Category: Advanced Forex Education

Educational Themes of Intermediate and Advanced Complexity. In this section, we include all that is needed to master technical analysis such as complete coverage of price action themes: Support-resistance, volume, volatility, breakouts, reversals, trend and range trading, candlestick and chart patterns and formations, Elliott wave and Fibonacci retracements and extensions, and harmonic patterns. It includes also a section covering all indicators from simple moving averages to the complexity of Ehlels Filters.
Another sub-section is dedicated to trading systems desing.

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Forex Fundamental Analysis

The Impact Of ‘Cash Reserve Ratio’ On A Country’s Currency

Introduction to Cash Reserve Ratio

Introduction to Cash Reserve Ratio

Introduction to Cash Reserve Ratio

The cash reserve ratio (CRR), also called the reserve ratio, is the minimum amount of deposits of the clients that are to be held by the commercial banks as cash or deposits with the central bank of the country. It is expressed in terms of a percentage. However, the rest can be used for investment and lending purposes. This is primarily done for two reasons; one, to maintain liquidity in the banks, and two, to not let the banks go bankrupt when they need to pay their depositors when demanded.

The amount deposited by the commercial bank into the central bank is unlike depositing into debt and equity funds. That is, the central banks will not pay any interest to the commercial banks for it.

How is the Cash Reserve Ratio Calculated?

The Reserve Requirement times the Bank Deposits yields the Cash Reserve Ratio.

Cash Reserve Ratio = Reserve Requirement x Bank Deposits

Where,

Reserve Requirement is a percentage value determined the central banks by considering factors such as supply and demand, inflation rate, spending rate, trade deficits, etc.

Bank Deposits is the Net Demand and Time Liabilities (NDTL), which is the deposits made by the customers into commercial banks.

To understand this clearly, let’s take an example. Let’s say a depositor deposits the US $5000 into his bank account. This amount is referred to as Net demand and Time Liability (Bank Deposits). Also, consider the reserve ratio (reserve requirement) to be 6%. Now, the bank will have to hold 6% of the depositor’s amount (the US $5000) as reserves; that is, US $300 is given to the central bank as cash reserves. The leftover amount (US $4700) can be used for investment as well as for lending loans. If we were to assume that the lost out of $4700, then the bank will have will still $300 safe with the central bank.

The Measure and Impacts of Cash Reserve Ratio 

The Cash Reserve Ratio is an important tool in the monetary policy. As its primary use, the reserve ratio is used to control the money supply of an economy. It also regulates inflation rates and keeps in the liquidity flowing in the markets.

The Reserve Ratio typically measures the change in the interest rates and inflation in an economy. Now, let’s vary the CRR and check on the changes in the inflation rates, interest rates, and the money supply.

Case 1: Decrease in the Cash Reserve Ratio

The CRR is the part of deposits of the customers that are held by the central banks. Now, if there is a decrease in the CRR, the amount held by the central banks is lesser, which implies that the commercial banks will have more amount in their hands. In such scenarios, the banks typically reduce the interest rates on loans they provide. Also, the decrease in the reserve ratio increases the money supply in an economy, and this, in turn, increases the inflation rate.

Case 2: Increase in the Cash Reserve Ratio

The implication when the CRR increases is the opposite of the above case. An increase in the CRR means that the amount held by the central banks is higher, which reduces the amount held by the commercial banks. Now since they have less money in hand, they compensate it by increasing the interest rates on the loans they provide. The money supply, in this case, decrease, which drops the inflation rates as well.

Impact of Reserve Ratio on the Currency

The Reserve Ratio does have an impact on the currency, but indirectly. It does help in determining the demand for the currency. In the previous section, we saw that an increase or decrease in CRR affects inflation and interest rates. As a matter of fact, an increase in the interest rate increases the demand for the currency, given all other factors are kept in favor of the currency. Also, the increase in the interest rates attracts more foreign investors, which creates more demand for the currency. On the other hand, the decline in the interest rates, in general, brings down the demand for that currency. Foreign investors, too, don’t have their eyes here anymore.

Note that, Reserve Ratio or the interest rate for that matter alone does not determine the demand for that currency. There are several other considerations that must be made along with this—for instance, the relationship between interest rates and inflation. Higher interest rates with a decent and feeble increase in inflation can prove a positive effect on the currency.

Cash Reserve Ratio: The Stats

There are portals over the internet where one can find the historical data as well as the forecast data. One can also analyze them by the different types of graphical representations they provide.

India | Brazil | China | Russia

How often is the data released?

The frequency of release of the reports is the same for most of the countries. In countries such as China, Malaysia, Russia, Brazil, etc. the data released every month, while it is released daily in India.

Effect of Cash Reserve Ratio on the Price Charts

Now that we’ve fairly got an idea about the reserve ratio, let’s see how the prices are affected after these reports are out. Precisely, we will see how the volatility of the market has changed as well as the effect in volume.

For our example, we will be taking the Indian Rupee into account to analyze the charts. The frequency of release of data of Reserve Ratio in India is daily. The reports are published by the Reserve Bank of India.

Note that the Cash Reserve Raito data has a feeble impact on the currencies. Since the CRR is indirectly impacted on the currency, the level of impact is pretty low compared to other fundamental indicators such as interest rates, GDP, inflation, etc.

Consider the below announcement made by the Reserve Bank of India. We can that the announcement was made on February 6th at 6:15 AM GMT, and the value reported was 4%, which was the same as the previous month as well as forecasted value.

Now, since the actual values are the same as the previous and the forecasted value, we cannot expect any high volatility or a shoot up in volume as such. However, let’s analyze a few charts and see its impact.

USD/INR | Before the Announcement – (February 6, 2020)

Below is a chart of USD/INR on the 15min timeframe just before the news was released.

USD/INR | After the Announcement – (February 6, 2020)

Consider the chart of USD/INR on the 15min timeframe after the release of the news. The news candle is represented as well. We can see that the news favored the US dollar but not the Indian Rupee. However, the movement wasn’t as gigantic as such. The volatility was above the average, and the volume was quite low. From this, we can conclude that the reports didn’t have any massive impact on the USD/INR.

EUR/INR | Before the Announcement – (February 6, 2020)

EUR/INR | After the Announcement – (February 6, 2020)

Below is the chart of EUR/INR in the 15min timeframe. The news candle has been marked in the box, as shown. We can clearly infer that the news candle barely made a drastic move in the market. Nonetheless, the volatility was above the average mark. So, news traders cannot expect any high volatility during the release of the news. And traders who stay away from the markets during the news can now trade fearlessly as the news doesn’t have a major impact on the currency.

GBP/INR | Before the Announcement – (February 6, 2020)

GBP/INR | After the Announcement – (February 6, 2020)

Below is the chart GBP/INR on the 15min timeframe after the release of the news. The news candle is illustrated in the box, as shown. Similar to the USD/INR and the EUR/INR, this pair, too, has not shown any rise in the volatility as such. In fact, the volatility of this pair is at the average line. So, with this, we can conclude that the Cash Reserve Ratio barely has an impact on the currency.

Conclusion

The Cash Reserve Ratio is the amount of money that is deposited by the commercial banks into the central banks. This is primarily done to maintain the volatility in the banks. The reserve ratio is an important monetary policy tool. Moreover, it determines and maintains the interest rates, inflation, as well as the money supply of an economy. A rise or fall in the CRR brings a change in the previously mentioned indicators. Hence, this is a vital and very helpful fundamental indicator for both economists and investors. But comparatively, it is less helpful for the day traders, as the impact is feeble.

Categories
Forex Fundamental Analysis

Understanding ‘Core Inflation’ & It’s Impact On The Forex Price Charts

Introduction

Introduction

Introduction

Core inflation is the change in the price of the goods and services that do take food and energy into account. It is referred to as ‘core’ because it represents the most accurate illustration of the underlying inflation trends. The reason for the exclusion of food and energy is due to its high volatility. They change so often that they may depict an inaccurate reading of the inflation rate. And the commodity market is the sole cause behind the volatility, as it extensively traded all day.

Why Exactly Food and Energy are Excluded

As already mentioned, Food and Energy are exempted from the calculation of core inflation because the volatility in these markets is too high. This reduces the accuracy of the core inflation rates. Food and energy are considered as the most necessary staples; that is, their demand does not change even if there is a price hike. For instance, let’s say the gas prices rise due to the rise in oil prices. But this rise will hardly affect you as you’ll still need to fill up your tank in order to drive your vehicle. Similarly, you will not become hesitant to go to the grocery store because the prices have risen.

Oil and gas are commodities that are traded on the exchange market where people can buy and sell them. The commodity traded bid on the oil prices when they suspect a fall in supply or a rise in demand. Also, the thick that war will bring down the supply of oil. With this assumption and analysis, they buy at the present price and anticipate a higher price in the future. And this is enough to pump up the oil prices in the market. And if things don’t go as per the plan, the prices fall when they sell. Hence, this creates high volatility in the market.

The food prices are dependent on the prices of gas. The food prices tend to rise along with the gas prices because transportation of the food is dependent on trucking. When the oil prices rise, the effect can be seen in the gas price a week later. And if the gas prices maintain its uptrend, the effect of it can be observed on the food prices a few weeks later.

Measuring Core Inflation

The core inflation is measured by both the Consumer Price Index (CPI) and the core Personal Consumption Expenditure Index (PCE). The PCE is the depiction of the prices of goods and services purchased by consumers in the United States. Also, since inflation determines the trend in trend in the rising prices, the PCE is a vital metric in assessing inflation. However, both PCE and CPI are considered to be very similar as both help in determining the inflation in the economy.

CPI and PCE – Which is the Preferred Measure?

It is observed that PCE tends to provide inflation rates that are less affected by the short-term price changes, which is why the Federal Reserve prefers the PCE index over the CPI. The Bureau of Economic Analysis (BEA), a division of the Department of Commerce, measures the rates by using the existing gross domestic product (GDP) data, which helps in determining the overall trend in the prices. The GDP gives the measure of the total production of goods and services. In addition, BEA takes in the monthly Retail Survey data and compares it with the consumer prices generated by the CPI. In doing so, the data irregularities are removed, which helps in providing long-term trends.

Why is Core Inflation Important?

It is important to asses core inflation because it determines the relationship between the price of the goods and services and the level of the consumer income. If there is an increase in the price of the goods and services and no proportional increase in consumer income, consumer buying power will decrease. So, we can conclude that inflation causes the value of money to depreciate compared to the prices of goods and services.

However, if the consumer income increases, but the price of the goods and services remains unchanged, consumers will theoretically have money buying power. Moreover, there will be an increase in the investment portfolio, which leads to asset inflation. And this can generate additional money for consumers to spend.

Core Inflation and its Impact on the Economy and Currency

Core inflation has both a subtle and destructive effect on economic growth. It is said to be subtle because an increase of one or two percent takes quite a while. However, this can have a positive effect at this rate as well. People purchase goods and services beforehand, knowing that price will rise in the near future. Hence, this increase in demand stimulates economic growth. And since currency depends directly on the economy, the price of the currency rises as well.

Inflation can have a negative effect on the economy, as well. That’s because people will have to spend how much ever high price on food and gas, as they are the essentials. This brings down other consumer sectors in the market because people tend to spend less here. Their businesses are less profitable now. This imbalance in the market lowers the economic output.

Reliable sources of data for Core Inflation

The core inflation rate is released by the countries’ statistics board. For most countries, it is released on a monthly basis. And the reports are in terms of percentages. Below is a list of sources of core inflation data for different countries.

EUR | USD | AUD | GBP  For other world countries, you may access those reports here.

How does Core Inflation Affect the Price Charts?

Until now, we understood the definition of Core inflation and its impact on the economy and the currency. Here we shall see the immediate effect of the currency pair when the reports are released. For our example, we will be taking the U.S. dollar for our reference. The core inflation rate in the U.S. is released by the U.S. Bureau of labor statistics. The frequency of the announcement of data is monthly.

Below is the core inflation data released by the U.S. Bureau of labor statistics for the month of February. But, the data for it is announced in the first week of March. We can see that the core inflation has turned to be 2.4 percent, which is 0.1 percent higher than the previous month and the forecasted value. Now, let’s see how this value has affected the U.S. Dollar.

EUR/USD | Before the Announcement – (March 11, 2020 | Before 12:30 GMT)

Below is the chart of the EUR/USD on the 15min timeframe just before the release of the news.

EUR/USD | After the Announcement – (March 11, 2020 | After 12:30 GMT)

Below is the same chart of EUR/USD on the 15min timeframe after the release of the news. The news candle has been represented in the chart as well. It is evident from the chart that the news did not have any effect on the currency pair. Though the reports showed an increase in the core inflation, there was hardly any drastic pip movement in the pair. Also, the volatility was below the average, and the volume was low. With this, we can come to the conclusion that the core inflation rate did not impact the EUR/USD.

GBP/USD | Before the Announcement – (March 11, 2020 | Before 12:30 GMT)

GBP/USD | After the Announcement – (March 11, 2020 | After 12:30 GMT)

Consider the below chart of GBP/USD on the 15min timeframe. We can see that the news candle was a bearish candle. That is, the news was positive for the U.S. Dollar. However, if we were to check on the volatility of the market, the volatility when the news came out was at the average value. Seeing the volume bar corresponding to the candle, it wasn’t high as such. Hence, the core inflation did not impact the GBP/USD.

Traders who wish to trade this pair can freely go ahead with their analysis as the news has a very light impact on the USD.

USD/CAD | Before the Announcement – (March 11, 2020 | Before 12:30 GMT)

USD/CAD | After the Announcement – (March 11, 2020 | After 12:30 GMT)

Below is the USD/CAD candlestick chart on the 15min timeframe after the release of the news. The news showed an increase in the core inflation rate by 0.1 percent. In the chart, we can see that the report turned out to be positive for the USD. In fact, the news candle actually broke the supply level and went above it. Compared to EUR/USD and GBP/USD, the core inflation had a decent impact on USD/CAD. However, the volatility was at the average mark, and the volume didn’t really spike up.

Conclusion

Core inflation is an economic indicator that measures the inflation of an economy without considering food and energy. This is because of the high volatility in the food and energy market. The core inflation rates are usually taken from the CPI or the PCE. This is an important indicator as it determines the relationship between the price of goods and services and consumer income.

It also gives an idea of the current economy of a nation. However, when it comes to its effect on the currency, there is not much impact on it. So, conservative traders can trade the markets without fearing the release of the news, as there is no drastic rise in the volatility of the markets.

Categories
Forex Elliott Wave

How to Analyze the Zigzag Pattern – Intermediate Level

The zigzag pattern is a three-wave structure that has a limited number of variations. In this educational post, we’ll present how to analyze the zigzag pattern under an intermediate level perspective,

The zigzag pattern is a three-wave structure that has a limited number of variations. In this educational post, we’ll present how to analyze the zigzag pattern under an intermediate level perspective,

The zigzag pattern is a three-wave structure that has a limited number of variations. In this educational post, we’ll present how to analyze the zigzag pattern under an intermediate level perspective,

The Elliott’s Zigzag Pattern

R.N. Elliott, in his work The Wave Principle, described the zigzag as a corrective formation that follows an internal sequence defined by 5-3-5.

The wave analysis analyst should consider that corrective patterns are not easy to recognize while the structure is not complete; however, it results revealing and useful to make forecasts once the formation is complete.

Zigzag Construction

Glenn Neely, in his work Mastering Elliott Wave, describes the zigzag construction as follows:

  1. Wave A shouldn’t retrace beyond 61.8% of the impulsive wave.
  2. Wave B should retrace at least 1% of wave A, but shouldn’t exceed 61.8% of wave A.
  3. Wave C must finish at least slightly beyond the end of wave A.
  4. If wave B retraces more than 61.8% of wave A, thus the movement developed doesn’t correspond to the end of wave B. In this case, the move realized correspond to a segment of a complex wave B.

The following figure illustrates the steps of the zigzag pattern construction previously described.

Types of Zigzag

According to the extension of wave C, the zigzag pattern would be classified as normal, extended, or truncated.

Normal zigzag: In this case, wave C can reach between 61.8% to 161.8% extension of wave A. Concerning wave B, this segment doesn’t retrace more than 61.8% of wave A, and wave C shouldn’t extend beyond 161.8% of wave A.

Truncated zigzag: This formation is less frequent than the other two zigzag pattern variations. Further, wave C shouldn’t be lower than 38.2% of wave A, but not greater than 61.8% of wave A. 

Once wave C ends, the next path should retrace at least 81% of the entire zigzag formation. According to Neely, this pattern it is likely that appears in a triangle structure.

Extended zigzag: This variation is characterized by having a more prolonged wave C than the other two models, which surpasses the 161.8% of wave A, being similar to an impulsive sequence. 

Once completed the wave C, the next path tends to retrace at least 61.8% of wave C.

Canalization Process

To canalize a zigzag formation, the wave analyst should pay attention to wave A and the end of wave B. 

The canalization process begins with the trace of a base-line linking the origin of wave A with the end of wave B, then using this line, a parallel line is projected at the end of wave A.

If the wave analyst encounters a zigzag pattern, then the corrective formation could move inside the channel, violate it, but never move in a tangent way to the channel. If it occurs, then the corrective sequence may correspond to a complex correction.

Finally, once the price violates the base-line O-B, we can conclude that the zigzag pattern ended.

NASDAQ e-mini and its Zigzag Pattern

The following figure represents to NASDAQ in its 12-hour timeframe. The chart reveals the upward process that the technologic index developed in the Christmas rally of 2018 at 5,820.50 pts.

The impulsive bullish sequence completed its internal five-wave moves at 7,879.50 pts on April 24th, 2019, from where the price began to develop a corrective zigzag pattern.

As illustrated in the last figure, the wave (a) in blue looks as a five-wave structure that ended at 7,290 pts on May 13th, 2019. The second leg of the zigzag pattern advanced close to 61.8% of the wave (a), which accomplishes the requirement of zigzag construction.

The next bearish path, corresponding to wave (c) produced a second decline in five waves and dropped beyond the 61.8% and below 161.8% of (a) which lead us to conclude that the type of zigzag pattern is normal.

At the same time, we observe that the price didn’t violate the lower line of the descending channel. However, once NASDAQ soared above the upper line of the descending channel, the corrective structure ended, giving way to the next upward motive wave.

Conclusion

In this educational article, we reviewed the characteristics of the zigzag pattern and how the wave analysts can differentiate from another kind of corrective formation. 

At the same time, the Fibonacci tools represent a useful way to validate what structure develops the market. In this context, this knowledge will allow the wave analyst to identify potential zones of reaction, which would enable us to incorporate into the trend.

In the next article, we will review the triangle pattern and how to recognize its variations.

Suggested Readings

  • Neely, G.; Mastering Elliott Wave: Presenting the Neely Method; Windsor Books; 2nd Edition (1990).
  • Prechter, R.; The Major Works of R. N. Elliott; New Classics Library; 2nd Edition (1990).
Categories
Forex Fundamental Analysis

‘Labor Force Participation Rate’ & It’s Impact On The Forex Market

What is the Labor Force Participation Rate?

What is the Labor Force Participation Rate?

What is the Labor Force Participation Rate?

Labor force participation rate can be defined as the group of the population who are between the age of 16 and 64 in the economy that is currently employed or unemployed (seeking employment). The other set of the population, including the ones who are still undergoing studies, people who are above the age of 64, and the housewives, do not fall into the labor force participation rate. As far as the formula for this concerned, it is the sum of all the employed people and the people seeking employment divided by the total noninstitutionalized, civilian working-age population*.

LFPR = Labor Force / Civilian Non-Institutionalized Population

Where Labor Force = Employed + Unemployed

Working-age population – this is the population of people in an area that is considered to be capable of working in a predetermined age range criterion.

More about Labor Force Participation Rate

The LFPR is a measure to evaluate the working-age population in an economy. This working-age population is a dataset of only those people who are between the age of 16-64.

Since the LFPR involves the calculation of the number of employed and unemployed people, this indicator is closely related to the unemployment rate. The LFPR is a vital metric when the economy is under recession or is slowing down. This is when the people get their eye caught into the unemployment data.

When the market is under recession, the labor force participation rate tends to go down. The reason to account for it is simple. At the time of recession, the economic activity is feeble, which results in fewer jobs across the nation. This, in turn, discourages the people from focusing on their employment and hence leads to a lowering of the participation rate. In addition, the participation rate is an important factor in understanding the unemployment rate.

The group of people who are not interested in working or are in some sort of insignificant type of job is not included in the participation rate. But, when it comes to the understanding of the unemployment rate in detail, we do take the participation rate into account. A population that has a majority of them who are aging, it can have a negative impact on the economy of any country. And this is when the labor participation rate comes into play. If the value is on the higher side, this is a good sign for the economy. But, for smaller values, the countries need to be cautious of their economies. This is the reason, both participation rate, as well as the unemployment rate, must be looked carefully into and simultaneously to get a clear understanding of the overall employment status in the economy.

What do the trends have to say?

Consider the above chart representing the labor force participating rate in the U.S. for two over two decades from 2000 to the present year. Defining as per the chart, the labor force participation rate is the population of people who are able to work as a percentage of the total population.

Going behind the specified period, the rate increased from 1960 to 2000, as women came into the picture of the workforce. At the beginning of 2000, the rate peaked at 67.3 percent. But, due to the recession that happened the very next year, the rate dropped to 65.9 percent by April 2014. Similarly, the recession in 2008, lowered the labor force participation rate even more to 62.3 percent by October 2015. In the coming years, though there wasn’t any significant financial crisis, the rate had risen only to 62.9 percent.

The primary implication to drop could be the falling of the supply of workers. So now, fewer works should manage to negotiate for higher wages. But things turned out to be different. The income inequality increased, and as a result, the average income workers were hit hard. And understandably, they could not put up a competition with robots. Moreover, businesses replaced capital equipment instead of hiring more labor as they found it be cost-effective.

