I actually followed two pairs on Thursday (January 8), given the EUR/USD was once again looking rather uninspiring for trade setups during the first couple hours of screen time. The Euro was once against falling against the U.S. dollar and fell under 1.1800 just before 5AM EST during European morning trading. The 1.1800 whole number was one point I was watching as a psychological support. These whole numbers tend to display heightened price sensitivity when they are being challenged for the first time in a long time.
Much is sometimes made of whole numbers in terms of support and resistance, but they don't have a ton of significance in decision-making (as in the institutions who are largely responsible for influencing the course of the market) if price has been hovering around them regularly. In the case of the EUR/USD, however, we are entering lows that haven't been seen in nine years so we are in semi-uncharted territory. Hence, it's quite natural to pay some level attention to these whole numbers. In a congestive market where the same whole number appears regularly, I tend to simply ignore them entirely.
In terms of actual call option trade setup targeting, I was looking more toward the support 1 level right around 1.17875, just below 1.1800. While I did receive a touch and rejection on the 4:50 candle (see below image), there were a few reasons to be suspicious of a call option setup here:
1. “The trend is your friend” reasons. The multi-month trend, especially the previous week's trend, was massively down. The intraday trend was also pointing southward.
2. Price had just dropped twenty pips in twenty minutes. Going against momentum and “trying to catch a falling knife” can be very risky.
3. A lower wick extended nearly five pips below the support 1 level, the price targeted for potential entry. Oftentimes when you get these long wicks below a level – sort of like a “false break” – it may simply mean that the market wants to go in that direction in the very near future.
All of these are important considerations that may factor into assessing the quality of a trade setup – namely, it's probability of producing a winning trade.
I would have needed more consolidation along support 1 to help support a call option trade. Ideally two further candles along support 1 – after the rejection/false break candlestick – demonstrating that buying influence actually held some potential here. But there was no indication of that so I passed on this opportunity. As you can see from the image above – which is inclusive of all the information contained within this post – this turned out to be a good decision.
My actual trade required a relatively large amount of patience – it occurred four hours after the break of support 1 – eventually coming as a put option. Once price fell below support 1 and moved some distance down, this level naturally became a target for possible put option setups. Pullbacks to support or resistance that follow the general trend tend to produce great high-quality trades.
However, this pair predominantly ranged from 1.17650-1.17750 during a three-hour time span.
Minor support had popped up around 1.17780 and 1.77740. As shown on the first image of this post, I had considered a put option along 1.77740 upon the re-touch of the level, but that 7AM candle (the one that did the re-touch), had some wild movement to it, first appearing bearish only to rally up about ten pips. So I passed on that one.
Price had rejected the minor resistance of 1.17780 on the 8AM candle. That along with the ongoing downtrend (both intraday and on a macroscopic scale) lended credence to the idea of a put option on a subsequent re-touch of the level. I took this setup on the 8:35 candle and had about a three-pip winner by expiration.