone asked why the ECB didn’t raise rate like BoE even though the level of inflations is comparable in the Eurozone and the UK. Her answer was that there are still rooms in the labour market in the Eurozone and she had not yet seen any meaningful wage inflation pressure. I’m writing this before the US Jan inflation print which can either further the current narrative (inflation is high and central banks need to do more/ faster) or an alternative narrative (inflation is high but probably has peaked and central banks can be slow). The key question for me is the pace of the global monetary transition/pivot and at the moment, nobody (including the central banks and markets) knows.
(2) On gold and real yield: I coincidentally was looking at the same chart this week. My chart is longer i.e. from 2003 to now. What I find interesting is there seems a breakdown in the relationship between gold and real yield in 2022. For example, if you calculate the correlation (between gold and inverted real yield), it’s generally positive (which makes sense) i.e. the higher the inverted real yield, the lower the real yield and the higher the gold price. For this year, this correlation is negative. At the moment, I don’t have a good explanation for this. Maybe we haven’t got enough data points for 2022 yet and correlation is a very noisy (& unstable) metric.
(3) On stop loss and profit taking: your entry is 1600, stop loss 1702 (+6.38% from entry) and profit taking 1421 (-11.19% from entry). You mention that you will cut the position prior to the ECB March meeting which is on 10th March. If you do so, your position only has (max) 20 trading days to run. During this time line (20 days), it’s not impossible but probably unlikely that XAUEUR will drop 11.2% to reach the profit taking level (I ran some historical 1-month moves and XAUEUR almost never witnessed such a move before). So the profit taking level seems optimistic given the timeframe.
Some great points in here. My belief (I have been writing about this a ton in AmFx) is that central banks generally follow the market during tightening cycles and ECB and RBA are doing exactly that. I don’t think ecb is dovish look at Nagel interview yesterday im DeR Ziet. They are just following the market and trying to make sure periphery does not blow up by slow playing it a bit I think.
How would you re-assess the trade thesis given last week development (1) ECB officials like Lagarde is trying to dampening market expectations (https://www.politico.eu/article/ecbs-christine-lagarde-warns-against-hasty-rate-hikes/ ); and from Russia/UKR situation. Not saying the thesis is wrong but what's your framework for updating your prior hypothesis. I find this is one of most challenging aspects i.e. you need to have convictions on your trade but at the same time be open-minded to changes in market prices/narrative/data. Also how to separate noise from true signal. Thank you.
The ECB side i'm not worried about as i believe they will simply follow market pricing. the russia side not good .. i should have had that in my risks, that's a major oversight since it was a known unknown. almost always prefer to stick to the plan, because i have no edge on predicting russian behaviors. if anything, invasion is expected at this point so could be a very poor timing for exit. main takeaway is that i failed to factor in a known risk, which is a bit of a fail. sticking to the plan though.
Good point on real rates these corrs are never stable so I don’t fully rely on them I just use them as inputs. True on the March 10 thing it’s ambitious for sure.
XAU/USD movement is mostly explained by 3 factors: real yields, DXY, and central bank activity. CB activity has been mute but on the fringes I would be worried of China+Russia buying gold in order to reduce global USD dominance and reduce USTs. You're correct about real yields, but the reason for correlation breakdown is due to the last factor. DXY weakness this past month. Find the long DXY thesis and you will have your short gold trade exploding to catch up to higher real yields.
Since January 1, 2018. Gold up 50% and DXY up 6%. I am bearish USD and bearish gold essentially expecting a reversal. Historically, always strong corr between DXY and USD but it's not a universal truth and has not worked as a framework since 2018. Even more recently... Since June 2021 ... DXY up 4%, Gold up 4%.
Yes I hear what you're saying and I see the same thing. However you can't just look at a single time period. The way it's been trading, it's like: "if real rates down OR dxy down, then gold up". OR, not AND. And not correlated to just one of the factors. See if you can code that into excel. The correlation is strongest when both factors are inputs into the model. There have also been some days in Jan where the equity selloff has pushed some gold buying so can't forget that as well. It's been a tough go for the gold shorts (speaking for myself).
Hi Brent — What a good series. Thank you for doing this. To what Pete referenced in his earlier comment, could you do a postmortem on a trade that didn't work? It would be insightful to understand how you approach a failed trade.
Finishing up Art of Currency Trading, new AM/FX subscriber and now here, nice to find someone with a chill but professional attitude, new traders have to sift through so many Gurus, humans are the scammiest creatures.