The consistent falling rates of the labor force participation can be boiled to the four points listed below:

  • An aging population
  • Long-term unemployment, leading to structural unemployment
  • Increased opioid dependency
  • Sickness to the extent that they cannot work

How the ‘Labor Force Participation Rate’ Impacts the Economy?

The countries whose population has a skilled and mobile labor force that can adapt to the changing business needs, tend to have a good labor force and stable participation rate.

Investment in human capital plays a role in the valuation of the LFPR. When countries invest more in human capital and stand better than the crowd (rest of the countries), their economy tends to stay above the average mark.

Labor mobility acts as a great add-on to the labor force as well as the economy. The nations with mobile workers have the skill set to negotiate workers, change employers, and start new businesses. The U.S. is one such example of the same. They are much better than other developed countries when it comes to moving to find a job.

Impact of Labor Force Participation Rate on the Currency

The labor force participation rate determines the population in an economy who are employed and unemployed in a certain predefined age range. And this goes hand in hand with the unemployment rate of an economy. Hence, we can conclude that the impact of the currency from LFPR correlates with the unemployment rate.

A rise in the labor force participation rate implies an increase in the participation rate. And this is a positive sign for the economy of a country. Thus, an increase in the participation rate can lead to an appreciation in the value of a currency.

Contrarily, a downfall in the labor force participation rate implies that the labor force is dropped due to the bad performance of an economy. This typically happens during recession times. Therefore, to sum it up, a decline in the LFPR could indicate a negative effect on the currency.

Reliable Sources for Statistics on Labor Force Participation Rate

Firstly, the frequency of release of reports on the Labor Force Participation Rate is 30 days. All the data is expressed as a percent.

Below is a list of links through which one can access the participation rate data for different countries. The information that can be retrieved from the sources are as follows:

  • Actual, previous, highest, and lowest data
  • Graphical statistics for a period of more than 25 years
  • Forecast

USD | GBP | EUR

For the rest of the countries, you may click the link here to access the reports.

Impact of Labor Force Participation Rate Announcement on the Price Charts

Now that we’ve understood pretty much on the theoretical concepts of Labor Force Participation Rate, let’s get a little technical and see how the reports of this economic indicator affect the prices of the currency. Basically, we will be seeing the movement in the charts before the release of the news and then observe its effects after the release of the news.

As already mentioned, this data is released on a monthly basis for most of the countries. For our discussion, we shall be considering the LFPR of the United States. That is, we will be analyzing how the LFPR affects rates of the U.S. Dollar.

Consider the below report released by the U.S. Bureau of Labor Statistics. The Labor Force Participation Rate in the United States has remained unchanged at 63.4 percent in February 2020. Note that, though the data is released in March, in reality, it is the reports for the month of February.

Now that we know the actual value is the same as the previous data, as well as the forecasted data, let us examine how it has affected the prices of the U.S. Dollar.

EUR/USD | Before the Announcement (March 6, 2020)

Consider the EUR/USD chart on the 15min timeframe. At this point in time, we can see that the market is in an uptrend and is presently moving sideways. Let’s see how the price is affected when the news comes out the next candle.

EUR/USD | After the Announcement (March 6, 2020)

Below is the same chart, but after the announcement of the news. The news candle is clearly represented in the chart as well.

We can see that after the news was released, the candlestick left a small wick on the top and a long wick on the bottom and closed a few pips below the open price. We can infer that the news didn’t much create a drastic move in the market. This is because the actual rate was the same as the previous rate. However, the volatility of the market showed an increase. The ATR indicator indicated that the current market volatility was ten pips. But, the volatility after the news release jumped to 27 pips. The volume too increased after the release of the news, which can be seen at the bottom of the chart.

This also means that the news could not really affect the current trend of the market. So, traders can still look out to buy entries after the release of the news. For instance, the wick in the bottom could be interpreted as the strength of the buyers in the market.

GBP/USD | Before the Announcement (March 6, 2020)

Below is the chart of GBP/USD on the 15min timeframe. The market is in an uptrend and currently is at the support (black line). We need to see if the news will respect the support or will break through it.

GBP/USD | After the Announcement (March 6, 2020)

Below is the same chart of GBP/USD after the announcement of the news. We can see that the news was positive for the USD. However, the USD wasn’t strong enough to break below the support. And this was because the actual value was the same as the previous value.

Coming to the volatility, the average volatility was ten pips, and when the news came out, the volatility increased 16 pips, which was decently above the average value. There was a slight increase in the volume as well.

As far as trading this pair is concerned, we can prepare to go long when a doji-like candle was formed at the support area.

Conclusion

Labor Force Participation rate is that economic indicator that measures the workforce of a country by considering a specific age group. As mentioned, the LFPR and the unemployment rate are closely related to each other. That is, for assessing the unemployment rate, having an idea about the participation rate is quite vital. The labor force participation rate has a good weightage in the valuation of the economy of a nation. It has its effects on currencies as well. So, this indicator turns to be handy for economists as well as traders and investors.

Categories
Forex Fundamental Analysis

Impact of Unemployment Rate On A Nation’s Economy & It’s Currency

Introduction

Introduction

Introduction

The unemployment rate is a fundamental indicator of macroeconomics. Before getting into defining the unemployment rate, let’s first understand what even unemployment is. Later, we shall get deep into understanding the unemployment rate and its effects on the economy and the currency (using price charts).

What Is Unemployment?

To put it in simple terms, Unemployment is a scenario where a person is constantly looking for work but is unable to find it. So, works are considered to be unemployed if they do not work but are capable and are willing to do so. This is a great factor in determining the health of the economy. And the measure of unemployment is what is termed as the unemployment rate.

Understanding Unemployment Rate

The unemployment rate can be defined as the percentage of unemployed workers in the total labor force, where the total labor force comprises of all the employed and unemployed citizens within an economy. Mathematically, it is the number of labor force divided by the number of unemployed people. And as mentioned, to be considered unemployed, the person must have an active history of them looking for jobs. So, if you’ve given up looking for a job or work, you will not be considered unemployed.

More about Unemployment

Unemployment is a vital economic indicator as it indicates the inability of the workforce to obtain work to contribute to the productive output of the economy. The simple implication of unemployment would be less total production than that could have been possible. Also, an economy with high unemployment would have lower growth output with disproportional fall in the requirement for basic consumption.

On the flip side of things, a low unemployment rate implies that the economy is producing goods almost at its full capacity, having a commendable output, and rising standard living standards. Talking it further, an extremely low unemployment rate would mean an overheating economy and signs for inflationary pressures. It could be a hard time for businesses that would be in need of additional workers.

Types of Unemployment

Now that the definition of unemployment is clear, let us go ahead and understand how economists have classified unemployment. Unemployment is broadly classified into two types, namely, voluntary and involuntary. Voluntary unemployment is the case when the person has quit the job voluntarily in search of another job. But, in the case of Involuntary unemployment, the person has been fired by the organization. Now, the person must look for other employment. Voluntary and involuntary unemployment can be further divided into four types.

  • Frictional Unemployment
  • Cyclic Unemployment
  • Structural Unemployment
  • Institutional Unemployment
Frictional Unemployment

Frictional Unemployment is the most obvious type of unemployment. This occurs when a person is in between jobs. When a person quits a company, it takes some time to search for a new job. However, this unemployment is typically short-lived. Moreover, this type of unemployment does not really cause problems for the economy. Frictional unemployment is something natural, as ideally, it is not possible to find a job right after a person leaves a job.

Cyclic Unemployment

Unemployment varies based on the cycles of the economy is termed as cyclic unemployment. During the course of economic growth and declines, there is variation in the number of unemployed workers. For example, during economic recessions, unemployment rises, and during economic growth, unemployment decreases.

Structural Unemployment

This type of unemployment causes due to the advancements in the technology, or the structure through which the labor markets operate. The technological advancements could be the automation of manufacturing or the use of automobiles in place of horse-drawn transport. Such things lead to unemployment because there is no requirement of labor for it.

Institutional Unemployment

The consequence of permanent or long-term institutional factors and incentives in the economy could be unemployment. Such unemployment is called institutional unemployment. Some of the factors leading to institutional unemployment include

Government policies
  • High minimum wage floods
  • Generous social benefit programs
  • Restrictive occupational licensing laws
Labor market phenomena
  • Efficiency labor
  • Discriminatory hiring
Labor market institutions
  • A high rate of unionizations

How the Unemployment Rate Affects the Economy

We know that the unemployment rate is a vital indicator, as it gauges the joblessness in an economy. This, in turn, gauges the economic growth rate as well.

The unemployment rate economic indicator is a lagging indicator. This indicator does not predict that the market is going to rise or go under recession, but it measures the effect of the economic events. Based on the event, this indicator makes a move. For example, the unemployment rate does not rise until the recession has officially begun. But, a point to note is that the unemployment rate continues to rise even after the recession starts to fade away.

There are two reasons for it. One of them is that the companies are reluctant to lay off their people when the economy takes a downside. For large companies, it might take a few months to come up with a layoff plan. Secondly, the companies are more reluctant to hire new workers until they have a confirmation that the economy has stepped into the expansion phase of the business cycle.

For example, during the well-known financial crises that happened in 2008, the recession actually began during the first quarter of the year. The US GDP had 1.8 percent. Until May 2008, the unemployment rate was 5.5 percent. But, when the recession came down, and the economy started to do well, the unemployment rate hit 10.2 percent in October 2009.

So, with this, we can entitle the unemployment rate as a powerful confirmation indicator rather than a lagging indicator. For example, if the other leading indicators are already showing an expansion in the economy, and the unemployment rate has started to decline, then you are confident that the companies are yet again going to hire people.

Unemployment Rate and its Impact on the Currency

As already discussed, unemployment signals the economic growth of a country. If the economy is doing is bad, then then the unemployment rate rises. And if the economy is growing fairly, the unemployment rate declines. When it comes to currency, it is proportional to the economic growth of a country. This, in turn, implies that unemployment is inversely proportional to the value of the currency.

Frequency of the release of the Unemployment rate

The unemployment rates are released by the Bureau of Labor Statistics on Friday of every month. Typically, the present values are compared with the previous month’s values. Sometimes, a year-to-year comparison is made as well.

Dependable Sources of Information 

With the list of sources mentioned below for different countries, one can obtain valuable statistical information on the unemployment rates. Specifically speaking, one can get a visual representation of the historical values over a period of as high as 25 years. Apart from that, users get access to information regarding the actual, previous, highest, lowest unemployment rates as well.

USD | CAD | CHF | AUD | JPY | EUR | GBP

How the ‘Unemployment Rate’ News Release Affects the Price Charts?

Now that we have a good amount of theoretical information on the Unemployment rate, let’s get a little technical. In this section, we shall analyze how the prices of the currencies are affected after the release of the reports.

As mentioned, the reports on the unemployment rate are released by the Bureau of Labor Statistics on a monthly basis, typically on Fridays. As a usual effect, it is said that the actual data less than the forecasted data is good for the currency.

Also, note that, as per sources (Forex factory), this news is expected to have a high impact on the currency. For our illustration, we have taken into account of the Unemployment rate of the US released on 7th February.

In the below image, we can see that the Actual percentage is 3.6%, which is 0.1% higher than the forecasted percentage (3.5%). Also, it is higher than the previous month’s value. So, we can conclude that the unemployment rate in the US has increased in February compared to January.

When it comes to the effect on the forex exchange market, we can expect the US dollar to drop as the unemployment rate has increased (which is not good for the economy).

Now, let’s see its effect on few USD charts by pairing it with other major currencies.

USD/CAD | Before Announcement – 7th February

Below is the candlestick chart of USD/CAD on the 15min timeframe. If we were to look at the recent trend, we could see that the market is in an uptrend. Now, we need to see if the trend continues after the release of the news or reverses its direction.

USD/CAD | After Announcement – 7th February

Below is the candlestick chart of USD/CAD on the 15min timeframe after the release of the news. The news candle is indicated as shown. We can see that when the news was released, the market just plunged down. Here, we can infer that the market moved as the way we expected it to move. Also, the volatility surged up when the news came out. If you look at the volume indicator as well, we can see that the volume shot up high.

However, in hindsight, the market recovered from the drop and left a wick on the bottom. With this, we can conclude that the drop in price was consumed by the strong buyers. The buyers did not let sellers reverse the market.

EUR/USD | Before Announcement – 7th February

In the below chart of EUR/USD, we can see that the market is in a downtrend, where the purple line represents the support and resistance line. Currently, before the release of the news, the market is in the S&R area. We need to see how the market will react after the news.

EUR/USD | After Announcement – 7th February

When the news was announced, we can see that the market went up, came down, and closed below the open price. There was strength from both sides, and the volatility was pretty high. If you look at the volume bar corresponding to the news candle, we can see that the volume too was high at that point in time.

In this currency pair, EUR is the base currency, and USD is the quote currency. According to the impact of the news, the market was supposed to shoot up. The market did try to go higher but got rejected by the sellers. So, basically, the seller’s market was more dominated than the news in this case.

 GBP/USD | Before Announcement – 7th February

GBP/USD | After Announcement – 7th February

Below is the chart of GBP/USD on the 15min timeframes after the release of the news. We can see that this chart is very similar to the EUR/USD chart. The news candle initially shot up, but came down and closed red. The volatility during this time was quite high, which can be inferred from the corresponding volume bar below. And according to the news, the market was supposed to go north, but the market continued its downtrend.

Bottom line

The unemployment rate, though a lagging indicator, should not be taken for granted. It is as vital as the other economic indicators such as GDP, inflation rate, interest rate, etc. Employment is one of the primary reasons for the economies do well. Economies with high unemployment rates are being hit hard. Coming to the investors’ and traders’ point of view, one must keep an eye on the rate of this indicator and treat it as a powerful confirmation tool rather than just a lagging indicator.

Categories
Forex Elliott Wave

Corrective Waves Analysis – Intermediate Level – Part 1

Corrective waves are formations produced between two impulsive movements. In this educational article, we’ll see the standard corrective patterns defined by R.N. Elliott.

Corrective waves are formations produced between two impulsive movements. In this educational article, we’ll see the standard corrective patterns defined by R.N. Elliott.

Corrective waves are formations produced between two impulsive movements. In this educational article, we’ll see the standard corrective patterns defined by R.N. Elliott.

The Basic Structure

R.N. Elliott, in his treatise, defined corrections as a movement that develops against the trend built by motive waves.

Corrective formations characterize themselves by having three internal segments. Its analysis process tends to be more difficult than on motive waves, due to different variations that can arise while the movement is in progress.

However, the corrective structure will be clear once the formation completes its internal sequence. In this context, the wave analyst has to be patient as the price action advances.

Rules Construction

In simple words, if price action doesn’t endorse the rules of an impulsive wave, as commented in our previous articles (read more), then the market advances in a corrective structure.

The basic, or standard, corrective patterns defined by Elliott are as follows:

  • Flat (3-3-5)
  • Zigzag (5-3-5)
  • Triangle (3-3-3-3-3)

Similarly as the alternations on impulsive waves, corrective waves also alternate in terms of price and time.

Price: This kind of alternation applies only to the zigzag pattern. Wave A will alternate with B in terms of price; wave B will be a 61.8% or lower than the wave A length.

Time: The alternation in terms of time acquires more relevance. In particular, if the first segment elapses a specific length of time, the second leg will advance in a related 61.8% or 161.8% of the time spent by wave A.

Finally, the third segment will last similar to one of the previous sections or be 61.8 or 161.8% span of one of the two earlier waves.

Flat Pattern

The flat pattern is characterized by having an internal subdivision that follows a 3-3-5 sequence. The next figure shows its structure.

Likely, its most important characteristic is that among the standard corrective formations, this pattern has the broadest kind of variations.

The construction process and its basic rules are as follows:

Once price completes its first movement against the trend, and its form holds an internal three-segment subdivision, the recovery developed by the next sequence has to be, also formed by three internal waves that advance at least 61.8% of the first decline.
Finally, the price progression of the C wave must be over 38.2% greater than wave A.

The flat pattern has several variations defined in terms of the strength of its wave B, wave C, or both.

To understand what type of flat formation and its depth the market is developing, we should trace two parallel horizontal lines from the A wave extremes. Thus, based on the obtained evidence, we can conclude that:

  1. If wave B moves between 61.8% and 81%, the flat pattern develops a weak wave B. In this case, the wave C should be at least 61.8% of wave B.
  2. If wave B moves between 81% and 100%, then the flat pattern advances in a normal wave B. In this scenario, there are two options for wave C, the failure, and the extended wave C.
  3. Finally, if wave B extends over 100% to 127.2% of the A wave, then we are in the presence of a strong wave B. In this case, waves A and C should be similar in terms of price.

The U.S. Dollar Index and its Flat Pattern

The U.S. Dollar Index (DXY), in its 2-hour chart, shows the progression that price developed in five waves from June 25th, 2019 low at 95.84.

The five-wave sequence identified in green was completed on July 09th at 97.59, from where the Greenback began to retrace in three waves. The figure reveals that after having completed the first decline identified as wave “a” in green, DXY bounced slightly over 81% of wave a, which makes us conclude that the U.S. Dollar index runs in a potential normal flat pattern.

The next decline corresponds to wave c; the figure shows that once pierced slightly below the end of wave a, the price found fresh buyers at 96.67 completing the three-wave sequence of the flat pattern.

Conclusions.

In this educational article, we review the concepts of corrective waves and its rules of construction. Similarly, we presented how corrective waves alternate in terms of price and time. These new concepts of alternation add to the definitions given in our basic level article on corrective waves.

On the other hand, we presented the flat pattern that the Dollar Index has recently developed and how this formation did not achieve the Fibonacci levels as stated by Gleen Neely in his work “Mastering Elliott Wave.”

In the next article, we will present the zigzag pattern and its analysis process.

Suggested Readings

  • Neely, G.; Mastering Elliott Wave: Presenting the Neely Method; Windsor Books; 2nd Edition (1990).
  • Prechter, R.; The Major Works of R. N. Elliott; New Classics Library; 2nd Edition (1990).
Categories
Forex Psychology

The Road to Become a Pro: The Trading Job Part 1

Except for elementary tasks, to do a job properly, it is commonly subdivided into several tasks or processes, each of them optimized to get the best results. To succeed in Forex trading, people need to think about trading as a job made up of several processes that the trader needs to do every day. 

Except for elementary tasks, to do a job properly, it is commonly subdivided into several tasks or processes, each of them optimized to get the best results. To succeed in Forex trading, people need to think about trading as a job made up of several processes that the trader needs to do every day. 

Except for elementary tasks, to do a job properly, it is commonly subdivided into several tasks or processes, each of them optimized to get the best results. To succeed in Forex trading, people need to think about trading as a job made up of several processes that the trader needs to do every day. 

There are three groups of processes a trader should do day, in day out plus another one that must be carried out periodically.

  • Preparation of the next trading session
  • The core trading processes
  • Post-session analysis 
  • Periodic review
  • Preparation for the session

Trading is like no other profession. Usually, when driving a car, the risk taken compared with the ability of people to predict where the vehicle is going is shallow, and even more so, when we think that it is in the interest of other drivers to avoid collisions against you. That is the opposite of what happens when trading the financial markets. Here, prices move to the direction of maximal pain, that is, pros and institutions, which have vast amounts of information about the trades of the rest of the crowd, move prices so as to hurt the most and profit from your “collisions.” Thus, even when just a few people recognize the fact, psychology plays a vital role in the success of the trader. 

Self-Assessment

According to Dr. Van K. Tharp, success is 60 percent self-control and 40 percent risk control. He also stated that the risk control part is 70 percent position sizing and 30 percent reward to risk ratio trades (cutting losses short and let profits run). Thus entries and exits, the basis of a trading system, account for just 12 percent of the total factors that make trading successful. That means traders need to work on themselves much more than on market analysis.

Traders also need to evaluate their physical and psychological conditions and prepare themselves before the opening of the session, since, as we saw, that they are the most crucial factor in their performance. Most top traders are aware that they must show a zen-like, emotion-free state of mind when trading. They call it Zero-state. 

Dr. Tharp contends that the propper psychological, mental state is the difference between profits and losses. That is quite true. Sometimes the edge a trader has over the market is tiny. That edge can be lost if the wrong mental state changes the equation, makes him modify or avoid a profitable entry or hold a losing trade too much, not following the rules.

Rate yourself

Before you start the trading session, rate yourself in your different facets (parts). Health, happiness, family relationships, economic condition, Self-image, your fear-greed state, your own market sentiment, and any other aspect you consider vital for you; and rate these aspects on a scale of 1 to 5 or 1 to 10. Make an index of all these and keep it. Check your trading performance in comparison with this index. Maybe you discover that trading below a certain level hurt your profits. You could make a rule not to trade unless your self-index is higher than a specific figure.

 Beliefs for Self-rating
  • I am crucial to successful trading
  • Being aware of how my brain works is a trading edge
  • Self-analysis can help my different mental parts to get in agreement
  • Trading with a self-rating below X hurt my profits
  • Success in trading is a measure of my mental performance
Best Mental States for self-rating
  • Honesty with yourself is crucial
  • Rational and meticulous
Mental strategy for self-rating
  • See yourself analyzing your condition
  • Identify and solve possible conflicts
  • Do the rating and judge if you are fit to trade today
  • if not, can you identify the part or parts with the lowest scores to improve them?
  • Yes? Go to Rehearsal
  • No? Avoid trading today.

Rehearsal

Rehearsal is a crucial element to improve almost any human activity. Visualizing the possible scenarios of future trades and identify your actions if one of them becomes real is key to success. Top athletes mentally rehearse his play before committing themselves to action. 

The rehearsal task is essential because your rational mind will be in command, and any fear or greed request sent by your subconscious (system one) mind can be easily spotted and analyzed if it is in collision with your planned course of action. That helps the trader avoid costly mistakes.

