When we look at the range of opportunities as traders, one world typically comes to mind: volatility. Today provided us with perhaps some of the biggest string of events we have seen a several weeks, despite the ongoing, consolidated patterns across the breadth of majors.
If you follow my updates, I’ve been mentioning the 1.5000 SNB ‘tolerance’ level on EUR/CHF for the past week. Close to getting hit yet again yesterday, the SNB reacted, this time in a very aggressive manner. Though they declined comments regarding any action, reports were coming through of ‘direct buys’ from the Bank and one particular UK clearer that spiked EUR/CHF from a low of 1.5013 to a high of 1.5381, for a daily range of approximately +368 pips. USD/CHF created a daily range of +390 pips. The pair currently trades towards the high of the initial spike, and consolidation is to be expected at this point. The luster seems to be over for the time being, and I currently don’t see a clear conviction to either buy or sell either of these pairs for the time being.
Particularly in the low 3800’s (1.3825 or so), there have been reports of sovereign interest buying into EUR/USD. This ‘interest’ was able to prop up the pair last week and bring it to new highs at 1.4138, doubling on top of rumors of European central banks dipping in, buying it over the past couple of days.
Typically, ‘sovereign’ interest is in it for the longer haul, and the pair is likely to meet a string of buyers again should it drop below its current trading range. From a technical perspective, it has broken the down-sloping trendline originally created by a head and shoulders pattern, and did not close below it today. So whilst a string of FOMC reactions, among other intraday events, might have caused the pair to drop lower, bias is still generally geared to the upside. Bank research notes seem to agree. As I scan my arsenal of IB research, ‘Long’ still appears to be the consensus for the time being.
Our major levels of interest below on the pair are 1.3904, 1.3928, 1.3793, 1.3722, and 1.3668, should we see any further declines from here.
The ongoing strength of GBP/USD seems to confirm these thoughts regarding recent dollar weakness. Yesterday, reported Asian sellers in the 1.6600 area helped cap buy orders on the pair ahead of BOE Governor King’s address before the Treasury Select Committee. The intraday decline hit a low of 1.6368, in line with seemingly perfect technical support. Looking at daily charts, the downward sloping diagonal trendline from June 3rd has now been penetrated, and these initial highs are yet again at risk of being taken out. 1.6200 buying pressure never let go of the pair in the last week, with a hard line of institutional interest protecting the pair from lower lows.
Lower levels for cable include 1.6368, 1.6300, 1.6280, 1.6241, 1.6200, 1.6150 (channel low), 1.6090
USD/JPY has been steadily propped up over the course of the past several days, due to the aid of FOMC speculation and a lower than expected trade surplus from Japan. The downward-sloping diagonal trendline has now been penetrated, and we’re seeing a backwards-bounce off of this line recorded yesterday. Regardless, the ‘main events’ are now over for the short term and a correction could be due. Technical analysts still seem to be ultimately targeting lower lows in the weeks ahead. Short term, I prefer looking for sells out of ‘exhaustion’ from the recent speculative rally. In the week ahead, we could continue to see buying pressure matriculate, though it is likely to me met by sellers along the path, looking for broader-term trend continuation.
Levels ahead of USD/JPY include 96.88 (50% ret.), 97.27, and 97.94 (76.4 ret.).
Despite the recent decline of world equity markets, the dollar remains weak, creating a very short-term out-of-synch correlation with risk.
When world markets decline, analysts begin shouting outrageous price targets lower, when no more than two weeks ago we were listening to similar outrageous claims of 1200 getting hit on the S&P in the very near term, etc. But markets don’t simply traverse up or down, and in fact most of the time they remain consolidated. Regardless, this downside risk to the world equity markets is still very much a concern, with more and more reports of long equity baskets getting stopped out and recommendations to go long US treasuries trickling in just about every day now. With this deflection-to-risk scenario developing with the dollar against “English speaking” currency pairs in recent weeks, we have reason to believe that any further increase in world equity markets would accelerate the pairs higher (against the dollar), while any moves lower in world equity markets would simply be muted.
Last week, we were discussing the best times to use double zeros.
I argued: Not when price is making recent new highs and new lows, but rather, when price has been 'sloshing around' the zeros for a while and is already in an underlying trend. Today, I caught a good example of this, and thought it was worth mentioning here.
EUR/USD found some uncharacteristic buying pressure early in the US session today and made a quick attempt for the zeros at 1.3900. They worked this time, and priced faded, as we've seen many times before in this kind of situation.
I'm not a fan of using double zeros when price is making new highs and new lows. Others might argue, but typically you'll see a stack of retail orders lined up around these areas (eg to sell in an uptrend) ready to get taken out and feasted upon by an eager crowd of overeager buyers.
Unless there is a strong reason around these areas (when price is making new highs and lows that haven't been seen in a long time) in the form of some fierce support and resistance or other major retracements, will I usually look to fade them.
An example when EUR/USD was on its way to new highs:
And from today:
The S&P 500 has fallen approximately 46 pts from its highs, keeping risk traders at bay and pairs such as GBP/USD, EUR/USD and AUD/USD remain consolidated, with downside support levels under constant pressure.