Thankyou - amazing learning - didn't fully understand the alternate trade if you couldn't access XAUEUR on your platform. Where would SL & TP be for EURUSD?
You can't really stop out of just one side of the trade. If you do XAUUSD and EURUSD separately, you normally would have a P&L stop loss. If you NEED a EURUSD stop .. below today's low is perfect. 1.1364
Thank you for sharing your thoughts, and the structure behind your trading. A great piece. Looking forward to reading the next note.
Do you ever include alternative trades you have considered and rejected on your sheet? For example, would you think about short silver versus the euro instead?
Yes I try to go through this when structuring trades. What asset class, what product, spot or derivatives, etc. Will definitely cover that in future. For example, if you're bearish AUD, is it better to sell AUDUSD AUDJPY etc. Or if you're bearish tech do you buy AMZN puts, or go short ARKK etc.
This is amazing! Thank you so much for doing this :)
Great start, I'm totally on board for this and I think it's going to be great fun! :-D
I'm also glad to see your TP is set more or less where I had an interest in buying Gold (It adds to my confidence if we get there)! There's a good chance it spills into the October '12 top at 1380'ish € if it goes to your TP, but yours is a safer target for sure.
I'm already looking forward to Trade 2!
Ah, and the sheets!... Thank you so much, I've been meaning to revamp my trade checklists (technicals only) by incorporating more robust elements that explain the actual moves and will be taking inspiration from the the Idea/Filters section. I also need to be more disciplined about skipping high cortisol temptation trades taken on a whim ("because they kinda look good") and this will give me an incentive to get to work on that – I do like 2 or 3 trades a week at best, so I have no excuse to not study a setup properly.
Thanks again for your generosity and quality content, Brent!
Yes my biggest problem has always been over trading. Having a big pain in the butt checklist and framework to fill out means those impulsive trades make no sense because when you go to fill out the sheet you have nothing to write !!! So then you close the trade and wait for a real idea. 😎
I have a fantastic journal, but it requires me to add at least 3 screenshots (HTF entry, execution time frame entry, exit screenshot) on top of the usual data. Taking those trades means I have to go through the whole process and that makes me face the price of temptation in clicking buy/sell. :-D
Thanks man !!
Many thanks, Brent. Great info and great idea for the 1st trade. Looks like the market agrees with you already!
Great start and interesting trade. Thank you!
Thanks Brent, a superb start to your series. You break down everything so well. Just re-reading your previous book - The Art of Currency Trading - and will buy Alpha Trader this week. I hope you don't mind me asking a further question on the XAUEUR trade - do you have any fears that a Russian invasion of Ukraine may send gold temporarily higher and hence, stop you out of the trade? It's the one cross wind that's making me stall on this trade as XAUEUR pumped up by around 40Euro on Friday. Look forward to the next edition Brent, much appreciated.
Great post - thanks for doing this, Brent. I tried to come up with a way to implement this trade via ETFs if that would help anyone who can't trade it as you presented it. I think selling 250sh of GLD and buying 400sh of FXE does the trick (~$40k USD notional). Looking at the GLD/FXE ratio, stop loss looks to be 1.71 and profit taking at 1.42. When I was looking at this last night, the ratio was 1.61, so I think these reference points would produce similar risk and return amounts.
Some observations:
(1) On narrative: I agree that central banks globally have pivoted from accommodative monetary policy designed to cushion economic contraction to tighter policy aimed at inflation. The market interpreted the ECB 03FEB meeting as hawkish and your chart on 2yr Schatz showed this. Subsequently the ECB officials seem to be quite taken aback by the market reaction and have tried to reign back expectation of an accelerated monetary tightening. I was watching the Lagarde press conference (which happened on the same day BoE voted 5-4 for a 25bps rate increase with the 4 votes being 50bps hike). Someone asked why the ECB didn’t raise rate like BoE even though the level of inflations is comparable in the Eurozone and the UK. Her answer was that there are still rooms in the labour market in the Eurozone and she had not yet seen any meaningful wage inflation pressure. I’m writing this before the US Jan inflation print which can either further the current narrative (inflation is high and central banks need to do more/ faster) or an alternative narrative (inflation is high but probably has peaked and central banks can be slow). The key question for me is the pace of the global monetary transition/pivot and at the moment, nobody (including the central banks and markets) knows.