Beliefs for Rehearsal
  • Our capacity to process information is limited
  • Stress caused by our system one reduces that capacity further
  • Rehearsal helps our rational mind to take control of system one, which is irrational and primary
  • Better be prepared to act when needed, especially on disaster situations
  • Rehearsal will prevent mistakes and save money
The mental States for Rehearsal
  • Rational
  • Complete
  • Creative
  • Positive
Mental Strategy
  • Which unanticipated scenario can stop me from following the rules?
  •  For each trade: Plan the possible scenarios. Which stops and targets are optimal?
  • Mentally see yourself executing your solutions on every trade.

Further reading: Peak Performance Course Book 1 – How to use Risk, Van K. Tharp chapter V

Categories
Forex Fundamental Analysis

What Is Balance Of Trade & What Impact Does It Have On The Forex market?

Introduction

Introduction

Introduction

The Balance Of Trade AKA. BOT is essentially the difference or variance in a nation’s export and import. When understood correctly, this indicator can help us in evaluating the relative robustness of any given economy compared to the other ones. 

Understanding Balance Of Trade

In the simplest of analogies, consider a scenario where a rice seller sells $1000 worth of rice to other grain sellers in the market over a month. Within that month, if he had purchased $800 worth of goods like vegetables, fruits, etc. from the other vendors, his Balance Of Trade would be $200.

Here, in this example, the market is the entire world, and the rice seller is equivalent to a nation. $1000 is the net worth of the exported goods and services that went out of the country, whereas the $800 is the net worth of the imported goods and services that came into the country. In this case, $200 is the trade surplus that the country is having.

Therefore, Balance Of Trade can be considered as a difference between what goes out (exports) and what comes in (imports) over a given time frame. And depending on whether exports or imports are greater, a nation is said to be running a Trade Surplus or Trade Deficit, respectively. Fundamentally, an Export is when a foreign resident or nation purchases an in-country produced good or service, and an Import is when an in-country citizen purchases goods or services from foreign.

How is the Balance Of Trade calculated?

In the previous article, we understood the formula of a country’s current account. That is, Current Account = (Exports – Imports) + Net Income + Net Current Transfers.

In the above formula, (Exports – Imports) is the Balance of Trade.

How Can This Economic Indicator Be Used For Analysis?

Investors can use Balance Of Trade numbers to ascertain whether the overall economic activity of a nation has grown or slowed down concerning the previous month’s/quarter’s/year’s numbers. For example, a country which has seen a trade surplus for let’s say over ten years, and due to some calamities, its exports got hit. The nation might enter into a trade deficit or a reduced trade surplus. Such a relative comparison can help investors to ascertain whether a country’s economy is booming or slowing down.

In an absolute sense, a Trade surplus or Trade deficit, as discussed, cannot tell in entirety. But it will definitely give us a macroeconomic picture of an economy’s health and what the nation has undergone in the present business cycle. Let’s assume a country is a major exporter of oil for which it receives a majority of its income. If the production of oil is doubled, automatically there will be an increase in the demand for that currency worldwide. This will result in an appreciation of that country’s currency.

Not just this, but the Balance Of Trade can also point towards many things like an increase in employment or an oncoming expansion or recession when viewed with correct perspective and analysis.

Impact of Balance Of Trade on Currency

By simply looking at the BOT numbers, we cannot conclude whether a nation is experiencing growth or slow down straight away. Because the Balance Of Trade only projects a partial picture and not the whole picture.

A developing country might want to import more goods and services from abroad, which increases the competition in their respective markets. Thereby they keep the prices and inflation low. During these periods, that country will have a Trade Deficit. To an outsider, it will only look like the country is consuming more than it is producing. So this scenario can be wrongly assumed as the country’s economy is slowing down. But in reality, what if the country is experiencing a trade deficit for the first six months and a trade surplus for the next six months?

Developed nations like the United States and the U.K. have experienced long periods of trade deficits against developing and emerging economies like China and Japan, who have maintained trade surpluses for long times. Hence, the time frame, business cycles, the relative situation with other countries all factor in to give a correct interpretation to the BOT.

But in general, most of the time, an increase in the Balance of Trade number is good for Currency. It is a proportional indicator, meaning. Lower or negative Balance of Trade numbers relative to previous periods signals currency depreciation and vice versa.

Balance of Trade & Balance of Payments

BOT is a major component of a Nation’s BOPs, i.e., Balance Of Payments. Balance Of Payments, ideally, should always equate to zero, giving us a complete account of all things traded in and out of an economy. A nation can have a surplus while having a trade deficit. This happens when other components of Balance Of Payments like Financial Account or Capital Account run into large surpluses.

But in general, countries prefer to have a trade surplus, and it is obvious. A country in net terms receiving a gain or profit for their goods and services would mean that the people of that country will experience higher wealth, and it would automatically result in a higher standard of living. And also, by continually exporting, they would develop a competitive edge in the global market. This would also increase employment within the nation, which, in general, is favorable for the nation. But as said, it is always not necessary for this condition to be true. It depends on what goals the country has in mind for future short term deficits also matters.

Hence Balance Of Trade is one of the important indicators for analysts to ascertain a country’s economic activity and current health of an economy.

Economic Reports

Since the Balance of Trade is about imports and exports, data for the same is publicly available on a monthly basis for all the countries. The reports are released in the United States by the U.S. Bureau of Economic Analysis and the U.S. Census Bureau. The units would be typically in millions of dollars for most reports and for most nations. The popularly used reports are typically seasonally adjusted to give a more accurate report.

Sources of Balance Of Trade

To get the latest information about this economic indicator for the United States, you can refer to this link. To know all the diverse components involved in Balance Of Payments and International Trade, you can refer to this page from The Bureau Of Economic Analysis.

Impact Of ‘BOT’ News Release On The Price Charts

Now that we know the meaning of trade balance and how it affects the economy, we shall extend our discussion and understand how it impacts any of the currencies after the news announcement is made.

As we can see in the below image, the Trade Balance indicator has the least effect on currency (yellow indicator implies the least impact on currency). Hence, this might not cause extreme volatility in the currency pair after the news release. It is still important to understand the effect and look at how we can position ourselves in the market in such scenarios.

For illustration, we have chosen the New Zealand Dollar in our example, and we will analyze the latest’ Trade Balance’ data of the same. The data shows that Trade Balance was increased by 44M as compared to the previous reading, which is said to be positive for the currency. But let us see how the market reacted to this data after the announcement was made.

NZD/JPY | Before The Announcement - (Feb 26th, 2019)

The below chart shows that the overall trend is down, which means the New Zealand dollar is very weak. As said in the above paragraph that changes in Trade Balance of a country do not have much impact on the currency, so better than expected data can only cause a reversal of the trend. However, if the data is retained at previous reading, we can expect a continuation of the downtrend, and volatility will be more on the downside. We will be looking to trade the above currency on the ‘short’ side if the Trade Balance data is bad for the country since even positive data cannot push the currency higher.

NZD/JPY | After The Announcement - (Feb 26th, 2019)

After the news announcement, we see that the price crashed below the moving average, reacting to the not-so-good numbers of Trade Balance for New Zealand. The market participants were expecting much better Trade Balance data, but after seeing that it was increased by mere 44M, they were disappointed and hence sold New Zealand dollars. We can take advantage of this change in volatility by taking risk-free ‘short’ positions in the pair soon after the market falls below the moving average. We can hold on to our trade as long as the price is below the moving average and exit once we see signs of reversal.

GBP/NZD | Before The Announcement - (Feb 26th, 2019)

Here we can see that the New Zealand dollar is on the right-hand side, and since the market is in a downtrend, the currency is strong. In this situation, a risk-free way to trade this pair is by going ‘long’ if the Trade balance numbers are not good for the pair and after trend reversal signals. Since the downtrend is not very strong, we can take ‘short’ positions only if it breaks the recent ‘lows’ and shows signs of trend continuation.

GBP/NZD | After The Announcement - (Feb 26th, 2019)

After the numbers are out, we see the positive reaction for the New Zealand dollar as the numbers were better than last time, but it could not take it lower. Since the data was weak, we can ‘long’ positions in the pair once the price makes a ‘higher low’ after crossing above the moving average.

EUR/NZD | Before The Announcement - (Feb 26th, 2019)

The above chart represents the currency pair of EUR/NZD, which shows similar characteristics as that of the NZD/JPY pair but in reverse as the New Zealand dollar is on the right-hand side. In this pair, the New Zealand dollar is extremely weak, and we also the price is above the moving average showing the strength of the uptrend. Therefore taking’ short’ positions in this pair is not advisable even if the Trade Balance data is good for the New Zealand economy, as it is a less impactful event, and the reversal might not last. A better option would be to go ‘long’ in this pair.

EUR/NZD | After The Announcement - (Feb 26th, 2019)

After the news announcement, we see a red candle, and the price bounces off the moving average, continuing its uptrend. Since the data was not very positive, the market continues its uptrend, and thereby the New Zealand dollar weakens further. This could be the perfect setup for a ‘buy’ since all parameters are in our favor. The volatility here expands on the upside, after the news release.

That’s about the Balance of Trade and its impact on the Forex currency pairs. We just wanted to show how the markets get impacted after the news release. It is always advisable to combine these fundamental factors with technical analysis as well to ace the Forex markets. Cheers.

Categories
Forex Psychology

The Road to Become a Pro: Preparation

I see a lot of people approaching the financial markets as a way to get a second income or even be financially independent. The major part of them wants to invest in the financial markets but don’t have the time or interest in mastering the needed skills to really succeed. 

I see a lot of people approaching the financial markets as a way to get a second income or even be financially independent. The major part of them wants to invest in the financial markets but don’t have the time or interest in mastering the needed skills to really succeed. 

I see a lot of people approaching the financial markets as a way to get a second income or even be financially independent. The major part of them wants to invest in the financial markets but don’t have the time or interest in mastering the needed skills to really succeed. 

A minority of them are involved in acquiring those skills but think that to be successful, only the knowledge to forecast the markets is needed, most of them focused on learning one or several technical analysis methods that would allow them to do it.

The cruel reality is that the randomness of the markets is high, and forecasting is not deterministic. Thus, operating in leveraged markets makes the task much more difficult if traders are not aware of the statistical parameters and size limitations of the system in question. Thus, psychology comes into play as traders get confused and unable to act as losses accumulate, greed, and fear driving the decision process instead of the rational mind.

The preparation tasks

Dr. Van K. Tharp states in his Peak Performance Course series that top traders need to master 15 different tasks or processes, twelve related to trading, two preparation tasks, plus “being out of the market” task. The two tasks related to preparation are: 

  • Developing Self-awareness and 
  • Developing a low-risk game plan

Self-Awareness

This task aims to recognize our strengths and flaws, so we can profit from the first ones and overcome the second ones. For instance, if you are good at recognizing breakouts, you could focus on that kind of pattern to create your trading strategy. Another trader might have difficulty with decision making but is good at programming. Thus he could use his skills to develop a mechanical system that makes decisions for him.

Goal Settings to solve the conflict

Dr. Tharp rightfully states that most traders are nor aware of what they want to accomplish. Of course, they want to get the max out of the markets, but that statement says nothing about the right way they should go. Most of the time they have conflictive goals, they want profits but also avoid losses, be safe at the same time they risk capital. Most of the time, unresolved conflict of both primary desires spells catastrophe. The right way to solve personal issues is through goal setting. In the case of profit/risk conflict, traders must set goals for the monthly profits and verify these are congruent with the expected risks (drawdowns), and match both to fit him. Goal setting is part of developing a system that suits you, but to know what suits you, you need to know yourself. It is important to list all your desires and expectations about you and the markets.

Are you a risk-taker or avoid risk? Do you want to work 100 percent of the time looking at monitor screens or just to enter a trade? Do you like to plan in advance, or are you an intuitive trader acting the moment you feel a move?  

Development of a Low-risk Plan

The key to succeeding in the financial markets is not good forecasting, but profiting from low-risk ideas. A lot of traders only focus their attention on entries and forget that the exit is when the profits are realized. Also, since most traders want to avoid losses, they think that a high percentage of winners is the critical element of a sound trading system. Thus these traders end up scalping small profits and holding their substantial losses. Instead, the key to success is the opposite. Traders must create a written plan with a primary element: low-risk trades.

A low-risk idea is one in which the reward is higher than its risk. The property of high reward-to-risk ratios is better shown with an example. Let’s call the risk R and the reward a multiple n of R. It is evident that in a series of n trades, just one needs to be profitable to break-even. Thus, if continually trading using 5:1 RR ideas, only one profitable trade, every five trades is enough to keep us afloat. Therefore, it is in the trader’s interest to chose low-risk trades as protection for a drop in the percentage of winning trades.

Consistency by following your rules

A written plan consisting of a set of rules is essential. You need written rules so you can, later, analyze results and make changes to the rule that needs to be improved. If there are no rules, it is impossible to improve them. 

For instance, let’s suppose there is a stop-loss rule that cut losses at 1.5 ATR(10). Maybe, after some time, you see that there is a substantial portion of trades that reverse after your stop is hit. If your system has such a rule, and you keep a record of your past trades, you could do an analysis and conclude that your system could be optimized by changing the 1.5ATR to 1.8ATR, but that 1.9ART or more harms you in the risk side with no substantial improvement in the number of winning trades. That kind of analysis, obviously, is impossible if your stop-loss strategy is decided on each trade depending on your subjective feelings

Making money demands consistency and discipline. Trading rules are essential to both. To respect the rules is the factor to consistency, and a disciplined mind is required to adhere to the rules. With no rules, trading is a set or random entries and exits with no possible statistical value for future analysis and improvement. In this context, a mistake means not a losing trade, but not following the rules.

Further reading: Peak Performance Course Book 1 – How to use Risk, Van K. Tharp chapter V

Categories
Forex Fundamental Analysis

Comprehending ‘Current Account to GDP Ratio’ Economic Indicator

Introduction

Introduction

Introduction

The Current Account balance represents one half of the nation’s Balance Of Payments. This number typically ranges in billions and trillions. When trying to comprehend such big numbers, a strong understanding of what do these numbers represent in actuality is paramount.

What is the Current Account Balance?

The equations given below represent what Current Account balance is composed of and how it contributes to the nation’s Balance Of Payments

The current account balance is the sum of the Balance Of Trade, Net Income, and Net Current Transfers. Fundamentally, the Balance Of Trade represents the difference between total exports and imports of goods and services for that nation.

Balance Of Trade: The Balance Of Trade is the difference between the revenue generated by export and the expenditure incurred by the imports. A nation that exports more than what it imports is said to be running a trade surplus. Conversely, a country whose imports exceed its exports is said to be running a trade deficit. A country that is having a trade deficit is said to have a negative Balance Of Trade, and a trade surplus country is said to have a positive Balance Of Trade.

Net Income: It represents the income received by a country for its investments in areas like real estate or holding in foreign shares, etc.

Net Current Transfers: The net current transfer represents one-directional transfer between one Nation to another without any equivalent financial item in return. This may take the form of worker remittances, charitable fund transfer, or even relief funds, etc.

All these three components are combined to form what is called the current account balance of a nation.  A country with a negative current account balance is a net borrower from the rest of the world, and that which has a positive current account balance is a net lender to the rest of the world.

For example, the United States, which is running a negative current account balance, indicates that the nation is importing or consuming more than it is exporting or producing, thereby sending trillions of dollars out of the nation in exchange for equivalent goods and services.

Current Account & Capital Account

The Capital Account reflects the opposite of what current account balance shows. If a country is importing commodities by sending out money, it must receive an equivalent amount of money in one form or another from a certain set of sources. The Capital Account reflects those sources.

A country receives capital when its domestic assets are purchased by foreign bodies. The same country also spends money when it purchases foreign assets using domestic currency. The total of these both may result in a positive or negative capital account. A country running a negative current account balance must have, by definition, a positive equivalent capital account as the total of the entire Balance Of Payments should equal to zero.

How is the Current Account Balance to GDP calculated?

The current account balance, which often ranges in billions and trillions, is expressed as a percentage of GDP. The Bureau of Economic Analysis releases the current account balance quarterly, semi-annually, and annually. The World Bank publishes current account balance as a percentage of GDP for all the nations.

Below is the snapshot of the current account balance as a percentage of GDP for the United States published by the World Bank on their official website.

How can the Current Account Balance to GDP be Used for Analysis?

The current account balance is an entire country’s economic figure, and when calculated as a percentage of the Gross Domestic Product GDP, we can draw a lot of conclusions about the current economic situation within the nation.

We have to also keep in mind that simply a negative current account balance or its percentage does not mean that the economy is stagnating nor a positive current account balance indicates a growing economy. The United States has been running in a negative current account balance since 1980.

The current account balance is one part of the Balance Of Payments, and when we look in the absolute sense, we will not be able to assess the nation’s economic situation properly. Instead, if we look at the percentage concerning the previous number, we might be able to know whether the economic conditions have improved or declined concerning earlier periods.

For example, in the US, a $1.1 billion reduction of the current account deficit in the third quarter of 2019 concerning the previous quarter was mainly due to increased income and reduced goods deficits, as mentioned by the Bureau of Economic Analysis.

Impact On The Currency

The Current Account balance reflects the overall economic activity and the revenue circulation in and out of the country. As a percentage of GDP, it can give us a relative comparison on a global scale with other competing nations. In general, it is a proportional indicator. Meaning, an increase in the results in currency appreciation on a relative basis with previous periods and vice-versa.

On a relative basis, the measured changes in the percentages can help us understand which country’s economic activity has grown or contracted. Such macro-economic indicators are very useful for many people. For instance, Governments can take policy decisions or put appropriate pressure or give support to certain businesses, either increase or decrease economic activity.

Traders can also use these indicators to predict currency movement and may decide to invest. Large and unpredictable movements in the current account balance can shake the confidence of investors in either direction, i.e., positively or negatively.

Sources of Current Account Balance to GDP

The United States Bureau of Economic Analysis releases quarterly reports of the Current Account Balance numbers. It can be found here.

Also, the World Bank releases Current Account Balance as a percentage of GDP on its official website for many countries. Those numbers can be found here.

Impact Of ‘CA To GDP’ Announcement On The Price Charts

In this section of the article, we shall see how the Current Account % of GDP will impact the currency and cause a change in the volatility. We will be analyzing the Current Account % of GDP data of New Zealand by observing the changes in the data from previous reading to the current reading.

The Current Account % of GDP data is released every quarter, and thus we will have four readings in a year. The latest data available to us is of the 3rd quarter released in the month of December and the 4th quarter data will be released in March. As we can see below, this indicator has the least impact on the currency (Yellow Implies Least Impact), and we should not expect much volatility after the news announcement.

Below is the Current Account % of GDP of December quarter, which is released by the ‘Statistics New Zealand’ agency, which collects information from people and organizations through censuses and surveys. It is also known as ‘Stats NZ’ and is a government department. The data shows that the Current Account % of GDP was increased by 0.1%, which we will now see what impact it created on the charts.

NZD/CAD | Before The Announcement - (Dec 17th, 2019)

Before the news announcement market is in a clear downtrend and is attempting for a pullback. When we are talking about the impact of the news, we know that since it is a less impactful event, a better than expected result would mean a partial reversal of the trend. If the numbers are not that good for the ‘New Zealand Dollar’ we should expect a continuation of the current trend.

Thus, from a trading point of view, it is better to join the current downtrend if the Current Account % of GDP is maintained somewhere around the previous reading. We should not be going ‘long’ in the market even if the data is good for ‘New Zealand Dollar’ since the impact of the indicator is not high, and then the rally will not last.

NZD/CAD | After The Announcement - (Dec 17th, 2019)

The Current Account % to GDP was increased by 0.1%, which is mildly positive for the New Zealand Dollar. We see the initial reaction of the market where the candle barely closes in green. The volatility witnessed is also very less due to the above-mentioned reason.

Therefore, we can trade this currency pair on the ‘short’ side, after the price goes below the moving average line, which will our confirmation sign for the trend continuation. Since the news outcome was not good for the New Zealand Dollar, the downtrend could continue further, and we should be able to easily make a profit on the downside.

NZD/CHF | Before The Announcement - (Dec 17th, 2019)

  

NZD/CHF | After The Announcement - (Dec 17th, 2019)

The above chart represents the currency pair of NZD/CHF, which shows similar characteristics as that of the NZD/CAD currency pair. In this pair, we can notice that the news release did not even take the price above the moving average line, which means the data is very weak when compared to Swiss Franc. The market became volatile after the news release and took the price down. Thus, this is a much better pair for taking a ‘short’ trade with an amazing risk to reward ratio. We can also continue to hold on to our profits as long as the price is below the moving average.

EUR/NZD | Before The Announcement - (Dec 17th, 2019)

EUR/NZD | After The Announcement - (Dec 17th, 2019)

In this currency pair, the New Zealand Dollar is on the right side, so we see an uptrend illustrating the weakness of the currency. Since the Current Account % of GDP data was slightly positive for the New Zealand Dollar, we see a red candle after the news announcement, but later it was fully overshadowed by the green candle. This means the Current Account numbers were not good enough to take the currency lower.

What we see after the news release is a ‘Bullish Engulfing’ candlestick pattern, which is essentially a trend continuation pattern. Thus, once the price goes above the moving average line, we can enter for’ longs’ in this pair with a stop loss below the red candle and aiming for a new ‘higher high.

That’s about the Current Account To GDP ratio Economic Indicator and its impact on the Forex market. If you have any questions, please let us know in the comments below. All the best.

Categories
Forex Elliott Wave

Intermediate Wave Analysis – Impulsive Waves – Part 3

Impulsive waves are characterized by their directionality; thus creating trends; however, how the wave analyst can recognize the stage of the trend? To answer this question, we will present the canalization process.

Impulsive waves are characterized by their directionality; thus creating trends; however, how the wave analyst can recognize the stage of the trend? To answer this question, we will present the canalization process.