Throughout this recession we have seen the staunch correlation of these pairs to the world equity markets, where risk trading reigns supreme, and few things have caused them to separate this relationship along the path. The occasional interest rate news and other local events are common among driving what seem to be nonsensical spikes and heavy movements in price, though from a macro perspective, we seem to religiously revert back to this relationship.
The dollar is slightly weaker tonight, after a correction the stock market helped push the pairs higher late in the US trading session. We now sit in the middle of a range that began approximately 2 weeks ago, with lower highs being made across the board.
After 2 weeks of consolidation and indecision among buyers and sellers, the S&P 500 has officially broken through its supportive trendline, and bears are now targeting lower retracement levels. Likewise, the Nikkei, FTSE and FESX are in the same boat, finally falling over from an overheated rally that began in early March.
Because of this, we look to badly needed US dollar strength in the weeks to come on the back of risk leaving world equity markets for the time being, bringing EUR, GBP AUD, etc to lower levels.
A “V” shaped recovery is great for political talk, but reality is another issue. Despite a string of better-than forecast numbers over the course of the past several months, world economic data is still very generally poor and sectors are still in rough shape. What wealth has entered these sectors over the course of the past few months has provided little in terms of sustenance, as more debts need to get paid off from beatings taken over the course of the past year. We had little reason to believe this rally would continue for long; the only question was: “how high before another collapse?”.
But as we all know, markets move up, down and sideways, and this equity market support break could temporarily be the beginning of a head and shoulders pattern or some other mutant of this. When we translate this over to currencies it means we could indeed go higher on GBP, EUR and AUD; it’s still not out of the question, though bias is certainly down.
Particularly for GBP, the currency seems to be resilient to sellers this past week, but downside levels continue to get tested. EUR is weaker; thus, it’s been my weapon of choice to sell when markets are moving lower. Two weeks ago we had strong sentiment leaning to the upside on all of these pairs, and is now vanishing little bit by little bit.
Using GBP/USD as an example, here are our alternatives as I see them now:
For buys:
The downward-sloping diagonal trendline is the first major area of resistance, followed by highs at 1.6618 and 1.6661. A potential move into this area could see a short term retracement, or bounce from the diagonal trendline or highs, followed by a breakout. Ideally, a long position would be taken on confirmation of this momentum , anywhere between the diagonal trendline high and 1.6618. A target on this trade would potentially be as high as the 1.7100 area, if it can clear the 1.6780 area. We would lock ourselves in at breakeven ahead of the local resistance (1.6661) to protect from any failures.
For sells:
Downward pressure on the 1.6239 and 1.6212 area continues. If a failure is truly to occur and in any time soon, we would like to see a day of heavy selling pressure going into this level, ideally selling ahead of this zone to protect ourselves from any false breakouts. The major area of support below this zone comes in at 1.6130 and 1.6114 (retracement confluence) and 1.6089, as well as a slew of rather ambiguous support levels from bumps made on the hourly charts in the most recent uptrend. Because we have a ‘triangular’ pattern taking shape, the likelihood of a big pullback from an area like this (1.6130-1.6089) is possible, though we would prefer to lock our trades in at breakeven and see if we can ‘ride it out’ for lower lows.
In terms of methods for entering trades ahead of these levels, I’ll be posting more in the coming weeks. I’m finding that latching onto trends seems to be an issue for many traders, and I have an armful of techniques I use to do so. I’ll keep you posted. -Steve
Another pattern which I monitor heavily, serving as an intraday price turning point. These are very reliable if used properly and can be seen on everything from daily down to 15 min charts. Most frequently, you’ll be using them on hourlies.
The easiest way to describe this pattern is a 0-1-0 pattern, where in the case of a buy, price makes a new low; that low is taken out, price comes back up past the initial pullback from the first low, comes back down and uses the base of the first low as support. Its essentially a mutated version of the very common head and shoulders pattern, without the diagonal trendline ambiguity.
Think of it as the top of a 2 dimensional pyramid made of squares, where the blocks on the second level from the top have equal highs.
In the case of a buy:
1. Price makes a new low
2. Price retraces from this low
3. Low is taken out to the downside (price extends beyond it)
4. Price comes back above the initial retracement from the first low
5. Price comes back down and fades the original swing point
The reason we require, in the case of a buy, a higher high on the second retracement, is to disqualify the current downtrend, and initiate a price reversal. Without the higher high, market participants could easily view the current price action as nothing more than a bump in a downtrend, as opposed to a reversal. Reverse this logic for sells.
Like anything else I list here, these are nothing more than patterns that repeat themselves all the time, and some of you might be aware of this one already. They key is to identify, and most importantly, react to them, when the opportunity arises.
Remember that demo account you had, where you doubled the balance in a matter of weeks? After all, it’s the reason you took your paycheck money and put it in FX to begin with. What seems to be the problem now that you have your own money in there?
I post articles filled with theory and potential solutions but I feel like this is a highly overlooked element that gets ignored far too much in this business. If there’s a ‘theory’ based article I don’t want you to skip, this is the one.