(2) On gold and real yield: I coincidentally was looking at the same chart this week. My chart is longer i.e. from 2003 to now. What I find interesting is there seems a breakdown in the relationship between gold and real yield in 2022. For example, if you calculate the correlation (between gold and inverted real yield), it’s generally positive (which makes sense) i.e. the higher the inverted real yield, the lower the real yield and the higher the gold price. For this year, this correlation is negative. At the moment, I don’t have a good explanation for this. Maybe we haven’t got enough data points for 2022 yet and correlation is a very noisy (& unstable) metric.
(3) On stop loss and profit taking: your entry is 1600, stop loss 1702 (+6.38% from entry) and profit taking 1421 (-11.19% from entry). You mention that you will cut the position prior to the ECB March meeting which is on 10th March. If you do so, your position only has (max) 20 trading days to run. During this time line (20 days), it’s not impossible but probably unlikely that XAUEUR will drop 11.2% to reach the profit taking level (I ran some historical 1-month moves and XAUEUR almost never witnessed such a move before). So the profit taking level seems optimistic given the timeframe.
Some great points in here. My belief (I have been writing about this a ton in AmFx) is that central banks generally follow the market during tightening cycles and ECB and RBA are doing exactly that. I don’t think ecb is dovish look at Nagel interview yesterday im DeR Ziet. They are just following the market and trying to make sure periphery does not blow up by slow playing it a bit I think.
How would you re-assess the trade thesis given last week development (1) ECB officials like Lagarde is trying to dampening market expectations (https://www.politico.eu/article/ecbs-christine-lagarde-warns-against-hasty-rate-hikes/ ); and from Russia/UKR situation. Not saying the thesis is wrong but what's your framework for updating your prior hypothesis. I find this is one of most challenging aspects i.e. you need to have convictions on your trade but at the same time be open-minded to changes in market prices/narrative/data. Also how to separate noise from true signal. Thank you.
The ECB side i'm not worried about as i believe they will simply follow market pricing. the russia side not good .. i should have had that in my risks, that's a major oversight since it was a known unknown. almost always prefer to stick to the plan, because i have no edge on predicting russian behaviors. if anything, invasion is expected at this point so could be a very poor timing for exit. main takeaway is that i failed to factor in a known risk, which is a bit of a fail. sticking to the plan though.
Good point on real rates these corrs are never stable so I don’t fully rely on them I just use them as inputs. True on the March 10 thing it’s ambitious for sure.
XAU/USD movement is mostly explained by 3 factors: real yields, DXY, and central bank activity. CB activity has been mute but on the fringes I would be worried of China+Russia buying gold in order to reduce global USD dominance and reduce USTs. You're correct about real yields, but the reason for correlation breakdown is due to the last factor. DXY weakness this past month. Find the long DXY thesis and you will have your short gold trade exploding to catch up to higher real yields.
Since January 1, 2018. Gold up 50% and DXY up 6%. I am bearish USD and bearish gold essentially expecting a reversal. Historically, always strong corr between DXY and USD but it's not a universal truth and has not worked as a framework since 2018. Even more recently... Since June 2021 ... DXY up 4%, Gold up 4%.
Yes I hear what you're saying and I see the same thing. However you can't just look at a single time period. The way it's been trading, it's like: "if real rates down OR dxy down, then gold up". OR, not AND. And not correlated to just one of the factors. See if you can code that into excel. The correlation is strongest when both factors are inputs into the model. There have also been some days in Jan where the equity selloff has pushed some gold buying so can't forget that as well. It's been a tough go for the gold shorts (speaking for myself).
yep i'm just saying the same thing as you .. DXY can be a factor but also often not relevant.
Also, with due respect, your XAU/EUR short is working right now only because of the EUR/USD leg. XAU/USD is climbing higher still.
Brent could you make example with position sizing but with mini future for expl.S&P500?
Looks like this went the other way in the end (XAUEUR climbed to 1880 in March).
Did you publish a post-mortem for it by any chance?
Hi Brent — What a good series. Thank you for doing this. To what Pete referenced in his earlier comment, could you do a postmortem on a trade that didn't work? It would be insightful to understand how you approach a failed trade.
may you share the link to the framework sheet? :) didn't get from podcast that where exactly it i in.
Finishing up Art of Currency Trading, new AM/FX subscriber and now here, nice to find someone with a chill but professional attitude, new traders have to sift through so many Gurus, humans are the scammiest creatures.
Thank you for doing this Brent. Great piece & fun!
Thanks Brent for sharing the process behind the trade. It is a great learning