Impulsive waves are characterized by their directionality; thus creating trends; however, how the wave analyst can recognize the stage of the trend? To answer this question, we will present the canalization process.

Canalization

Until now, we presented a set of rules that allow that wave analyst to identify which kind of structure the price action is creating. However, these rules do not provide any clue about its target area.

To aid in solving this question, R.N. Elliott, in his Treatise, introduced the use of channels to identify the potential target zone of the next path.

Channels are a useful tool to recognize if an impulsive sequence is complete, and to identify the potential ending points of waves in progress.

In motive waves, there exist two kinds of base-line of channels; these are base-line 0-2 and 2-4. The way to trace them is as exposes the following figure.

In the left-side figure, we observe the trace of the 0-2 line. The dotted line represents a preliminary 0-2 line that was violated by the price action. In this case, the wave analyst must update the base-line 0-2 until the confirmed end of wave 2.

Once the ending of the second wave and traced the base-line is validated, the wave analyst must project a line parallel to the 0-2  line at the end of wave 1, this channel will provide a potential target of the third wave.

Analogously, on the right-side figure, we distinguish the trace of base-line 2-4 and its projection at the end of wave 3. The channel projection will provide the potential end of the fifth wave.

The procedure for executing the canalization process is as described below.

Once the price has created the first impulse wave and, then, completed the second corrective wave, a base-line is projected linking the origin of the first impulse wave to the end of the second wave.

The base-line is then projected at the end of wave 1. This channel will provide the wave analyst with the potential target of wave 3.

When wave 3 is complete, the ends of wave 1 and 3 are joined, then a parallel line is projected towards the end of wave 2.

The projection of this channel will provide information about the possible end of wave 4.

Subsequently, once wave 4 is complete, the ends of waves 2 and 4 are joined, then the line parallel to the end of wave 3 is projected, this channel will provide the potential target of wave 5.

EURNZD – Channels Suggests a Five-Wave Sequence Completion

The following chart illustrates to EURNZD cross in its 4-hour timeframe. From the figure, we observe the rally developed by price action that began on January 24th, low at level 1.66642.

EURNZD made a first rally that boosted the price in five waves until 1.71764 level reached on last February 02nd. Once its first upward sequence has been completed, the price retraced in three waves.

The corrective process brought the price to find fresh buyers at 1.67854 on February 10th. The completion of waves (i) and (ii) allow us to trace the first channel in blue, from where the next path corresponds to wave (iii).

On the figure, we observe that the price extended its third upward sequence until 1.78755 level on March 02nd. Once this fresh higher high was reached, EURNZD started to consolidate in a fourth wave. The ending of this corrective structure drives us to trace the second upward channel in brown.

The upper-line breakout of the second ascending channel carried the EURNZD cross to complete its fifth wave that found resistance at 1.90725 level, reached on March 09th.

Once it peaked at 1.90725 level, the price action pierced the base-line of the second ascending channel, this movement could drive the cross to start a corrective sequence in the coming trading sessions.

Conclusions

In this article, we have seen how the use of channels can assist the wave analyst in the process of identifying impulse wave targets.

From the example exposed, we observed how the canalization process worked in the real market. It is essential to consider that the fifth wave can fail, and not surpass the upper-line of the ascending channel.

In this context, the wave analyst should consider the signals that can reflect the end of the five-wave sequence, for example, the base-line breakdown.

Suggested Readings

  • Neely, G.; Mastering Elliott Wave: Presenting the Neely Method; Windsor Books; 2nd Edition (1990).
  • Prechter, R.; The Major Works of R. N. Elliott; New Classics Library; 2nd Edition (1990).
Categories
Forex Fundamental Analysis

How ‘Government Debt to GDP Ratio’ Impacts The Forex Market

‘8765Introduction

‘8765Introduction

‘8765Introduction

Government Debt to GDP is one of the main indicators which points towards the current health of an economy and its probable future monetary prospects. For a long time, analysts have used Government Debt to GDP ratio as one of the reliable indicators in ascertaining a country’s economic health and its resultant country’s currency worth.

What is the Government debt-to-GDP ratio?

The debt-to-GDP is the proportion of a country’s total public debt to its GDP (Gross Domestic Product). In simpler words, it is the ratio of what a country owes to what a country earns. The debt-to-GDP ratio of a country compares its sovereign money owed to its total economic output for the year. Here the output is measured by gross domestic product.

Why is the Government debt-to-GDP ratio important?

When we contrast what a nation owes against what it outputs, the debt-to-GDP ratio assuredly indicates a nation’s potential to repay its dues. The Government debt to GDP in many places is conveyed as a percentage. This ratio can also mean the time required by a nation to repay and close off the owed sum where we assume if GDP is entirety used for its debt repayment.

The Government debt-to-GDP ratio is a beneficial indicator for analysts, economists, investors, and leaders. It enables them to ascertain a country’s potential to repay its owed debt. An excessive debt to GDP ratio tells that the country isn’t generating enough output to be able to repay its debt. A small ratio means there is enough income to pay off the interest on its debt.

To elaborate in layman terms, consider this analogy where a nation is like an employee, and GDP is like his/her income. Financial Institutions will be willing to give a bigger loan if they earn a higher salary. In the same way, investors would come forward to take on a country’s debt if it generates more revenue.

If investors start to lose confidence in repayment by a country, they will tend to expect a higher return in the interest rate for their lent money for the higher defaulting risk. That results in the rise of the country’s cost of debt. It means the debt itself becomes more expensive in the sense that more money goes on in just paying interests only. Such situations can quickly become a financial crisis and thereby resulting in depreciation on their credit score. That will, in turn, impact their money lending capacity and credibility in the future.

How can Government debt-to-GDP ratio be Used for Analysis?

If a Government has spent more in the past than they have received in tax revenues, it means they are injecting more money into the economy than they are withdrawing and vice versa. In general, injections are inflationary and withdrawals deflationary. The higher the percentage of Debt to GDP a Government has, the more they have to spend to maintain inflation or GDP growth or risk defaulting on their debt.

As the debt to GDP ratio increases, Economic growth becomes more dependent on Public Spending. If the Government decides to cut public spending, then this would mean if all things being equal, reduce the debt to GDP ratio and be deflationary. The thing we need to notice here is that a higher debt to GDP ratio means there is more pressure to inflate. The only choices are to deflate (which is not desirable), default on the debt (not desirable), or to inflate further.

Historically 80% level of debt to GDP is usually seen as the trouble zone. The default zone is above 100%, where it means that what country earns is less than what country owes. Interest rate suppression is necessary to keep interest bill on Government debt to a minimum. At levels of 100%+ Debt to GDP Ratio, Governments have no choice but to continue to inflate further.

Impact on Currency

If a country’s debt-to-GDP ratio increases, it often points towards an oncoming recessionary period. When a country’s GDP decelerates during a contraction, it causes federal revenue, in the form of taxes and federal receipts, etc., declining.  This results in currency depreciation. In this type of situation, generally, the government tends to increase its public spending to spur growth in the economy. If this spending produces the desired effect, the recession will waive off. Taxes and federal revenues will again increase, and the debt-to-GDP ratio should accordingly return to normal.

When the entire world’s economy keeps on improving, investors will tolerate a higher exposure on their lent money because they seek higher returns. The returns on U.S. debt will increase as requests for U.S. Debt depreciates. If a particular country’s interest rate returns are higher than usual, we also need to keep in mind the fact that the probable reason for such high rates are either because the nation is already in a lot of debt, so it is very likely to default, and it certainly is in less demand in the market.

The country has to give out larger sums of interest to get them to purchase its bonds and lend their money to the Government. Hence, Investors generally choose developed nations or nations with a proven track record of repayment. In general, a decrease in the Debt to GDP number indicates a growing economy, which ultimately results in strengthening the currency.

Economic Reports

To calculate the debt-to-GDP ratio, we have to know mainly two things: the country’s current owed sum and the country’s generated revenue, i.e., its real Gross Domestic Product. This data is publicly available, and it is released quarterly. The majority of economic analysts, professional traders, look at total overall debt, but some institutions, like the CIA, only consider the total public debt to publish in their publishes.

Sources of Government Debt to GDP

The Research Division of St. Louis FRED is in the top 1% of all economics research departments worldwide. St. Louis Fed publications provide analysis, information, and instruction for the journalists, the general public, and students. These outlets allow us to effectively address economic trends, explore historical trends, and current data for economic policy.

For the United States, we can get a comprehensive analysis of Federal Debt, Total Public Debt, and Total Public Debt as a Percentage of Gross Domestic Product, Federal Surplus or Deficit. All of these details with illustrative historical analysis and many more subcategories of the same can be found in the St. Louis website.

Inflation Rates of some of the major economies can be found below.

United Kingdom | Australia | United States | Switzerland | Euro Area | Canada | Japan 

How ‘Government Debt to GDP Ratio’ News Release Affects The Price Charts?

After understanding the Government Debt to GDP economic indicator, we will now see how a currency is affected after the news announcement is made. To understand the effect, we have chosen ‘Brazilian Real’ as the reference currency, as the data available is appropriate for analyzing the impact made by the news.

The Debt-to-GDP ratio data has the least importance and does not cause much volatility in the currency pair after the news release. This is the reason why most countries do not announce the data every month and review the GDP ratio on a yearly basis. But Brazil is one country where the government releases the data on a monthly basis. Let us analyze the lastest Debt to GDP ratio of Brazil.

The Debt to GDP ratio of Brazil is released by the Brazilian Institute of Geography and Statistics (IBGE), which is the official agency responsible for the collection of various information about Brazil. We see that the Debt to GDP ratio was reduced by a mere 1.5% from the previous January’s ratio. Let us find out how the market reacted to this.

Note: The ‘Brazilian Real’ is an ’emerging currency’ which is not traded in high volumes and hence can appear to be illiquid at times.

USD/BRL | Before The Announcement - (Feb 28th, 2020)

In USD/BRL, the market before the news announcement is in an uptrend showing the weakness of the ‘Brazilian Real.’ The price, just before the data is about to release, has broken the moving average line, which could be a sign of reversal. As we mentioned in the previous section of the article, lower than expected reading is taken as positive for the currency and should strengthen the currency.

Hence if the data is much lower than 55.7%, we can take a ‘short’ trade and expect a trend reversal. In this case, we will also have a confirmation from the MA. Whereas if the data is maintained around the previous reading or increased, it is bad for the currency, and we need to wait for some trend continuation signs to join the uptrend.

USD/BRL | After The Announcement - (Feb 28th, 2020)

After the news announcement is made, traders see that there was not much change in the Debt to GDP ratio, where was it was reduced by just 1.5%. This is the reason why USD/BRL did not collapse, which would strengthen the ‘Brazilian Real.’ The price did go down for a while but later created a spike on the bottom and closed above the opening price.

This spike could be a sign of trend continuation, and one can go ‘long’ in the market with a stop loss below the ‘low’ of the spike and targeting the recent high. We are essentially taking advantage of the increase in volatility after the news announcement.

EUR/BRL | Before The Announcement - (Feb 28th, 2020)

EUR/BRL | After The Announcement - (Feb 28th, 2020)

The EUR/BRL currency pair shows similar characteristics as that of the USD/BRL pair but with a major difference that the price remains below the moving average most of the time. Even though a wonderful rejection is seen at the time of news announcement, it is advised to go ‘long’ in this pair with a smaller position size and taking profit at the earliest. The debt to GDP ratio was not reduced much to create an impact on the pair, which can be seen from the ranging nature of the market after the news release.

GBP/BRL | Before The Announcement - (Feb 28th, 2020)

GBP/BRL | After The Announcement - (Feb 28th, 2020)

In the above chart, we can see that the currency pair is already in a downtrend, showing the strength of the ‘Brazilian Real.’ Since the pair is in a strong downtrend, not so good news for the Brazilian Real would mean no reversal of the current trend. However, this currency pair could prove to be the best pair for trading among all other pairs if the news outcome is positive for the Brazilian Real as we will be trading with the trend.

After the news announcement is made, the market barely goes above the moving average, which means going ‘long’ in this pair can be very risky. Therefore, the only way to trade in such scenarios is when the news outcome is positive for the currency pair on the right-hand side and profit on the downside.

That’s about Government Debt To GDP Ratio and its impact on some of the Forex currency pairs. In case of any queries, let us know in the comments below. Cheers.

Categories
Forex Daily Topic Forex Psychology

What does it take to Replicate Success?

Replicating something is done by taking a model and copying it. To become a successful trader, beginners should replicate, or model, a successful trader. But what does it take to replicate Success?

Replicating something is done by taking a model and copying it. To become a successful trader, beginners should replicate, or model, a successful trader. But what does it take to replicate Success?

Replicating something is done by taking a model and copying it. To become a successful trader, beginners should replicate, or model, a successful trader. But what does it take to replicate Success?

The Model

To replicate a model, we need first to define and subdivide it into sub-processes or tasks. According to Dr. Van K. Tharp, the needed subtasks required to master to become a successful trader are:

 The trading process

  1. The process of trading
  2. The process of developing a trading system that fits the trader
  3. The process of objective definition and risk management
  4. The process of a business plan as a document that guides decision-making.

Of course, to aim for excellence, we need to model the best traders in class. 

The first step is to subdivide the model into sub-tasks. Once the tasks have been defined, we need to attach beliefs, mental states, and mental strategies for each one. The purpose is to duplicate the way a successful trader thinks and acts. If we can achieve this feat, we are sure the results can be replicated.

The beliefs

According to Dr. Tharp, beliefs act as the first filter to transform the information coming from the world. Beliefs, meanings, categorizations, and comparisons determine how people perceive the real world. What a trader expects from the market depends largely on his beliefs about it. That which is called market sentiment is really “market beliefs.”

Since beliefs are filters to reality, it is wise to classify them, by asking ourselves the following

  • Where did this belief come from?
  • How useful is it?
  • How does it limit my actions?

This process helps us keep and improve valuable beliefs and get rid of un-useful ones.

Mental States

The next step to generate success is duplicating the mental state of top traders. It has to do with discipline and emotional control. When people carry their mental problems to trading their results usually come from an improper mental state, not suited to trading:

  • I’m impatient and always get in too early
  • I get mad at markets. They seem to know when I trade just to do the opposite
  • I’m afraid the market is against me now that I’m wining
  • I get too excited when I’m winning and don’t get out in time.

Controlling these states is not the solution to solve all problems. It is just one part of it. Dr. Van K. Tharp tells that in the ideal model to the trading success, each task has an optimal mental state attached to it. 

Mental Strategies

 A mental strategy is a sequence of thoughts that go from a stimulus coming any of your senses to output or action. Let’s create an example with two possible mental strategies for the same stimulus to better understand the concept.

Mental Strategy One:
  • perceiving a trading signal
  • realizing it is a known signal
  • Think about what can go wrong if you take it
  • Visualize the scenario
  • Feel afraid
Mental Strategy Two
  • Perceiving the Signal
  • Recognize it as part of your system
  • Feel good your system delivers you a new opportunity
  • Take it and trade

What do you think is the right strategy for trading? Could you take action and trade consistently using mental strategy one?

As in the case of the mental states, each trading task requires an optimal mental strategy to optimize the results.  That will be developed in future articles.

Further Reading: Peak Performance Course Book 1- How to use Risk, Van K. Tharp.

Categories
Forex Fundamental Analysis

What Is ‘Inflation Rate’ & Why Is It One Of The Most Important Fundamental Indicators?

Introduction

Introduction

Introduction

Based on the current inflation rate and future monetary policies, we can effectively gauge the current economic situation of a country. Using the Inflation rate data, we can also get an insight into the current currency’s value and in which direction the economy is heading towards. Hence we must look at this key indicator in its depth to solidify our fundamental analysis.

What is Inflation?

In Economics, Inflation is the increase in the prices of goods & services, and the resultant fall in the purchasing power of a currency. What this means, in general, is that when a country experiences Inflation, the prices of the most commonly used goods & services by the citizens of a country increase. Because of this, the average person has to spend more money to buy the same amount of goods which cost less in the previous period.

For instance, if John went to a grocery store to purchase his monthly groceries, and it cost him 100$ in 2018. Next year, i.e., in 2019, John goes to the same store to buy the same set of goods, and it had cost him 105$. Now John either has to remove some items or pay more to make the same purchase. Here John has experienced Inflation of 5%.

What is Inflation Rate?

The percentage increase in the price of goods & services over a period (usually monthly or yearly) is called the Inflation Rate. In our previous example of John, we see we have an inflation rate of 5%.

Inflation Rate is compounding in nature, i.e., it is always calculated with reference to the most recent statistic and not any particular base year or a base inflation rate. For example, if John were to buy the same goods in 2020, if it costs him 110$, then John has experienced 4.54% of Inflation and not 10% inflation.

Why is Inflation Rate important?

Inflation, in general, when kept in check, is good for an economy as it fuels growth. The increase in the prices of common goods and services means people have to compete and work better to earn more to meet their needs. But as in any case, excess or high Inflation can be crippling for an economy.

Because the citizens of the country get poorer when the purchasing power of the currency falls due to a high increase in prices, inflation Rates can be used to gauge the current financial health of an economy and what the citizens of a country are currently experiencing.

How does Inflation Occur?

A general view in the economic sector is that steady Inflation occurs when the money supply in the country outpaces economic growth. It means more currency is being circulated into the economy than its equivalent activity (revenue-generating practices). Inflation occurs mainly due to the rise in prices. But in brief, Inflation can occur due to the following situations:

Demand-Supply Gap: When the demand for a particular good is higher than the supply or production of the same, then there is a natural surge in the price of that good.

Increased Money Supply: When more money is in circulation in the economy, it means an individual has more disposable cash. This increases consumer spending due to a positive future sentiment resulting in increased demand, which ultimately increases the price of goods.

Cost-Push Effect: When the cost of inputs to the process of manufacturing good increases, it coherently increases the overall cost of the finished good. This results in a higher selling price of goods, which ultimately results in Inflation.

Built-In: Built-in inflation happens when there is a sort of feedback loop in the prices of goods and incomes of people. As people demand higher wages to meet the needs, it results in higher prices of goods and services to fund their demand and vice-versa. This adaptive price and wage adjustment automatically feed off each other and result in an increase in prices.

How is Inflation measured?

Based on different sectors, the costs of different sets of goods & services are used to calculate different inflation indexes. However, there are some most commonly used inflation indices in the market, like the Consumer Price Index (CPI) and Producer Price Index (PPI) in the United States.

Consumer Price Index (CPI): The Bureau of Labor Statistics (BLS) surveys the prices of 80,000 consumer items to create the Index and publishes it on a monthly basis. It is a measure of an aggregate price level of most commonly purchased goods and services like food, shelter, clothing, and transportation fares. Service fees like water and sewer service, sales taxes by the urban population, which represent 87% of the US population, are weighted into the percentage, based on their importance in terms of need.

Changes in CPI are used to ascertain the retail-price changes associated with the Cost of Living, and hence it is used widely to assess Inflation in the USA. In this Index, there are many subcategories wherein certain goods are either included or excluded to give a more accurate picture of Inflation in absolute or relative terms. For example, Core CPI strips away food, gas, and oil prices from the equation whose prices are volatile in nature.

Producer Price Index (PPI): It measures the average change in the selling prices received by domestic producers for their output over a period of time (usually monthly). Unlike CPI, which measures retail prices from the viewpoint of end customers who purchase the items, PPI measures the prices at which goods and services are sold to outlets from the manufacturer. PPI measures the first commercial transaction, and hence it does not include the various taxes and service costs that are associated and built into the CPI.

PPI vs. CPI

PPI measures the change in average prices that an initial-producer or manufacturer receives whilst CPI estimates the change in average prices that an end-consumer pays out. The prices received by the producers differ from the prices paid by the end-consumers, on the basis of a variety of factors like taxes, trade, transport cost, and distribution margin, etc.

Sources of Inflation Indexes

The US Bureau of Labor Statistics releases all the above-mentioned indexes here:

Consumer Price Index | Producer Price Index 

Inflation Rates of some of the major economies can be found below.

United Kingdom | Australia | United States | Switzerland | Euro Area | Canada | Japan 

How ”Inflation Rate” News Release Affects The Price Charts?

In this section of the article, we shall find out how the Inflation rate news announcement will impact the US Dollar and notice the change in volatility after the news is released. As discussed above, CPI is a well-known indicator of Inflation as it measures the change in the price of goods and services consumed by households. Therefore, the data which we should be paying attention to is the CPI values and analyze its numbers. We can see that the Inflation Rate does have a high impact on the currency of the respective country.

Below, we can see the month-on-month numbers of CPI, which is released by the US Bureau of Labor Statistics. The data shows that the CPI was increased by 0.1% compared to the previous month, which is exactly what the analysts forecasted.

Now, let’s see how this news release made an impact on the Forex price charts.

USD/JPY | Before The Announcement - (Feb 13th, 2020)

On the chart, we have plotted a 20 ”period” Moving Average to give us a clear direction of the market. From the above chart, it is clear that the US Dollar is in a strong downtrend, which is also evident from the fact that the price remains below the ”Moving Average” throughout. Just before the news announcement, we see a ranging action, which means the market is in a confused state.

Now we have two options with us, one, to ”long” in the market if there is a sudden large movement on the upside and, two, to take advantage of the volatility in either direction by trading in ”options.” We recommend to go with the first option only if you have a large risk appetite, else choose the second option by not having any directional bias. Let us see which of the above options will be suitable after the news announcement is made.

USD/JPY | After The Announcement - (Feb 13th, 2020)

After the CPI numbers are announced, we see that the price does not go up by a lot, and it creates a spike on the top and falls below the moving average. It is very apparent that the news did not create the expected volatility in the above currency pair. From the trading point of view, in the two options discussed above, the first one is completely ruled out as the market did not show a strong bullish sign, and if we had gone with the second option, we would land in no-loss/no-profit situation.