Here are three huge clichés about trading FX that we’ve all heard before, and separate the winners from the losers:
1. The trend is your friend
2. Let your profits run
3. Cut your losses short
They’re clichés for a reason. They work, and they’re true. But doing them is another story.
Today I want to add something to this list:
4. Take Action
Here’s a quote that needs emphasis:
“I watch trade after trade go by that would have been a winner, but the one I ended up taking was a complete loser.”
Some quick shots at this issue off of the top of my head:
1. Never hesitate.
2. Be on your toes. Focus in sharply on your chart and pull the trigger.
3. Control your risk. Most of the time you don’t take the trade because you are subconsciously aware of how much you could lose.
4. Curb the doubt. You know what you’re doing. You didn’t doubt your actions on the demo account.
5. Take the easy ones.
Overanalysis
You rightfully want and should plan out all of your trades, but don’t think that just because you didn’t spend 2 hours planning it out means it won’t be a winner. In fact, I find that the more I think about things the more things get screwed up, to say it plainly. Traders that have tendencies to overanalyze markets get caught up in a freakish pattern of actually undertrading, which is just about as bad as overtrading. In both scenarios the result is, many times, negative, depending on how you do things.
My daily plan is put together in a matter of minutes. I see what I need to see, and realize that there is only so much news out there that is truly going to shape the charts in front of me.
Ultimately, when someone comes into the market with a fist full of cash and moves it sharply, no fundamental data is going to tell you exactly when and where this is going to happen. But the technical levels and methods we use here will. Many of these levels are formed on an intraday basis, however, so constant monitoring plays a major role in your success.
Get comfortable, but not too comfortable
You’re not going to trade successfully if you’re under too much stress. By nature, I ‘m high-strung. I have always been this way and doubt it’s going to change any time soon. I take trades I’m comfortable with only, and doing this allows me to ‘keep peace’ with myself and let the rest follow.
Best way to do this? Profit. Build up a bank of initial profits, and your mind goes at ease on subsequent trades faster than you can imagine. Do what you need to do to post some initial balance higher than what you started with and the rest becomes much, much easier. A way to do this? Next point:
Take the Easy Ones
I use this as the slogan for this website for a reason. There’s no sense in taking trades that are ambiguous or pose a very low probability. Key word of this slogan is “TAKE”.
You actually DO know what's going on. The good versus bad subconscious
When we talk about our subconscious minds in terms of trading we generally refer to it in a negative sense, because usually it comes up when we’re talking about fear of losing. But there’s a good side to our subconscious, one which we don’t realize is there most of the time because we’re too busy remembering all of the bad things that have happened.
Anyone that has a basic knowledge of psychology might be familiar with the "Little Albert" experiement, where "Little Albert", just a child, was conditioned to be afraid of small, furry animals. We don't touch the stove because it's hot. We don't put our arms in spinning lawnmower blades for other obvious reasons. In trading, this subliminal conditioning which might have led us to a fear of losing is one which never gets us ahead, as we all know.
But here's the good news: when we learn how to trade, we are subconsciously storing a library of information in the back of our heads. Whether we realize it or not, its there. So when we see something on an intraday basis that is so obvious and so plain, are we taking it? Yes or no?
Most of you are pros already….I can see it in the charts that get posted and the comments that follow. But my experience knows full well that you’re not taking all of the trades you post. Don’t think your knowledge or education is any less than anyone else that takes up trading for a living. Do what is obvious, and use your initial judgment. It’s usually right.
Many times, you know EXACTLY what you’re doing, and how the market is behaving / reacting, but your doubts cloud your actions. Until finally, you get so fed up and bored at staring at charts, you pull the trigger on a losing trade.
“AAA” stands for “Action, Action, Action”.
Keep saying it. Easier said than done, I know. But get it done.
Naturally, I can't stress the importance of all of the other tenets I teach here (eg risk management, daily planning, etc), and this piece of the puzzle is in no way intended to undermine or contradict any of it. Put everything together, and most importantly, when you see it, take it.
A trend-continuation pattern that I honestly adore. These are best viewed on smaller timeframes, usually 5 minute, where price will tap an area several times before finally thrusting through it. Its important to note that these work best during more volatile times, when there is a lot of volume in the market. Very little drawdown and big reward on these, in a little amount of time, usually.
1. Price makes at least 3 or 4 touches at a high or low area.
2. In examples below, price makes higher lows (lower highs for shorts)
3. Price lunges toward the area a 4th or 5th time, enter long or short before the level gets hit on the intial thrust. Getting in before the level gets hit allows you to move to breakeven in the event of a false breakout, or another fade.
Click any of the images to expand.
Following a spike, price will consolidate towards the highs. These work best when visible on 1hr timeframes. When price retreats back down (or up), the bottom of the consolidation zone acts as support (or resistance) go long (or short) at the base of the initial spike's consolidation zone. These are best played on a 1 hour or greater timeframe, and "V" shaped charges, back into the level should be avoided. The consolidation zone is a prerequisite. Perhaps easier said,
1. Price spikes out of a consolidated range
2. Price pulls back, making a 'flag' pattern
3. When price revisits the bottom of the flag, its used as support
Once you start noticing them you'll see them alot....they happen more often than you might think.
Click any of the images to expand.