The reason for extremely low volatility after the news announcement can be explained by the fact that the CPI numbers were merely increased by 0.1%. Since an increase in CPI is positive for the US Dollar, the market does not fall much and continues to hover around the same price.

AUD/USD | Before The Announcement - (Feb 13th, 2020)

AUD/USD | After The Announcement - (Feb 13th, 2020)

The above charts represent the currency pair of AUD/USD. Here since the US dollar is on the right side, we should see a red candle after the news release since the CPI data was good for the US dollar. By looking at the reaction of the market, we can say that the volatility did increase after the news announcement, which means AUD/USD proved to be better compared to USD/JPY.

A mere rise in the CPI number was good enough for the currency pair to turn into a downtrend from an uptrend. One can also see that the price goes below the moving average indicator. This means that the Australian Dollar is a very weak pair compared to the US dollar, the reason why the US dollar became so strong after the news release. Hence one can take a ”short” trade in the currency pair after the price breaks the MA line.

NZD/USD | Before The Announcement - (Feb 13th, 2020)

NZD/USD | After The Announcement - (Feb 13th, 2020)

The above charts represent the currency pair of NZD/USD. It shows similar characteristics as that of the AUD/USD pair before and after the news announcement. The CPI data caused the US dollar to strengthen against the New Zealand dollar, where the volatility change can be seen when the market turns into a downtrend.

The CPI data did have a positive impact on the currency pair, but the pair did not collapse. This means the data may not be very positive against the New Zealand dollar, where the price just remains on the MA line after news release and does point to a clear downtrend. Hence, all traders who went ”short” in this pair should look to take profits early in such market conditions as the market can reverse anytime.

That’s about Inflation Rates and its impact on some of the major Forex currency pairs. If you have any queries, please let us know in the comments below. Cheers.

Categories
Forex Psychology

Trading Psychology -Are you a Trader?

What defines you as a trader? What is the secret ingredient that makes an ordinary person a trader?

What defines you as a trader? What is the secret ingredient that makes an ordinary person a trader?

What defines you as a trader? What is the secret ingredient that makes an ordinary person a trader?

Dr. Van K. Tharp, in his first Peak Performance, tells the story of Jack, a wannabe trader that, after more than ten years losing money in the markets he discovered a trader who had made consistent profits in the markets for 30 years. This great trader was willing to teach him if he was committed to learning how to trade properly.

Jack told him he wanted to be a trader, and he understood he, the old trader, was willing to teach how to do it.

The trader said, “yes, I’ll teach anyone, but most people are not fit to learn. All I ask is to do what I tell them to. Many people say he will, but most of them don’t even finish his first assignment.”

Jack told him about his failures and his inability to follow supposedly successful systems that somehow it didn’t work for him. Then, he asked the old trader about his secret to success.

“I am a trader,” told Jack.

“I know it, said Jack, but what is the secret?”

“I have told you: I am a Trader. You are a game player. When you’re fully committed to becoming a trader, you’ll understand. Are you really entirely committed to become a trader?”

Commitment

Commitment means a person is focused on and putting all efforts to accomplish a goal. To show you the difference between commitment and lack of it lets us understand the following cases:

  • Case 1 A Trader made a profit in the market but did not follow his strategy rules.
  • Case 2 A trader entered a position with his system but is continually fearing the market will move against him
  • Case 3 A trader has subscribed to a signals service supplied by a successful trader but, somehow, he cannot trust them, so he cherry-pick them.

Contrast these cases with the following ones:

  •  Case 4 A trader made a profit strictly following his trading strategy.
  • Case 5 A trader entered a position not knowing the outcome of the trade, but being sure his system will make him money each month if he followed the rules of the strategy.
  • Case 6 A trader is entering all the trades the signal service provides, because he trusts the service, and records all trades for analysis purposes.

We can clearly see the contrast between cases 1-3 and cases 4-6. In the first case, the trader felt unsure, and we see there was an inner conflict between what he should do and that he felt. In the last cases, the trader was in sync with the method. There was no conflict between theory and practice.

According to Dr. Van K. Tharp, conflict is the result of people being fragmented internally. The different parts that make the personality of a person trying to accomplish particular positive purposes by following certain primary behaviors. Not all of these responses are congruent; thus, they push the person towards different directions. For instance, a role that supports a trade decision might be in conflict with the inner part of the trader that tries to avoid risk.

Obstacles to Success

Traders think that to trade successfully is as simple as knowing when to enter and exit. The issue is, when they realize that having always winning trades is not possible, they find two main obstacles: 

  • Not reaching the profits they wish, or 
  • Try to avoid losses. In fact, both issues are related. 

When a person tries to avoid losses, she holds into the loss hoping it the price will reverse and come to his favor. Then when a small paper profit shows, she closes it at once on fear the price would reverse and become a loss. Finally, she is cutting profits short and let losses run, which is a recipe for disaster.

The truth is in there

The real problem lies inside the trader’s head. People tend to avoid working on themselves, as it’s too uncomfortable, so they shift their problems and blame the market. For example, people seldom record their trades for later analysis. Therefore, they are not sure if the system fails or is himself. Then, they have second thoughts about every trade, so they cherry-pick the trades.

Also, they don’t use predefined targets or stop-loss levels, so they decide to stay or get out of the trade solely based on his inner feelings. Thus, in the end, they succumb to their biases. What’s worse, his system is totally random on entries and exits. Finally, since they do not register their trades, there is no way to know the properties of his system or devise ways to optimize it on entries, take-profits, and stop-loss settings.

The end of it is, the trader will doubt or quit the system after a perfectly normal losing streak because he lacks the information needed to verify if the current performance of the strategy is normal or not.

Winning and losing

Many people that are attracted to the markets by their huge potential profits don’t accept losing. But, the reality is there is no sure system to trade the markets. There is an element of chance or risk; thus, some trades will inevitably be losers, and traders have to accept losing. If a person wants to only win, the markets are not the place to be. To be successful, there is no need to be right all the time. Not even 50% of the time. A scientist may spend five years in the lab doing unsuccessful experiments until the last one pays and discovers something worth all the effort and time. A trader may be successful just one every five trades and be entirely successful. In the trading job, a winning rate and Reward-to-risk ratio combination is the key to success. 

Developing Commitment

According to Dr. Van K. Tharp, developing commitment is a three-step process.

 Step 1

Determine your own obstacles. List them on a document. If you’re not sure about them, keep a diary of your trades, reviewing it every week. Look for the obstacles you are encountering.

Step 2

Analyze every obstacle and try to see what is going on in your mind, what is the common element. Not taking losses? Cherrypicking trades? Taking profits too early? Not keeping your diary properly?. Do some inner research, try to find out what’s inside your head. Doubt, fear, unsure about your strategy?

Step 3

This step has to do with dealing with whatever is inside you that is sabotaging your trades. You must make peace with your obstacles. One way to deal with them, says Dr. Tharp, is to go to the extremes. For instance, if your problem is with losses, imagine taking a huge loss. As you keep doing this exercise, you will find it easier to cut your losses soon.

You should find the parts of your mind that are key to the conflict and negotiate between the parts, to spot behaviors that could fit both parts in conflict.

Further reading: Peak Performance Course Book 1 – How to use Risk, Van K. Tharp

 

Categories
Forex Fundamental Analysis

Understanding ‘Interest Rate’ & It’s Impact On Various Currency Pairs

Introduction

Introduction

Introduction

Economic indicators measure how strong the economy of a country is. They `can measure specific sectors of the economy, such as housing or manufacturing sector, or they give measurements of the country as a whole, such as GDP or Unemployment. The following article will explain one such crucial economic indicator that drives the value of the currency – Interest Rate.

What is Interest Rate?

The interest rate is a fee we are supposed to pay for the money we borrow from the bank. It is generally expressed in terms of a percentage on the principal amount borrowed. The Bank’s primary source of income comes from the difference in the interest rate they charge to the borrowers and the lenders. They operate and profit from the difference between these rates.

When interest rates are high in a country, banks find it difficult to pass on such rates to consumers as it corresponds to fewer loans and more savings. This reduces spending in people, which will have an impact on the economy. Also, raising the interest rates curbs inflation and thus improves the economy.

Types of Interest Rates

The interest rate is frequently used by money managers while making investment decisions, and they look at different types of rates. The different kinds of Rates are Nominal, Real, and Effective interest rates. These are classified on the basis of critical economic factors that can help investors become smarter consumers and better investors. Let’s understand each of these types below.

Nominal Interest Rate

Nominal Interest Rate is the rate that is stated on a loan or bond. It signifies the actual price which the borrowers need to pay lenders in order to use their money. For example, if the nominal rate on loan is 10%, borrowers can expect to pay $10 of interest for every $100 they borrow from the lenders. This is referred to as the coupon rate because it used to be stamped on coupons that were redeemed by bondholders.

Real Interest Rate

It is named this way because, unlike the Nominal Interest Rate, it considers Inflation to give investors an appropriate measure of the consumer’s buying power. If an annually compounding bond gives an 8% Nominal yield and the inflation rate is 4%, the real rate of interest is only 4%. This can be put in the form of an equation as:

Real Interest Rate = Nominal Interest Rate – Inflation Rate

There are other pieces of information that the above formula provides in addition to the Real Rate. Borrowers and investors make use of this info to make informed financial decisions. They are:

  • When the Inflation Rates are negative, Real Rates exceed Nominal Rates, and the opposite is true when Inflation Rates are favorable.
  • There is one theory that suggests that Inflation Rate moves alongside the Nominal Interest Rate over time. Therefore, investors who have a long time horizon will be able to get investment returns on an Inflation-adjusted basis.
Effective Interest Rate

This type of Interest Rate takes the concept of compounding into account that the investors and borrowers need to be aware of. Let us understand how Effective Interest rate works with an example. If a bond pays 8% annually and compounds semi-annually, an investor who invests $1000 in this bond will receive $40 of interest payments for the first six months and $41.6 of interest for the next six months. In total, the investor gets $81.6 for the year. In this example, the Nominal Rate is 8%, and the Effective Interest Rate is 8.16%.

Economic reports & Frequency of the release 

Federal Open Market Committee (FOMC) members vote on where to set the Target Interest Rate. Later, they release the reports on the same with the actual rate and analysis. The policies of Central Banks also have an impact on the Interest Rates of a country. The Reserve Bank members hold meetings eight times a year and once every six weeks to evaluate the Interest Rates. These economic reports are published on a monthly and quarterly basis, and investors can compare the previous Interest Rates to Current Rates and analyze how they changed over time.

Impact on Currency

Investors are always interested in countries that have the highest Interest Rate, and they are more likely to invest in that economy. The demand for local currency is expected to increase, which leads to an increase in value.

High-Interest Rate means residents of that country get a higher rate of return on the deposit they made in banks and on capital investments. So obviously, investors will invest their capital in countries where they get a higher rate of return for holding their money.

Under normal economic circumstances, when investments increase in a country, the value of the currency appreciates and thus attracting the traders across the world.

Sources of information on Interest Rate

The Interest Rate data of some of the major economies can be found in the below references. The Rates of the respective countries are also available on the Reserve Bank website. However, the FOMC makes an annual report on the Interest rate that can be found here.

Authentic Sources To Find The Info On Interest Rates 

GBP – https://tradingeconomics.com/united-kingdom/interest-rate

AUD – https://tradingeconomics.com/australia/interest-rate

USD – https://tradingeconomics.com/united-states/interest-rate

CHF – https://tradingeconomics.com/switzerland/interest-rate

EUR – https://tradingeconomics.com/euro-area/interest-rate

CAD – https://tradingeconomics.com/canada/interest-rate

NZD – https://tradingeconomics.com/new-zealand/interest-rate

JPY – https://tradingeconomics.com/japan/interest-rate  

Interest Rate is one of the crucial factors that impact the currency of a country. It is especially crucial for traders who prefer taking trades on Fundamental analysis. But it is advised not to trade just based on this fundamental indicator alone. It is always better to combine the fundamental factors with proper technical analysis to get an edge over the market.

How ‘Interest Rate’ News Release Affects The Price Charts?

It is important to understand how the new releases of macroeconomic indicators like interest rates have an impact on the price charts. Below, we have provided some of the examples to demonstrate the impact of Interest Rates news release on various Forex markets. There is a reliable forum where all the government news release date is published, and it is known as Forex Factory.  Here, we can find all the present and historical information regarding most of the fundamental indicators like GDP, Interest Rates, Inflation Rate, etc.

Below we can see a snapshot taken from the Forex Factory website. FOMC (Federal Open Market Committee) is a branch of the Federal Reserve Board that releases the Interest Rate data according to the predetermined frequency. On the right, we can see a legend that indicates the level of impact the Fundamental Indicator has on the corresponding currency.

Below, we can see the latest figures for Interest Rate data released by FOMC. We can see that the rate hasn’t changed from the previous release (both Actual and Previous being 1.75%)

 

Now, let’s see how this news release made an impact on the Forex price charts.

USD/JPY | Before The Announcement - (Jan 29th, 2020 | Just Before 2:00 PM)

From the above chart, it is clear that before the news releases, the market was in a consolidation state (observe the last few candles.) Most of the Fundamental traders and investors must be waiting for the latest Interest Rate numbers. We have also plotted an MA on the chart to identify the market direction, and we can see the MA also being flat before the news release.

USD/JPY | After The Announcement - (Jan 29th, 2020 | Just After 2:00 PM)

Right after the release, we can observe a Bullish candle, which shows the initial reaction to the Interest Rate. It seemed to be positive for the US dollar, but later the market collapsed. The Interest Rates remained unchanged and were maintained the same as before, which should be positive for the US dollar. Hence, we see that initial reaction.

But why did the market collapse after a few minutes? This is because the market was expecting a rise in the interest rates, but FOMC kept a neutral stance and did not raise the rates. This explains the reason why the market fell after the announcement. The MA, too, does not rise exponentially, which shows the weakness of the buyers.

Since the market moved quite violently, later, the news release could prove to be profitable for the option traders who did not have any directional bias. There will be many traders who would want to take advantage of the market volatility right after the news release. So, even before the news is out, they employ various options strategies and make a profit. This requires a high amount of experience and knowledge of options and is not recommended for beginners. Now, let’s quickly see how this new release has impacted some of the other major Forex currency pairs.

USD/CAD | Before The Announcement - (Jan 29th, 2020 | Just Before 2:00 PM)

USD/CAD | After The Announcement - (Jan 29th, 2020 | Just After 2:00 PM)

From the above charts, it is clear that the USD/CAD pair shows similar characteristics as that of our USD/JPY example. The last few candles before the news release portray a bit of consolidation prior to the news release, followed by a spike during the news announcement and then finally a collapse. One can take short trade in this pair and make a profit on the downside. Make sure to combine this with technical analysis for extra confirmation.

 AUD/USD | Before The Announcement - (Jan 29th, 2020 | Just Before 2:00 PM)

AUD/USD | After The Announcement - (Jan 29th, 2020 | Just After 2:00 PM)

Since the US dollar is on the right side in this pair, ideally, we should see a bullish momentum after the news release. We can see that right after the release, the market prints a spike on the downside and forms a ‘hanging man’ pattern, which could be a sign of trend reversal. It can be clearly observed that the news had a significant impact on this pair as it reversed the trend almost completely.

Bottom Line

All we wanted to say is that the major Fundamental Indicators do have a significant impact on the price charts. At times we can see that these news releases can increase the market volatility significantly and even change the direction of the underlying trend. When we combine these Fundamental Factors with the Technical Analysis, we will be able to predict the market accurately and take trades with at most accuracy. Cheers!

We hope you find this article informative. If you have any questions, let us know in the comments below. Cheers!

Categories
Forex Elliott Wave

Intermediate Wave Analysis – Motive Waves – Part 2

In our previous article, we covered the main rules of impulsive waves. In this educational post, we’ll present a complimentary set of rules of the impulsive waves.

In our previous article, we covered the main rules of impulsive waves. In this educational post, we’ll present a complimentary set of rules of the impulsive waves.

In our previous article, we covered the main rules of impulsive waves. In this educational post, we’ll present a complimentary set of rules of the impulsive waves.

The Alternation Rule

The alternation rule, as defined by R.N. Elliott, is not an author’s invention, alternation exists from the beginning of the universe, and this is a principle that governs nature. In the same way that the day alternates with the night, bullish market alternates with the bearish.

This rule is the foundation of wave theory; without the alternation, the wave theory would not exist. This rule states, “when two consecutive waves are compared, one must be different from the other and both must also be unique in form.

The essential element that distinguishes the alternation in the wave analysis is time. In other words, this means that if a movement on one wave occurs a reduced time span, the next move should take place in an extensive period compared with the previous move.

In wave theory, we observe the alternation in the following characteristics:

  1. Price: it is the vertical distance that the market advances.
  2. Time: it is the horizontal distance elapsed in the market progress.
  3. Severity: this corresponds to the percentage that price retraces an impulsive movement.
  4. Complexity: corresponds to the number of segments that conforms to the wave sequence.
  5. Construction: corresponds to the type of formation that market develops, for example, flat, zigzag, triangle, etc.

The Equality Rule

  1. The extension rule says that in an impulsive sequence, one of three motive waves must be the most extended. When the wave analyst has identified the extended wave, then, can apply the equality rule that refers to the other two waves that are as follows:1. If wave 1 is extended, then the rule applies to waves 3 and 5.
  2. If wave 3 is extended, then the rule applies to waves 1 and 5.
  3. If wave 5 is extended, then the rule applies to waves 1 and 3.

The equality rule establishes that two of non-extended waves tends to be equal in terms of price, time, or both.

This rule is useful, especially when the third wave is the extended wave, and the fifth fails. However, it is not helpful when the first wave is extended or is a terminal formation.

Superposition Rule

The superposition principle can be used in two different ways depending on the kind of impulsive structure; it means if the motive wave corresponds to a trend movement or a terminal sequence.

If the price action develops a trend movement, then waves two and four will never overlap. In terms of its internal sequence, the motive wave will have a 5-3-5-3-5 sequence.

If the price action follows a terminal move, then wave four will penetrate the second wave area partially. The internal subdivision of this find of waves will follow a 3-3-3-3-3 sequence.

GBPUSD Pair Follows the Elliott Wave Principle

The GBPUSD pair in its 12-hour chart illustrates the Elliott wave principle in the real market.

In the figure, we observe how the GBPUSD pair follows the Elliott wave principle. Firstly, the motive wave has five internal segments that create an upward trend; the third wave is not the shortest, and as shown in the chart, the third move corresponds to the extended wave.

Once finished the five-wave sequence, it starts a corrective move in the opposite direction of the trend following a three-wave structure, which still seems in progress.

Following the alternation rule, we observe that the first wave advanced 625 pips in 17 days, while the third jumped 817 pips in 11 days. Finally, the fifth wave ran 691 pips in 16 days. These measurements enable us to observe that the GBPUSD comply with the extension, equality, and superposition rules.

At the same time, we observe that corrective waves also alternates between themselves. The second wave retraced the movement formed by the first wave in 16 days, while the fourth wave retraced the advances of the third wave during 36 days.

Conclusion

In this article, we extended the toolbox for the wave analysis process, from where rules as the alternation, equality, and superposition, add to the seven basic rules and extension defined in our previous educational post.

In our next educational post, we will present the canalization process, which will allow the wave analyst to understand the price action from the Elliott wave perspective.

Suggested Readings

  • Neely, G.; Mastering Elliott Wave: Presenting the Neely Method; Windsor Books; 2nd Edition (1990).
  • Prechter, R.; The Major Works of R. N. Elliott; New Classics Library; 2nd Edition (1990).
Categories
Forex Daily Topic Forex Psychology

Sentiment Analysis- An Introduction

 

 

 

Market Sentiment

The Market sentiment term is used in reference to the mood of the market traders. Sometimes most traders feel fear and pessimism, and at other times they feel overconfident positive and, even, greedy. Investors trade their beliefs about the market, and the beliefs are raised by its over-protective system one (Please, read https://www.forex.academy/know-the-two-systems-operating-inside-your-head/). Thus, they react emotionally to the market, and these reactions influence the market at the same time that the market is changing their emotions.

The two systems

In the mentioned article, we talked about the work of Dr. Daniel Kahneman and the Two-systems model to explain people’s behavior. System one is fast and closely related to the primal emotions and instinctive knowledge. In contrast, system two is slow and is the way people use in rational thinking, computations such as math operations such as counting. We also said that system two trust system one most of the time. That is the way we are programmed. System one is a warning system if danger appears. 

Market Sentiment is a Contrarian Indicator

But the marketplace behaves very differently from the real world where system one was trained. Thus, market sentiment is a contrarian indicator. That is because the majority of market participants are non-professional investors moved mainly by greed or fear. Therefore, when a large portion of traders shows expectations about the future curse of an asset pointing to one direction, the market tends to move in the opposite direction. That is logical. Let’s suppose that a large percentage of retail investors think the EURUSD is going to rise significantly. That means they are invested in or plan to do it right away. At the times when the crowd is the most bullish, it is when they are nearly fully invested. 

The market is fueled by the buyer side. When everyone has already invested in the EURUSD most of their funds, almost no fuel is left to lift it further, as they don’t have more financial capacity to continue investing. Thus the demand shrinks. Only the supply side is left, since professionals, who sold every available lot to the masses, are not willing to buy that high; therefore, the prices should fall.

The Market Players

There are three types of market participants: The informed, the uninformed, and the liquidity players. The informed players have insider information about the course of the fundamental drivers and can position themselves in the direction of the future trend. These are the institutional traders. They tend to sell at the top, when the crowd is mostly optimistic and buy at the bottom when the public sees no end to the drop.

 Uninformed traders are the majority of retail traders. They act moved by greed and fear. Their greed made them bet with disproportionate leverage at the wrong moments. Their fear made then close their positions at the worst possible time or close it with minimal gains so as not to lose. 

 Liquidity traders are professional traders interested in short-term plays, so they mostly do not affect the primary market trends. On the forex, Liquidity traders operate using technical analysis and price-action strategies, using money management schemes and systems that have been proved to be profitable.

Traders are their worst Enemies

  •  Everybody knows they should buy low and sell high, but the majority buy high and sell low.
  • Everybody thinks it is easy to be successful in trading and be rick
  • Anyone should know that panic selling is a bad idea, but nobody follows the advice.
  • The major part of market signals is worth less than a coin toss, but people still crave them and then overtrade and lose at the first slight market retracement.
  • Nobody takes seriously trading with reward to risk ratios over two. Instead, they prefer High percent winners with lousy RR ratios.
  • Everybody trades untested strategies. Thus, they ignore the statistical parameters of the system, and, even, they cherry-pick the signals.
  • Nobody knows about position sizing even when they want to trade at maximal leverage.

Advice for you

Market Sentiment is a contrarian indicator. If you consider yourself a uniformed trader ( and 85% of retail traders are), trade against yourself. A lot of brokers trade against you, and they are getting rich.

Instead of one impulsive trade based on greed, consider yourself direction agnostic by taking two opposing trades using 15-pip away stop orders and a 2:1 Reward: Risk ratio: 

Practical System Example:

Two simultaneous and opposing orders with a Reward/Risk Ratio of 2.

1 One LONG EURUSD position
  • Buy Pending Order: Current price + 15 pip buy stop order
  • Stop-loss: 20 pips below the entry price
  • Take profit: 40 pips away from the entry price
2 One SHORT EURUSD position
  • Sell-short Pending Order: Current Price – 15 pip Sell stop order
  • Stop-loss: 20 pips Above the entry price
  • Take profit: 40 pips below from the entry price

Using this kind of order, you let the price tell you its direction. One order gets filled the other not. Also, an RR ratio of 2:1 protects you against a decrease in the percent of the winners, since only one good trade every three is needed to be profitable. 

Money management

Finally, do not risk more than one percent of your total assets initially. On the EURUSD, we know that every pip is worth $10 on each lot. Thus a 20 pip stop-loss distance is worth $400. To trade a full lot risking one percent, your account balance should be $40,000. Therefore if you own just $4,000, do trade one mini lot, and if your account is only $400, you should use just one micro-lot.

Learning is hard. You will think that trading that way you won’t get rich quick, but just four things you must consider.

  1. Your initial purpose should be to learn your trading job and know how the system performs.
  2. The primary goal of a trader is to preserve the capital
  3.  Compounding is a powerful concept.
  4. You should know your risk and its characteristics.

References:

THE COMPLETE RESOURCE FOR FINANCIAL MARKET TECHNICIANS, THIRD EDITION, 2016. Charles D. Kirkpatrick II, CMT Julie Dahlquist, Ph.D., CMT

Thinking, Fast and Slow, Daniel Kahneman

 

 

Categories
Forex Basic Strategies Forex Daily Topic Forex Price Action

Support, Resistance and Trade Management

-Support and Resistance are the two most important concepts in the financial market. Forex traders strongly rely on support and resistance, as well. Price action traders’ main weapon is support and resistance. In today’s article, we are going to demonstrate an example of how the price reacts to a major level of support and resistance. Let us get started.

-Support and Resistance are the two most important concepts in the financial market. Forex traders strongly rely on support and resistance, as well. Price action traders’ main weapon is support and resistance. In today’s article, we are going to demonstrate an example of how the price reacts to a major level of support and resistance. Let us get started.

-Support and Resistance are the two most important concepts in the financial market. Forex traders strongly rely on support and resistance, as well. Price action traders’ main weapon is support and resistance. In today’s article, we are going to demonstrate an example of how the price reacts to a major level of support and resistance. Let us get started.

Look at the chart. The price consolidates around the red-marked level, it finds its resistance there and makes a bearish move. After having a correction, it makes the new lowest low. This is now the sellers’ territory. Let us assume that there is no significant level, which may hold the price as support. Thus, we are not able to mark any level as support. The sellers are to wait for the price to consolidate and produce a bearish reversal candle to offer them short entry in this chart.

The price makes new lowest lows and heads towards the South with good bearish momentum. However, it seems that it may have found its support. It consolidates for a while around the red-marked level and produces a bullish engulfing candle. The buyers on the minor chart may get them engaged to keep an eye on the chart to go long above the highest high of the last candle. Let us find out what happens next.

The price heads towards the North. It consolidates and produces another bullish engulfing candle. It means the chart is now the buyers’ territory. This is where the game of support and resistance begins. You may have noticed that we have red-marked the level. This is the most significant level in this chart for the buyers. The price may consolidate and find its resistance in this chart before it reaches the red-marked level. However, this is where traders may make a decision concerning their long position. They may either close their whole trade or take partial profit.

The price keeps heading towards the North. It buyers are having a party here. They must not forget the red-marked level, though. Let us proceed to the next chart.

Look at the chart carefully. Do you notice that the price consolidates around the red-marked level, which is the swing high in this chart? It produces a bearish engulfing candle followed by another bearish one. The last candle on this chart comes out as a bullish inside bar. If the next candle comes out as a bearish engulfing candle, the sellers may drive the price towards the South. I am sure now you know where the sellers are to be careful with their trade management. Yes, they must take the red-marked support (swing low in this chart) into account to manage their short entries.

Categories
Forex Elliott Wave

Intermediate Wave Analysis – Motive Waves – Part 1

In our previous article, we presented the different standard Elliott wave formations, among which we highlight the impulsive sequence. In this educational post, we will look at the rules and principles to identify impulsive waves.

In our previous article, we presented the different standard Elliott wave formations, among which we highlight the impulsive sequence. In this educational post, we will look at the rules and principles to identify impulsive waves.

In our previous article, we presented the different standard Elliott wave formations, among which we highlight the impulsive sequence. In this educational post, we will look at the rules and principles to identify impulsive waves.

Understanding the Impulsive Waves

Impulsive waves are characterized by developing in a definite direction; this is which distinguishes a motive wave with a corrective sequence. The characteristics that must possess an impulsive structure are as follow.

  1. It must be built by five consecutive segments that follow a structure of a trend sequence or a terminal formation.
  2. Three of its five internal segments correspond to impulses in the same direction, which could be bullish or bearish. The other two moves will reverse one of the three impulsive segments moving in the main trend.
  3. Once the first impulsive movement ended, the price action must develop a smaller move in the opposite direction.
  4. The third segment moves in the same direction as the first impulsive movement. This movement cannot be of less magnitude than the first move.
  5. At the end of the third movement, the price develops a fourth segment, which pulls back the move of the third leg. This movement must never penetrate the region of the first impulsive movement.
  6. The fifth and last move is characterized by being longer than the fourth movement.
  7. When measuring and comparing the extension of waves first, third, and fifth, it can be observed that not necessarily the third wave will be the largest move; however, this segment cannot be the shortest of the three impulsive movements.

If the price action does not accomplish one of these rules, the market is not moving in an impulsive sequence. Rather, it advances in a corrective structure.

The Extension Concept

The extension is the main characteristic of motive waves, and it is used to describe the largest move of an impulsive sequence.

The basic rule to classify and identify a wave as an extension states that the largest wave must surpass the next largest move, at least by 161.8%.

The Use of Labels to Identify Sequences

Until now, we have used Intermediate Wave Analysis – Motive Waves – Part 1 labels them as W1, W2, and so on, to identify each segment. From now, we will use tags as 1, 2, 3, 4, and 5, to identify each movement.

Labels are a useful tool to aid the wave analysis process. The wave analyst should consider that, in R.N. Elliott’s words, the labels are not the end of the wave analysis, it is only a tool to maintain order in the analysis process.

It should be noted that according to the labeling process described by R.N. Elliott, we will use variations to differentiate degrees, which corresponds to the timeframe that belongs to each Elliott wave structure.

Example

To comprehend the structure of an impulsive wave and the extension concept, in the following chart, we observe the GBPUSD pair in its 12-hour timeframe.

The figure shows the impulsive advance developed by the Cable when the price found buyers at 1.1958 on September 02nd, 2019. The first motive wave, identified as “1” in green, resulted in a GBPUSD advancement of 624.1 pips, rising to 1.2582.

The third wave advanced over 814 pips or 6.68%. On the chart, we observe that wave 3 in green surpasses the 161.8% of the first wave. In the same way, the fifth wave gained 691.1 pips or 5.39%, which is similar to the first wave.

Concerning corrective waves 2 and 4, we observe that the second wave is shorter than the first move, and the fourth wave does not penetrate into the first wave region, which accomplishes the rules of construction of impulsive waves.

Furthermore, we observe that the third wave advanced beyond 161.8% of wave 1; similarly, the progression of the fifth wave is slightly lower than 161.8% of the third wave.

In consequence, GBPUSD shows the progress of a bullish five-wave impulsive sequence, with Cable having developed an extended wave in the third movement of the bullish cycle. Finally, once the fifth wave reached its end and the end of the bullish cycle, a three-wave movement in the opposite direction of the previous upward sequence will occur.

Conclusion

The impulsive movement is a structure that creates trends, which follows a five-wave sequence. The knowledge of its structure allows the wave analyst to understand the degree of the advancement of the prices and, in consequence, the potential next movement of the market under study.

In the next educational article, we will unfold additional concepts to understand the nature and rules of impulsive waves.

Suggested Readings

  • Neely, G.; Mastering Elliott Wave: Presenting the Neely Method; Windsor Books; 2nd Edition (1990).
  • Prechter, R.; The Major Works of R. N. Elliott; New Classics Library; 2nd Edition (1990).
Categories
Forex Daily Topic Forex Price Action

A Business of Glorious Uncertainty

Trading on the daily-H4 chart combination often brings more reward than our initial expectation. Typically, traders aim to earn 1R. However, it may even bring up to 5R. In today’s lesson, we are going to show an example of this.

Trading on the daily-H4 chart combination often brings more reward than our initial expectation. Typically, traders aim to earn 1R. However, it may even bring up to 5R. In today’s lesson, we are going to show an example of this.

Trading on the daily-H4 chart combination often brings more reward than our initial expectation. Typically, traders aim to earn 1R. However, it may even bring up to 5R. In today’s lesson, we are going to show an example of this.

This is a daily chart. The price heads down with good bearish momentum. The last candle is a spinning top. In a strong bearish daily trend, a spinning top does not suggest that the trend may change. However, the H4-daily traders’ strategy is different. They are to flip over to the H4 chart and wait for consolidation followed by a bullish breakout, to go long on the pair. Let us flip over to the H4 chart.

The H4 chart looks good. The chart produces two bearish candles consecutively. The buyers are to wait for a bullish engulfing candle closing above consolidation resistance to go long. The chart suggests that the buyers shall stick with the chart.

It consolidates more and produces a bullish engulfing candle. However, the candle closes within consolidation resistance. They are to wait for more. Look at the last candle. It seems like it is going to have a deep consolidation again.

This time the chart produces a bullish engulfing candle closing well above consolidation resistance. The buyers could trigger a long entry right after the candle closes and set the stop loss below the signal candle’s lowest low.

The trade does not go as per buyers’ expectations. It takes time to hit the target. However, the candle breaches through the take-profit level, closing as a strong bullish candle. The buyers may consider taking a partial profit and let the rest of the trade run. Let us find out what happens next.

This time the price heads towards the North with extreme bullish pressure. It travels about five times the distance of the buyers’ initial target. Assume, by taking partial profit, how much more a trader can earn. This is the beauty of trading on the daily-H4 combination. Since the daily chart is involved here, the price often heads towards daily support/resistance. This brings traders more profit if they deal with their trade accordingly. Another interesting point here to be noticed, despite producing an excellent bullish engulfing candle, the price does not head towards the North with good bullish momentum. On the other hand, once it hits the target level by producing another bullish Marubozu candle, it keeps going towards the North with extreme bullish momentum. This is why trading may be called a business of glorious uncertainty.

 

Categories
Forex Psychology

Trading Psychology: Learn the Art of Getting Over a Floating Losing Trade

In today’s lesson, we are going to show an example of a trade setup, which tests our psychology and ask us a big question. This situation is something that often happens with traders trading on the major pairs. We try to find out the answer to what we shall do in such a situation.

In today’s lesson, we are going to show an example of a trade setup, which tests our psychology and ask us a big question. This situation is something that often happens with traders trading on the major pairs. We try to find out the answer to what we shall do in such a situation.

In today’s lesson, we are going to show an example of a trade setup, which tests our psychology and ask us a big question. This situation is something that often happens with traders trading on the major pairs. We try to find out the answer to what we shall do in such a situation.

This is a daily chart. The price finds its support after being bearish for a long time. It produces a bullish engulfing pattern followed by another bullish candle. Using the daily-H4 combination, traders shall flip over to the H4 chart to get consolidation and a bullish reversal candle to go long above the last swing high. Let us flip over to the H4 chart.

The H4 chart suggests that the buyers may take control soon. A massive bullish engulfing candle followed by an inside bar bearish candle may attract the buyers to go long upon getting another bullish engulfing candle. The buyers are to keep their eyes on this chart since the chart may produce the signal candle anytime.

It does not produce the signal candle immediately. However, after a while, it produces a bullish engulfing candle closing above the last swing high. This is an A+ trade setup as far as the daily-H4 chart combination trading is concerned. The price makes a deep consolidation and produces the signal candle afterwards. This is what breakout traders love to see. A long entry may be triggered right after the last candle closes. Let us proceed to the next chart to find out what happens afterwards.

This must be painful for the buyers. The trade setup looks very good, but things have not been going as expected. The price comes back within the consolidation zone. This looks ominous for the buyers. Since this is an H4 chart, the buyers have the opportunity to look after their trade. They may ask themselves whether they should keep the entry or close it manually? I let you think about it for a minute.

If your answer is the buyers shall close the trade manually, you may not be right. The reason behind this is, once a trade is floating on a loss, traders shall leave it and let it finds its own way. If it hits the stop loss, let it hit it. Traders are to calculate this risk well before they take entry. If a trade is running on profit but acts unusual or gets sluggish at a significant level of support/resistance, that might be a different case. Although the chart suggests that most probably, the price is going to hit stop loss, the buyers shall hold the entry and concentrate on other pairs. If a trader wants to survive in this market for a long time, he must acquire this skill of getting over on a floating losing entry and concentrating on a new trade setup.

Categories
Candlestick patterns

Practical Application of Candlesticks: GBPNZD Long

Dragon Fly Doji
Dragon Fly Doji

This is the second article in a series of articles highlighting the importance and effectiveness of Japanese candlesticks in your trade plan.

Chart 1 – Original Trade Idea

If you haven’t read my first article in this series, you can read it here. That first article describes my approach to trading and how I identify trade setups. The trade I took back in December 2018 to go long on GBPNZD was one of the best performing trades I’ve had in the past two years. It remains a great trade! I wrote the following as justification for my trade idea.

Dec 12, 2018

Holy 2,000+ pip trade batman

The GBPNZD pair has a massive upswing potential, with little risk. And I’m just talking about a move to the center of the linear regression channel.

  1. The weekly chart shows two hammer candles – with the current week showing strong buying from the lows. Massive buying actually – firm rejection lower so far.
  2. The Chikou Span/Lagging Span is right near the bottom of the cloud – the probabilities of the Chikou Span just crossing below the bottom of the cloud on a weekly chart is very little, especially given that we’ve had ten weeks down without any meaningful retracement.
  3. YUGE bullish divergence that goes from July of 2017 to the present weekly low. It’s ridiculous.

This could be one of the biggest trades I’ve ever made – and the realistic target is 2,000 pips above, and the risk is only 275 – I’ll take those odds. And it’s very probable we trade higher than the center of the regression channel.

 

Using Candlesticks

If you are interested in learning about Japanese candlesticks, you should really pick up the Bloomberg Visual Guide to Candlestick Charting by  Michael C. Thomsett. There are over 200 different candlestick patterns in his book. And that is not even all of them! There are some patterns that exist that are very rare and very powerful. One of those rare and powerful patterns is on the GBPNZD weekly chart below:

Dragon Fly Doji
Dragon Fly Doji

The candlestick highlighted above is known as a dragonfly doji. As I wrote in my original trade idea, my entire purpose for going long was based on the existence of two consecutive hammers. When I saw these candlesticks occur on the weekly chart, I knew I was onto a big trade opportunity. Why? Because candlesticks are incredibly useful on weekly charts. Candlesticks were never meant to be used on anything less than a weekly chart – that might explain why they are more powerful on weekly charts. Just look at that dragonfly doji. It’s important to remember something about Japanese candlesticks: they tell a story. What does the dragonfly doji tell us? Panic and fear. Panic and fear for anyone short on the GBPNZD.

Look how long the wick is! That means a ton of sellers were able to push prices lower but gave up all of those gains – bulls took over. Anyone who was short during that weekly candlestick either covered immediately or experienced significant pain and had to cover eventually. Ultimately, the trade idea and initial profit target ran from the entry at 1.8457 to the bottom of the regression channel, where it wicked against at 1.9494 – a 1,037 pip move.

My actual trade results from that period:

GPNZD Results
GPNZD Results

 

Categories
Candlestick patterns Gann

Practical Application of Candlesticks: Gold Short

Practical Use of Candlesticks: Gold Short

Gold (XAUUSD) Daily Chart
Gold (XAUUSD) Daily Chart

Practical Use of Candlesticks: Gold Short

Practical Use of Candlesticks: Gold Short

This article is the first in a series of articles over the practical use of Japanese candlesticks. Japanese candlesticks are an excellent and powerful analytical tool. Candlesticks are three-dimensional because, to interpret and use candlesticks properly, we need price, time, and volume.

Each of these guides will utilize a trade idea I’ve shared on TradingView in the past. The nice thing about trade ideas that you share on TradingView is that you can hit ‘play’ and watch how price action played out after your idea. It’s one thing to say, “I called Gold dropping to this level, and it did” – it’s another to show evidence of that idea. I will also share some of my trade results from that same time period.


Identifying a Trade

I am a Gann-based trader through and through. I believe that time is the most important factor in the market, and that time is the reason why trends change. Gann Analysis is the study of cycles and finding the rhythm of a market. It is almost singular in its approach to financial analysis in that Gann Analysis is a Leading form of analysis. In other words, Gann Analysis seeks to predict what will happen in the future. We do that through the use of natural cycles like Lunar Phases, the cycles of Planets, Gann’s cycles, and numerous other measurements. I can’t get into all the details of what Gann analysis is but suffice to say; it is how I identify when I should take a trade.

In the trade idea for this setup, I identified the following reasons for wanting to short XAUUSD on Feb 19, 2019:

Feb 19, 2019

Time is the reason for trend changes.

Feb 18 was a time pivot in the current Law of Vibration cycle, a powerful 6/8th time-harmonic which acts as a source of resistance in time to the trend in force.

Feb 19 is a Full Moon, and the Moon is Apogee – trends reverse violently if these two astronomical cycles occur near a swing low/high.

Gold has been an uptrend for 186-days – which is well within the 180-day Gann Cycle of the Inner Year.

Violent short term reversal ahead.

Additionally, not shown is the Longitudinal position of Jupiter, which rests at 1330. When it comes to Gann’s Planetary Lines, I’ve learned to give equal weight to those levels as I would to Gann’s time cycle. Price has moved above that line – so the time cycles could just be conditions for further and swifter moves higher.

I updated the trade idea with an additional short:

Added to shorts at 1345.30 – 1235 CST

Ultimately, I took profits on Mar 6, 2019.

 

Using Candlesticks

Gold (XAUUSD) Daily Chart
Gold (XAUUSD) Daily Chart

The image above is the daily chart for Gold (XAUUSD). I’ve highlighted in a light blue box the trading period of this trade idea. Observe the first candlestick on the chart (red triangle above it). I consider that top candlestick a shooting star. Now, there are some real sticklers out there who are very dogmatic about what is an actual candlestick pattern and what isn’t. Japanese analysis is very dynamic and allows for a significant amount of interpretation. I only need to know a couple of things about the shooting start pattern:

  1. Did it show up at the top of a move?
  2. Is the shadow at least twice as long as the body?

Both 1 and 2 are true. The small wick below the body is irrelevant. When I combine this candlestick pattern – which is one of the most bearish candlestick patterns – to my Gann analysis, I get a very high probability setup for a short. But then I added to the short again, one day later on the 20th.

Gold (XAUUSD) 30-minute chart.
Gold (XAUUSD) 30-minute chart.

Switching to the 30-minute chart, I’ve labeled the additional short entry. Why did I enter that short? First, there is a rising wedge against the prior swing high. Second is the nature of the candlestick itself. The candlestick with the price label on it is two different patterns – but both are bearish. That candlestick is both a shooting star and a bearish engulfing candlestick. When we add the bearish engulfing candlestick to the shooting star and a break of the rising wedge, we get handed one of the highest probability short setups that you could see.

The results of this trading period are below:

Trade Results
Trade Results

 

Categories
Forex Price Action

Never Know What is around the Corner

In today’s lesson, we are going to demonstrate an example of trend riding along with the H4 breakout trading strategy. We often see that the market is in a strong direction, but it does not offer many entries. It is frustrating, but we must take it easy. We must not be impatient but keep our eyes on the chart. We never know what is around the corner.

In today’s lesson, we are going to demonstrate an example of trend riding along with the H4 breakout trading strategy. We often see that the market is in a strong direction, but it does not offer many entries. It is frustrating, but we must take it easy. We must not be impatient but keep our eyes on the chart. We never know what is around the corner.

In today’s lesson, we are going to demonstrate an example of trend riding along with the H4 breakout trading strategy. We often see that the market is in a strong direction, but it does not offer many entries. It is frustrating, but we must take it easy. We must not be impatient but keep our eyes on the chart. We never know what is around the corner.

This is an H4 chart. The chart shows that the price has been heading towards the South with strong bearish momentum. However, it has not offered any A+ entry yet. It produces some strong bearish engulfing candle breaching through consolidation support. However, consolidations have been shallow. Thus, the sellers on this chart have not been able to make the most of it. Look at the last candle. It comes out as a strong bearish candle as well. It suggests that the bearish trend is strong enough, and it may drive the price towards the South further. Let us proceed to the next chart.

The chart produces a bullish inside bar. This time it looks better since the inside bar candle is a long one. This means if the chart produces a bearish engulfing candle again, it would be after a deep consolidation. The deeper consolidation, the better it is as far as reward is concerned.

The chart produces two more bullish candles. It looks like it has been searching for its support. Deeper consolidation/correction is good, but if it goes too far by making a bullish breakout, equation changes. Let us proceed to the next chart.

Here it comes. An A+ bearish engulfing signal candle this is. The sellers may trigger a short entry right after the candle closes by setting stop-loss above the candle’s high. Take profit may be set with 1:1 risk-reward.

The chart produces another bullish corrective candle after such a nice-looking bearish reversal candle. However, it heads towards the South and hits the target. We learn two lessons here.

  1. A chart may not offer as many entries as we anticipate, even it is on a strong trend.
  2. We never know what is around the corner in the Forex market.

At one point, it seems that the chart may not offer any short entry for the H4 sellers. The price keeps heading towards the North. Deep consolidation is about to get into too deep. At last, the signal candle comes and offers an excellent short entry. While trading, we are always to be on our toes since we do not know what is around the corner in the Forex market.

 

Categories
Forex Elliott Wave

Introduction to Intermediate Wave Analysis

The wave analysis consists of the market study following the principles described by R.N. Elliott in its Treatise “The Wave Principle.” In this educational article, we’ll introduce the concept of wave patterns.

The wave analysis consists of the market study following the principles described by R.N. Elliott in its Treatise “The Wave Principle.” In this educational article, we’ll introduce the concept of wave patterns.

The wave analysis consists of the market study following the principles described by R.N. Elliott in its Treatise “The Wave Principle.” In this educational article, we’ll introduce the concept of wave patterns.

Introduction

In the preliminary section, we presented the fundamentals of the wave analysis. We learned the wave concept, which will allow us to identify the segments that build a sequence of waves. Additionally, we unveiled the way to recognize the start and the end of each formation. Finally, we presented different rules to describe each kind of sequence according to which the wave analyst will get a panoramic overview of the market.

In the current section, we will present the concepts of wave analysis defined by Glenn Neely, expanding R.N. Elliott’s work.

Grouping Waves

In the preliminary wave analysis section, we presented the concept of “monowave,” or segment, that corresponds to the basic unit of a movement developed by a wave sequence. R.N. Elliott, in his work “The Wave Principle,” defined a set of patterns that follows a specific order according to its internal subdivision.

Elliott grouped these patterns into two main groups, defined as impulses and corrections. In simple words, impulses are directional movements, having five internal segments that create trends. On the other hand, corrections are non-directional movements and, also, moves against the trend; these formations present three sub-divisions.

According to the process of wave grouping, we have five basic kinds of patterns, these are:

  1. 5-5-5-5-5: Impulse.
  2. 5-3-5: Zigzag.
  3. 3-3-5: Flat.
  4. 3-3-3-3-3: Triangle.
  5. 3-3-3-3-3: Terminal.

There are, also, other complex combinations called double and triple three, that will be studied in depth in the advanced analysis wave section.

Analyzing Waves Formations

The process for an Elliott wave pattern analysis begins with the separation of formations that have 3 or 5 internal segments. The knowledge of the basic structures will allow the wave analyst to simplify the study of complex corrective patterns.

As the formations under study are recognized, the analyst should consider that the waves must have a certain level of similarity to each other, in terms of price and time. Two consecutive waves will be similar in both price and time if the smaller of the two is not less than one third (1/3) of the largest. In case the next wave is shorter, then the next wave is said to belong to a sequence of lesser degree. In other words, if W2 does not meet the price and time rule with respect to W1, then W2 must be associated with W3. After this association is made, the new segment should be called W2.

Example

The following chart illustrates Johnson & Johnson (NYSE: JNJ) in its log-scale 2-week timeframe. On the figure, when we compare wave 2 with wave 1 we observe that both comply with the similarity rule in price and time. However, wave 4 does not reach the 1/3 of time rule when compared with wave 3.

Fig 1 – Johnson & Johnson (NYSE: JNJ) 2W Log-scale. (click on it to enlarge)

Conclusions

In this article, we introduced the five basic Elliott wave patterns, which will use in the wave analysis process. Also, we presented the rule of similarity in terms of price and time between waves.

The application of these criteria and integrating the concepts of Directional and Non-Directional moves drove us to conclude that Johnson & Johnson moves in its fourth wave due that does not accomplish the 1/3 rule of minimum time compared with wave 3.

Suggested Readings

  • Neely, G.; Mastering Elliott Wave: Presenting the Neely Method; Windsor Books; 2nd Edition (1990).
Categories
Forex Daily Topic Forex Price Action

Riding on a Trend is rewarding

The trend is the trader’s friend. To be able to spot the trend and reversal point are the two most important factors of price action trading. In the Forex market on the minor charts, trend changes in a second. However, the trend usually continues on major charts such as the H4, the daily as well as weekly. In today’s lesson, we are going to demonstrate an example of how we can ride on a trend and make most of it.

The trend is the trader’s friend. To be able to spot the trend and reversal point are the two most important factors of price action trading. In the Forex market on the minor charts, trend changes in a second. However, the trend usually continues on major charts such as the H4, the daily as well as weekly. In today’s lesson, we are going to demonstrate an example of how we can ride on a trend and make most of it.

The trend is the trader’s friend. To be able to spot the trend and reversal point are the two most important factors of price action trading. In the Forex market on the minor charts, trend changes in a second. However, the trend usually continues on major charts such as the H4, the daily as well as weekly. In today’s lesson, we are going to demonstrate an example of how we can ride on a trend and make most of it.

The chart shows that after making a strong bearish move, the price produces three consecutive bullish corrective candles. It finds its support and creates a bearish engulfing candle closing below consolidation support. The sellers may trigger a short entry right after the last candle closes. Let us proceed to the next chart.

The price heads towards the South and hits 1R. Look at the last candle. The candle comes out as a bearish engulfing candle as well after a long consolidation. However, the sellers on this chart shall skip taking this entry for its shallow consolidation. Let us find out what happens next.

The price again consolidates and produces another bearish engulfing candle. The sellers may trigger another short entry right after the last candle closes. This is the second entry of the trend.

As expected, the price again heads towards the South. This time the price moves with strong bearish momentum. The sellers again make some profit here. Let us proceed to the next chart.

The chart after producing one stronger bearish candle consolidates. This time the chart presents an A+ trade setup with deep consolidation and a strong bearish engulfing candle. The sellers may trigger another short entry here with 1R.

This is what tells the story of the Forex market. This one has been the best entry so far on this chart. However, the price does not head towards the trend’s direction as expected. Nevertheless, it hits the target again (1R). The sellers again make some pips. Altogether, it offers three entries and this is called riding on a trend. By looking at the chart, it seems it may provide more. The buyers must stay out of this chart until it produces a strong bullish reversal.

Meanwhile, the sellers shall keep eying on the chart to go short with the same process. It does not happen so often but when it does, traders shall make most of it. As they say, “Trend is your Friend,” and we have just demonstrated that riding on a trend is very rewarding.

Categories
Forex Elliott Wave Forex Fibonacci

How to Use Retracements to Analyze Waves – Part 5

Until now, we studied different scenarios for the retracement of W2 when it is lower than 100% of W1. In this educational article, we’ll review what to expect when the retrace experienced by W2 is higher than 100% of W1.

Until now, we studied different scenarios for the retracement of W2 when it is lower than 100% of W1. In this educational article, we’ll review what to expect when the retrace experienced by W2 is higher than 100% of W1.

Until now, we studied different scenarios for the retracement of W2 when it is lower than 100% of W1. In this educational article, we’ll review what to expect when the retrace experienced by W2 is higher than 100% of W1.

The Fifth Rule

The fifth rule surges when the price runs in wave two (W2) and its progress extends between 100% and 161.8% of the first wave (W1).

In this case, could exist four possible conditions as follows.

Condition a: this condition occurs if W0 is lower than 100% of W1. As a first scenario, W1 could be part of a corrective sequence, and in consequence, W1 should identify as “:3”. In terms of the Elliott wave formations, W1 could be the first or the second segment of a corrective pattern, like a Flat pattern, a triangle formation, or the center of a Complex Correction.

A second option considers the possibility of a five-wave structure. If it occurs, W1 should label as “:5”, and the structure could correspond to the end of a zigzag pattern.

Condition b: occurs when W0 moves between 100% and 161.8% of W1. In this scenario, W1 should be part of a three-wave structure. It means that we should identify it as “:3”. In consequence, W1 could belong to the first segment of a Flat pattern, a section of a Triangle structure, or the center of a Complex correction.

Condition c: this condition occurs if W0 is between 161.8% and 261.8% of W1. In the same way that condition b, in this scenario, W1 should be part of a corrective formation as a flat (which should be an irregular flat), triangle, or complex correction.

Condition d: occurs when W0 is higher than 261.8% of W1. In this case, W1 likely will be the first part of a corrective structure; then, W1 should identify as “:3”. In terms of the Elliott wave formations, the structure in progress could correspond to a Flat pattern, a triangle, or the center of a complex correction.

The Sixth Rule

This rule will activate if wave 2 retraces between 161.8% and 261.8% of W1. The possible conditions are similar as in the fifth rule and are detailed as follows.

Condition “a”: this condition occurs if W0 is lower than 100% of W1. In this scenario, W1 could be a three-wave structure (labeled as “:3”), and W1 could correspond to a flat, triangle, or the connector of a complex correction. A second scenario considers that W1 could be a five-wave formation (identified as “:5”), then, W1 could be the end of an impulsive movement.

Condition “b”: occurs when W0 moves between 100% and 161.8% of W1. In the same way that Rule 5, condition b, the most probable formation for W1 is a three-wave structure and should identify as “:3”. W1 could be the first segment of a flat, an internal section of a triangle, or the center of a complex correction.

Condition “c”: this condition occurs if W0 is between 161.8% and 261.8% of W1. The structure that W1 develops could correspond to a corrective pattern, which should identify as “:3”, and the formation developed could be a flat pattern with failure in C or an expansive triangle.

Condition “d”: occurs when W0 is higher than 261.8% of W1. In this case, W1 could be part of a zigzag, a segment of a contractive triangle, a flat pattern with a failure in C, or the correction of an impulsive move. In any case, W1 should identify as “:3”.

The Seventh Rule

The wave analyst must use this rule when the retrace experienced by wave 2 is higher than 261.8% of wave 1. In this case, the possible conditions of W0 are similar to rules fifth and sixth, which are as follows.

Condition “a”: this condition occurs if W0 is lower than 100% of W1. In this case, W1 could be part of a three-wave structure (identified as “:3″) developing a complex correction, or a flat with a complex wave B. Another option for W1 could be a five-wave structure (labeled as”:5″) running in the failure of the fifth wave.

Condition “b”: occurs when W0 moves between 100% and 161.8% of W1. In this condition, W1 could be a three-wave structure (identified as “:3”) performing the center of a complex correction, a flat pattern, or a contractive triangle.

Condition “c”: this condition occurs if W0 is between 161.8% and 261.8% of W1. In this case, W1 could be part of a corrective formation as a continuous correction, a flat pattern, or a contractive triangle, and W1 should identify as “:3”.

Condition “d”: occurs when W0 is higher than 261.8% of W1. In this scenario, the structure suggests that W1 could be part of a corrective formation (tagged as “:3”) as a zigzag pattern, the connector of a double zigzag, the center of a complex correction (or wave-x), or a contractive triangle.

 

Conclusions

In this educational article, we reviewed what should be the Elliott wave structure that W1 build when W2 exceeds 100% of W1. As can be observed, in most cases, the formation developed by W1 corresponds to a corrective sequence.

According to R.N. Elliott’s words, the knowledge of the corrective formations could provide to wave analyst an edge over what should be the next move. In this context, the comprehension of different rules and conditions presented could ease and offer a relevant clue in the wave analysis to the Elliott wave trader.

Suggested Readings

  • Neely, G.; Mastering Elliott Wave: Presenting the Neely Method; Windsor Books; 2nd Edition (1990).
  • Prechter, R.; The Major Works of R. N. Elliott; New Classics Library; 2nd Edition (1990).
Categories
Forex Elliott Wave Forex Fibonacci

How to Use Retracements to Analyze Waves – Part 4

In this educational article, we’ll review the fourth rule defined by Glenn Neely for the preliminary wave analysis. This rule, by its nature and context, it is likely that correspond to a corrective structure.

In this educational article, we’ll review the fourth rule defined by Glenn Neely for the preliminary wave analysis. This rule, by its nature and context, it is likely that correspond to a corrective structure.

In this educational article, we’ll review the fourth rule defined by Glenn Neely for the preliminary wave analysis. This rule, by its nature and context, it is likely that correspond to a corrective structure.

The Fourth Rule

The fourth case described by Neely considers the context when the price action developed by W2 retraces between 61.8% and 100% of W1. In the same way that the wave analyst measures the retracement developed by W1 on W0, and W2 on W1, it is necessary to evaluate the retracement of W3 on W2.

The author of “Mastering Elliott Wave” identified three possible categories of movements for wave three (W3), which are as follows.

  • Category “i”: will be considered if W3 is higher or equal to 100% and less than 161.8% of W3.
  • Category “ii”: this category occurs if W3 moves between 161.8% and 261.8% of W2.
  • Category “iii”: this category will occur if W3 is higher than 261.8% of W2.

The categories mentioned and their implications are detailed below.

Condition “a”: we consider this condition if W0 is lower than 38.2% of W1. For the three categories mentioned, in the most common cases, W1 could be the first segment or the center of a three-wave formation. In this context, W1 should identify as “:3”. In terms of the Elliott wave patterns, the structure could correspond to a Flat formation, the center of a triangle, or a segment of a complex corrective sequence.

In some particular cases, W1 may correspond to the end of a zigzag pattern inside of a complex correction or the end of a third wave. In this situation, W1 should identify as “:5”.

 

Condition “b”: will occurs if W0 is greater or equal than 38.2% and lower than 100% of W1. Depending on the extension of W3, W1 be likely the beginning or the mid-part of a corrective formation; then, W1 should identify as “:3”. In this context, W1 could be part of a flat pattern or the center of a Triangle formation.

In a particular case, W1 could be the end of a five-wave sequence; therefore, W1 must label as “:5”. If this scenario occurs, W1 could correspond to the end of a zigzag pattern.

 

Condition c: this condition occurs if W0 is greater or equal than 100%, and lower than 161.8% of W1. In this case, W1 belongs to a three-wave formation and should identify as “:3”. In terms of the structures defined by R.N. Elliott, the sequence in progress could correspond to a Flat pattern, a Triangle formation, or the center of a complex corrective formation, for example, a double or triple three pattern.

Condition d: this condition occurs if W0 is between 161.8% and 261.8% of W1. Similarly to condition “c,” in this case W1 should identify as “:3”. And in terms of the Elliott wave analysis, the structure in progress could be a flat, a triangle formation, or any part of a complex corrective sequence.

Condition e: will consider if W0 is higher than 261.8% of W1. In this condition occurs the same situation that conditions “c” and “d.” It means that W1 is part of a three-wave structure and should be tagged as “:3”.

According to the structures defined by the Elliott wave theory, W1 could be the first segment of a flat pattern, the center of a triangle formation, or the center of a complex corrective sequence.

Conclusions

In this article, we have seen the possible formations that could develop according to the retracements experienced by waves W0 and W2 concerning W1, and W3 compared to W2.

In terms of the patterns defined by the Elliott wave theory, the most likely formations to which W1 might belong is to a flat pattern, a central segment of a triangle structure, or the center of a complex corrective sequence.

Suggested Readings

  • Neely, G.; Mastering Elliott Wave: Presenting the Neely Method; Windsor Books; 2nd Edition (1990).
  • Prechter, R.; The Major Works of R. N. Elliott; New Classics Library; 2nd edition (1990).
Categories
Crypto Daily Topic Forex Price Action

Calculate Risk-Reward along with Candle’s Attributes

In today’s lesson, we are going to demonstrate an example of the importance of risk-reward. To be successful in price action trading, traders are to calculate risk-reward before every single entry they execute. Let us find out from the charts below the importance of risk-reward.

In today’s lesson, we are going to demonstrate an example of the importance of risk-reward. To be successful in price action trading, traders are to calculate risk-reward before every single entry they execute. Let us find out from the charts below the importance of risk-reward.

In today’s lesson, we are going to demonstrate an example of the importance of risk-reward. To be successful in price action trading, traders are to calculate risk-reward before every single entry they execute. Let us find out from the charts below the importance of risk-reward.

The price heads towards the South with an average bearish momentum. Ideally, it is the sellers’ territory. However, it has come a long way. The buyers must wait for a strong bullish reversal candle to go long on this chart.

This is an extremely strong bullish reversal candle. The buyers may wait for the price to consolidate and produce a bullish reversal candle. Within a candle, things are very different now.

The chart produces a bearish inside bar. Thus, buyers may get more optimistic. They are to wait for a bullish engulfing candle closing above the last swing high to trigger a long entry. The price may travel towards the drawn level, which is a significant level of resistance on the chart.

The chart produces a bullish engulfing candle closing well above the last resistance. As explained earlier, the buyers are to set their stop loss below the last candle and trigger a short entry right after the candle closes. The question is whether they shall take a long entry here or not. Think about it. The last candle closes within the level of resistance. Technically, there is no space for the price for traveling towards the North unless it makes another breakout here. The reward is zero here.

As anticipated, the price consolidates again and struggles to make another breakout. The last candle comes out as a bearish candle. Thus, things do not look good for the buyers. It may change its direction. If it makes a bullish breakout, that is another ball game, though. Let us proceed to the next chart.

The price does not make a bullish breakout but changes its trend. It is the sellers’ territory again. By looking at the last candle, the sellers may trigger a short entry by setting their take profit at the last swing low.

In this lesson, we have seen that the trend-initiating candle and the signal candle both get 10 on 10. However, the chart does not offer an entry because there is no space for the price for traveling towards the upside. Consequently, the sellers take over and drive the price towards the downside. To sum up, we not only look at the candle’s attributes but also calculate risk-reward.

Categories
Forex Elliott Wave Forex Fibonacci

How to Use Retracements to Analyze Waves – Part 3

In this educational post, we will review the third rule on the use of retracements in the wave analysis devised by Glenn Neely.

In this educational post, we will review the third rule on the use of retracements in the wave analysis devised by Glenn Neely.

In this educational post, we will review the third rule on the use of retracements in the wave analysis devised by Glenn Neely.

Third Rule

The third rule occurs when wave 2 (W2) retraces precisely 61.8% of wave 1 (W1). This scenario tends to be somewhat confusing to analyze because when the price retraces to 61.8%, there is the same likelihood that the structure in progress is an impulsive or corrective formation.

Once the retracement of W2 is compared with the height of W1, the wave analyst should evaluate the length of W0 relative to W1. From the resulting measure, several potential scenarios follow, each meeting one of the six following conditions.

Condition “a”: this condition occurs when W0 is lower than the 38.2% level of W1. In this case, W1 could be the end of a zigzag structure inside a complex corrective sequence. In this case, the end of W1 should be identified as “:5”. Another option is that W1 moves inside a continuous correction, or it is part of the first leg of a flat pattern, in this case, the end of W1 should be identified as “:3.

Condition “b”: this condition occurs if W0 is higher or equal than 38.2%, and lower than 61.8% of W1. Considering the lengths of waves “3” (W3) and “-1” (W-1), W1 could be the end of a zigzag pattern inside of a complex correction; in this case, W1 should be identified as “:5. There is another possible scenario when W1 is part of an ending pattern of an impulsive structure; for this setting, W1 should be tagged as “:3”.

Condition “c”: this condition arises when W0 is higher or equal than 61.8% and lower than 100% of W1. In this scenario, W1 could be part of a corrective structure, like a Flat or Triangle pattern. In consequence, W1 should be identified as “:3”. When the length of wave 3 (W3) is shorter than W1, W1 could be the end of a zigzag pattern, and W1 should be labeled as “:5”.

Condition “d”: this condition appears when W0 is higher or equal than 100% but lower than 161.8% of W1. Depending on the lengths of waves W2, W3, and W-1, W1 could be the first segment of a zigzag pattern. In this case, W1 will be identified as “:5”. In another instance, W1 could correspond to a section of a triangle structure or the central part of a flat pattern. If the wave analyst faces this scenario, it should identify to W1 as “:3”.

Condition “e”: This condition occurs when W0 is between 161.8% and 261.8% of W1. In the same way as with the “d” condition, W1 could correspond to the first segment of a zigzag pattern. Therefore, W1 will be identified as “:5”. The second possibility is that W1 could be the central section of a flat formation that concludes in a complex corrective pattern or a segment of a triangle formation. In this case, W1 will be tagged as “:3”.

Condition “f”: this condition occurs when W0 is higher than 261.8% of W1. In this case, it applies the same identification alternatives for W1 as a “:5” or “:3” described in the previous conditions. In other words, W1 could be part of a zigzag, flat, or triangle pattern.

Conclusions

The third rule studied in this article, reveals that this case corresponds mainly to a corrective formation. On the other hand, during the preliminary wave analysis, it is relevant to study the context in which the price action advances.

In the same way, although there are three kinds of basic corrective structures, as the price advances, the wave analyst must discard the options that couldn’t correspond to the Elliott wave formation. As said by R.N. Elliott in his work ” The Wave Principle,” the knowledge of the corrective structures provides the student an edge to visualize the potential next move of the market.

Suggested Readings

  • Neely, G.; Mastering Elliott Wave: Presenting the Neely Method; Windsor Books; 2nd Edition (1990).
  • Prechter, R.; The Major Works of R. N. Elliott; New Classics Library; 2nd Edition (1990).
Categories
Forex Elliott Wave Forex Fibonacci

How to Use Retracements to Analyze Waves – Part 2

In our previous educational post, we presented the first rule defined by Gleen Neely to analyze waves. In this article, we will introduce the second rule.

In our previous educational post, we presented the first rule defined by Gleen Neely to analyze waves. In this article, we will introduce the second rule.

In our previous educational post, we presented the first rule defined by Gleen Neely to analyze waves. In this article, we will introduce the second rule.

Second Rule

The second rule defined by Neely occurs when W2 is greater or equal than 38.2%, and lower than 61.8% of W1. Once the retracement realized by W2 is measured, the length of W0 will provide five possible conditions as follows.

Condition “a”: occurs when W0 is lower than 38.2% of W1. In this case, wave W1 should be identified as “:5”. This movement could correspond to an ending sequence of a corrective structure. Another possibility for this condition is that W1 belongs to the ending move of an impulsive sequence.

Condition “b”: this condition takes place when W0 is greater or equal to 38.2%, but lower than 61.8% of W1. In this case, it is likely that W1 corresponds to a five-wave sequence and completes a corrective formation and should be tagged as “:5”. However, it is also possible that according to a specific advance of waves W2 and W3, wave 1 is a three-wave structure and should be identified as “:3”.

Condition “c”: this condition occurs when W0 moves between 61.8% and 100% of W1. In this case, W1 could correspond to the end of a flat, or zigzag pattern, and in consequence, W1 should be identified as “:5. Depending on the context of the market under study, the structure could correspond to a complex corrective sequence. On the other hand, if W0 and W2 hold some specific lengths, W1 could be a three-wave structure, and W1 should be labeled as “:3”.

Condition “d”: this condition must be considered when W0 moves between 100% and 161.8% of W1. In this case, W1 could correspond to a zigzag formation, and in consequence, W1 should be labeled as “:5”. Another scenario may consider the possibility that the structure in progress would correspond to a triangle formation. In this case, W1 should be identified as “:3”.

Condition “e”: this considers the movement of W0 beyond of 161.8% of W1. When this situation occurs, wave 1 corresponds to a five-wave structure, and in consequence, W1 should be labeled as “:5”.

Conclusions

As commented in the previous article, when the wave analysts study the market structure, each movement should not be analyzed individually, instead of this, wave analyst must study the market in a context from the previous moves, and the progress developed by market across time.

In the following educational article, we will unfold the third rule described by Glenn Neely.

Suggested Readings

  • Neely, G.; Mastering Elliott Wave: Presenting the Neely Method; Windsor Books; 2nd Edition (1990).
Categories
Forex Elliott Wave Forex Fibonacci

How to Use Retracements to Analyze Waves – Part 1

In our previous educational post, we learned to identify the end of a movement. In this article, we will discuss how to use and evaluate retracements in the wave analysis.

In our previous educational post, we learned to identify the end of a movement. In this article, we will discuss how to use and evaluate retracements in the wave analysis.

In our previous educational post, we learned to identify the end of a movement. In this article, we will discuss how to use and evaluate retracements in the wave analysis.

Defining Retracement Rules

Glenn Neely, in his work “Mastering Elliott Wave,” establishes a set of rules and conditions to evaluate the retracements that each wave makes.

The first step begins with the analysis of the first movement and comparison of the retracement made in the second move (W2) with the first one (W1). Once we evaluated the retracement of W2, we need to analyze the retracement developed on the previous wave (W0) with respect to the first move.

In summary, depending on the retracement of wave 2 (W2) with respect to wave 1 (W1) and the retrace of wave zero (W0) compared to W1. Neely defined a ser of rules and conditions to evaluate and identify each movement. The set of rules will be as follows.

First Rule

We consider this rule when the second wave (W2) is lesser than 38.2% of the first wave (W1). Once we have measured the retracement made by W2, we must evaluate the previous wave (or wave W0). Under this rule, there are four possible conditions.

Condition “a”: occurs when the high of W0 is below the 61.8% level of W1. However, it is necessary to evaluate the retracement experienced by the previous wave to W0 (it is W-1). Depending on its length, W1 could be identified as “:3” or “:5”. It means that W1 could be part of a corrective or impulsive structure.

Condition “b”: this condition occurs when if  W0’s high is above 61.8% but below 100% of W1. Depending on the length of W-1, W1 could correspond to an impulsive or a corrective wave; thus, W1 could be identified as “.5” or “:3.

Condition “c”: this condition occurs when W0 is above or equal to 100%  of W1 level and less or equal than 161.8 of W1. In this case, we will label as “:5” the end of wave 1. However, under certain conditions, W1 could correspond to a “:3” structure.

Condition “d”: occurs when W0 is larger than 161.8% of W1. In this case, the end of W1 must be identified as “:5”. The labeling means that W1 corresponds to a five-wave sequence.

 

Conclusions

The evaluation of the retracements experienced by W2 and W0 could deliver insights to the wave analyst of what kind of wave is W1. However, in some cases, it is necessary to evaluate the context of more waves. This study would provide the wave analyst an overview of the Elliott wave structure that the market develops. For example, if the structure in progress corresponds to a terminal movement of a corrective sequence or an impulsive wave in development.

In the following article, we will continue discovering the rules described by Gleen Neely for the wave analysis.

Suggested Readings

– Neely, G.; Mastering Elliott Wave: Presenting the Neely Method; Windsor Books; 2nd Edition (1990).
– Prechter, R.; The Major Works of R. N. Elliott; New Classics Library; 2nd edition (1990).

Categories
Candlestick patterns Forex Candlesticks

Candlestick Reversal Patterns V – The Morning Star and the Evening Star

The Morning Star and the Evening Star

The Morning Star and the Evening Star

The Morning Star and the Evening Star

The morning Star and the Evening Star formations are patterns made of three candlesticks. The original candlestick patterns were made on the Japanese rice futures trading and were created for daily timeframes. Thus, they could depict gaps from the previous close to the next open. The Star was a small real body – white or black – that was gaping away from a previous large body. The only place where that could occur in the Forex markets is during weekends. Thus, what is required to form a star in Forex is a small body, the smaller, the better, at the end of a large body, preferably with large shadows.

The Morning Star

The Morning Star is a three-candle formation at the bottom of a descending trend. In astronomy, Mercury is the morning star that foretells the sunrise and the arrival of the day. That was the name the Japanese gave to the formation, as they consider it to be the precursor of a new uptrend.

As said, it is formed by three candlesticks. The first one is a large and black candlestick. The session day the price starts with a gap down (or just at the close in Forex) continues moving down for a while, then it recovers and closes near the open, creating a tiny body. The third day is a white candlestick that closes near the open of the first black candlestick. The important factor in the signal is the confirmation of buyers after the star candle is formed. The close of the third day should, at least, cross the halfway up to the black candle body, as in the case of a piercing pattern. 

Chart 1 – Morning Star on the DAX-30 Index (click on it to enlarge)

Criteria for a Morning Star 
  1. The downtrend was evident
  2. The body of the first candle continues with the trend (black)
  3. The second candle is a short body figure showing indecision
  4. The third day the candle closes at least above 50 percent the body of the black candle.
  5. The larger the black and white candles, the better.
  6. A gap is desirable but doesn’t count on it on 24H markets
  7. A high volume in the first and third candles would be good signs of a selloff and consequent reversal.
Market Psychology

As in most bullish reversals, the first day, the hopeless bulls capitulate with a significant drop and substantial volume. The next day the power of the sellers stops in a short-bodied candle. The third day began bullish, touching the stops of the late short-sellers, and also caused by the close of positions of profit-takers. That fuels the price to the upside, making more short sellers close their positions -buying- and pushing up further the price. At the end of the day, buyers take control of the market action closing with a significant white candle on strong volume.

The Evening Star

The Evening star is the reciprocal of the Morning star, and even more so, when trading pairs in the Forex market, or any pair, for that matter. In this case, the Japanese linked this formation with the Venus planet, as the precursor or the night. It is created when a long white candle is followed by a small body and a large black candle.

As the case of the Morning Star, a gap up on the second small-bodied candle followed by a gap down on the third black candle is further confirmation of a reversal, but that seldom happens in the Forex Market.  Also, the third candlestick is asked to close below 50 percent of the body of the first white candle.

 

Chart 2 – Evening Star on the EURUSD Pair (click on it to enlarge)

Criteria for an Evening Star
  1.  The upward trend has been showing for some time
  2. The body of the first candle is white and large.
  3. The second candlestick shows indecision in the market
  4. On the third day, it is evident that the sellers have stepped in and closes below 50 percent of the initial white candle.
  5. The longer the white and black candles, the better
  6. A gap before and after the second candle is desirable, although not attainable in Forex.
  7. A good volume in the first and third candles is also desirable.
Market Psychology

The uptrend has attracted the buyers, and the last white candle has seen an increasing volume. In the next session, the market gapped of continue moving up for a while, catching the last stops by short-sellers, but suddenly retraces and creates a small body, with the close next to the open. The next day there is a gap down makes the stops of the long positions to be hit, adding more selling pressure to the profit takers and short-sellers. The day ends with a close that wipes most of the gains of the first white candle, that shows that the control is in the hand of sellers.

 

 

Reference: Profitable Candlestick Patterns, Stephen Bigalow

 

 

Categories
Candlestick patterns Forex Candlesticks

Candlestick Reversal Patterns IV – The Hammer and The Hanging Man

 

 

 

The Hammer

The Hammer is a one-candle pattern. The Hammer is identified as a small body with a large lower shadow at the bottom of a downtrend. The result of having a small body is that the open and the close are near each other. The large lower shadow means during the session sellers could move down the price but, then, buyers stepped in and pushed the price back to the levels of the open, or, even, a bit further up. That means sellers lost the battle, and the buying activity started dominating the price action. A positive candle is needed to confirm the price action. This usually converts this candle into a Morning Star formation.

Chart 1 – Hammer in the USDCHF Pair

Criteria for Hammers

  1. The lower shadow must be at least twice the length of the body
  2. The real body is at the upper side of the range. The color does not matter much, although a white body would increase the likelihood of the reversal.
  3. There should be no upper shadow or a very tiny one.
  4. The longer the lower shadow, the better
  5. A large volume on the Hammer is a good signal, as a blob woff day might have happened.

Market Psychology

After a relatively large downtrend, the sentiment of the traders is rather bearish. The price starts moving down at the open and makes a new low. Then, buy orders to move the price up. Profit-taking activity also contributes to the upward move. Then intraday stop-loss orders come in fueling the action further up. A positive follow-up candle would confirm the control of the action by the buyers.

The Hanging Man

The Hanging Man is also a figure similar to a Hammer, with its small body and large lower shadow, but it shows up after a bullish trend. The Japanese named this figure that way because it looks like a head with the body and feet hanging.

Chart 2 – Three Hanging Man in the DOW-30 Index

Criteria for the Hanging Man

  1. The lower shadow must be at least twice the length of the body
  2. The real body is at the upper side of the range. The color does not matter much, although a white body would increase the likelihood of the reversal.
  3. There should be no upper shadow or a very tiny one.
  4. The longer the lower shadow, the better
  5. A large volume on the Hammer is a good signal, as a blowoff day might have happened.

Market Psychology

After a strong trend, the sentiment is quite positive and cheerful. On the day of the Hammer, the price moves higher just a bit, then it drops. After reaching the low of the session, the buyers step in again and push the price back up, close to the open level, at which level the session ends. This would indicate the price action is still in control of the buyers, but the considerable drop experienced in the first part of the session would mean the sellers are eager to sell at these levels, and a resistance zone was created. A lower open or a black candlestick the next day would move the control to the sell-side.

Reference.
Profitable Candlestick Patterns, Stephen Bigalow

Categories
Chart Patterns Forex Trading Guides

Chart Patterns: Start Here

Chart Patterns: Start Here

Chart Patterns: Start Here

Chart Patterns: Start Here

Something that I stress repeatedly throughout our series on chart patterns is the difference between traditional markets like the stock market and the forex market. I’m sure a good number of readers have spent time reading books on technical analysis and have recorded and have seen various statistics regarding the performance of the various chart patterns that exist. There’s a big problem that exists in the realm of technical analysis and its use in forex markets, and that is related to nearly 100% of all technical analysis trading material focused on the stock market. Why is this a problem? Several reasons.

  1. Statistical performance values for chart patterns based on the pattern’s performance in the stock market is overwhelmingly long-biased: the stock market has been in a bull market for over a decade.
  2. Forex markets do not ‘trend’ in the traditional sense of financial analysis, they range.

In a nutshell, just because a particular pattern in the stock market may not perform that well in the forex market, it does not mean that its performance isn’t positive in forex. I’ve learned that most underperforming chart patterns in the stock market perform very well in forex markets. As always, make sure you do your own due diligence and research – investigate each pattern for yourself and see how they play out in your own trading.

To begin learning about Chart Patterns, follow this series of education articles.

Chart Patterns: Pullbacks and Throwbacks

Chart Patterns: Symmetrical Triangles

Chart Patterns: Ascending Triangles

Chart Patterns: Descending Triangles

Chart Patterns: Head-And-Shoulder Patterns

Chart Patterns: Broadening Patterns

 

Sources:

Kirkpatrick, C. D., & Dahlquist, J. R. (2016). Technical analysis: the complete resource for financial market technicians. Upper Saddle River: Financial Times/Prentice Hall.

Bulkowski, T. N. (2013). Visual guide to chart patterns. New York, NY: Bloomberg Press.

Bulkowski, T. N. (2008). Encyclopedia of candlestick charts. Hoboken, NJ: J. Wiley & Sons.

Bulkowski, T. N. (2002). Trading classic chart patterns. New York: Wiley.

 

Categories
Candlestick patterns Forex Candlesticks

Candlestick Reversal Patterns III: Understanding the Harami

So far, the reversal formations we saw – the Piercing Pattern, the Dark Cloud Cover, and the Engulfing patterns, were strong reversal signals, showing that the bulls or bears had the control. The Harami is usually a less powerful signal.

So far, the reversal formations we saw – the Piercing Pattern, the Dark Cloud Cover, and the Engulfing patterns, were strong reversal signals, showing that the bulls or bears had the control. The Harami is usually a less powerful signal.

So far, the reversal formations we saw – the Piercing Pattern, the Dark Cloud Cover, and the Engulfing patterns, were strong reversal signals, showing that the bulls or bears had the control. The Harami is usually a less powerful signal.

The Harami is created when a short candle’s body is entirely contained inside the body of the preceding candle. The color of the second body of this pattern is unimportant, although the color of the first one follows the trend (black in downtrends and white in uptrends). The name “Harami” comes from the old Japanese word meaning “pregnant.” Japanese traders call the first candle, “the mother,” and the second one, “the baby.
The appearance of a Harami is indicative that the current trend has ended. According to Steve Nison, the Japanese say the presence of a Harami shows the market is losing its breath. They contend that, after a large healthy candle, the small inside candle shows uncertainty.
We have to say that if we look at the charts, harami-like formations appear often, but most of it was just pauses or pullbacks of the primary trend. Thus, although not good enough to call for a reversal of the trend, they could be potential signals to exit a trade or take partial profits.
Also, we have to remember that, since trading the Forex markets, and, also, intraday, there are no gaps available. This fact makes a harami quite similar to a Piercing pattern or a Dark cloud Cover if the body of the second candle surpasses half of the previous body.

Chart 1 – Several Haramis in the Cable.

As we see in chart 1, haramis and engulfing patterns are alike, with the exception of the second one.  What we can see is that be it harami or engulfing, the pattern is worth to pay attention to since most of the time signals the end of the previous leg.

Criteria for a Bullish Harami

  1. The body if the first candle is black (red) and the body of the second candle is white (green)
  2. There is evidence of a downtrend.
  3. The second candle opens higher or at the close of the first candle.
  4. Just the body needs to be inside the body of the first candle. That is unlike the inside day.
  5. A confirmation is needed for a reversal signal.
  6. The longer the black and white candles, the more powerful the signal
  7. The higher the white candle closes, the better.

Market Psychology of a Bullish Harami

After a selloff day, the next day, sellers don’t have the strength to push the prices further down. Concerned short-sellers start to take profits of just close the trade fuelling the purchases. The price finishes higher, and traders mark the double bottom as support. A strong day following the harami formation would convince the market participants that the trend has reversed.

Criteria for a Bearish Harami

  1. The body if the first candle is white (green) and the body of the second candle is black (red)
  2. There is evidence of an uptrend.
  3. The second candle opens lower or at the close of the first white candle.
  4. Just the body needs to be inside the body of the first candle. That is unlike the inside day.
  5. A confirmation is needed for a reversal signal.
  6. The longer the white and black candles, the more powerful the signal
  7. The lower the black candle closes, the better.

Chart 2- Several Haramis in the GBPAUD pair. Not all are successfully signaling a reversion of a trend

Market Psychology of a Bearish Harami

After a strong bullish trend, a long white candle emerges. In the next session, the longs cannot force more upsides. The asset began to drop, as concerned bulls are closing their positions to pocket their profits, and the day finished lower. Also, short-term traders mark the top of the white candle as a resistance level. A third day showing weakness is what is needed to convince everybody that the uptrend is over and a new leg down is starting.

References:

Profitable candlestick Patterns, Stephen Bigalow

The Candlestick Course: Steve Nison

 

Categories
Forex Elliott Wave

How to Start a Wave Analysis – Part 4

In our previous educational article, we learned to identify the end of the directional and non-directional movements. In this article, we will learn to recognize neutral movements.

In our previous educational article, we learned to identify the end of the directional and non-directional movements. In this article, we will learn to recognize neutral movements.

In our previous educational article, we learned to identify the end of the directional and non-directional movements. In this article, we will learn to recognize neutral movements.

The Neutral Movement

When the wave analyst faces the market in real-time, it is common to observe the price action running at a lower price/time relationship than the usual market speed. When this phenomenon occurs, we are in the presence of a neutral movement.

In particular, when the price changes its direction if the angle between the initial move and the next one is lesser than 45° thus, we are facing a neutral movement.

Depending on the kind of movement developed by segments under study, there exist two possible scenarios of a neutral move.

  • If the neutral movement runs in the middle of two legs that advances in the same direction, thus the end of the first path will be at the end of the neutral segment.
  • The second case occurs if the neutral movement advances between two segments that run in the opposite direction. In this case, the end of the first movement will be at the end of the second segment.

Neutral Movements in the US Dollar Index

The following chart shows the US Dollar Index in its 8-hour timeframe. In the figure, we observe a first neutral movement, which runs upward from 96.98 until level 97.40.

The ascending sequence makes two pauses that look horizontal. Applying the neutral movement concept, we conclude that this movement corresponds to a single path that advances into the rectangle.

In the second rectangle, we observe the decline that the Dollar Index from level 97.72 until 96.45. This bearish move exposes an acceleration that turns complex the wave analysis. In this case, the neutral movement concept helps us in determining that the bearish move corresponds to a single movement.

If the wave analyst looks for a detailed decomposition of the entire bearish segment simplified by the neutral movement, in words of R.N. Elliott, the wave analyst should have to study the move in a lower timeframe to identify every segment.

Waves Observation

Until the previous section, we observed that each movement produced is divided into two main categories depending on the segments that compound each sequence.

According to the Wave Principle, R.N. Elliott described the existence of a movement that follows a trend, and the reaction of the initial move. Elliott defined to these movements as an impulsive and corrective wave.

  • An impulsive wave progresses in a defined direction. Its internal sequence is formed by five segments, where three movements follow the same path, and the other two move against the main trend.
  • A corrective wave characterizes by its progress against the main trend direction. A corrective formation is composed of three segments.

Identifying Movements

To facilitate the wave analysis, R.N. Elliott, in his Treatise, defined the use of labels to identify the advance of the movement of each segment.

Elliott, in his work “The Wave Principle,” tells us that the use of tags to identify each movement is not an end by itself. Instead, it is a tool to ease the wave study.

The following chart represents the GBPUSD in its 4-hour range. From the figure, we observe the Cable developed a rally that advanced in five segments from level 1.19585 touched on September 03rd, 2019.

The sterling reached its highest level at 1.35149 on December 12th, 2019, from where the price action began a corrective process that still looks in progress.

Conclusions

Sometimes, the nature of the movement makes complex the waves’ observation process, and in consequence, to determine where it begins or ends.

The neutral movement concept aid the wave analyst to determine, in an objective way, where it starts or ends a move when it is not simple to define. Once the wave analyst discerns where each movement starts and finishes, the analyst will be able to advance in the wave identification process.

Suggested Readings

  • Neely, G.; Mastering Elliott Wave: Presenting the Neely Method; Windsor Books; 2nd Edition (1990).
  • Prechter, R.; The Major Works of R. N. Elliott; New Classics Library; 2nd edition (1990).
Categories
Chart Patterns

Chart Patterns: Wedge Patterns

Wedge Patterns

Falling Wedge
Falling Wedge

Wedge Patterns

Wedge Patterns

I want to stress, again, that the frequency and positive expectancy of patterns in technical analysis will vary from market to market. Most of the literature is written for the stock market, which is an overwhelmingly long-biased market. So, bullish patterns perform much better than bearish patterns in the stock market. I don’t have any real statistics to reference other than my years of trading experience. It has been my experience that wedge patterns are one of the most profitable setups in the forex market.

Wedges look like (and in fact, are) extended triangles. Wedges are made of two trend lines that are drawn just like a triangle. The difference between wedge patterns and triangle patterns is simple: the trendlines in a wedge pattern point in the same direction. Ascending triangles have flat tops and a rising bottom. Descending triangles have flat bottoms with declining tops. Symmetrical triangles have a downtrend line and an uptrend line. Wedges are different. Rising wedges have a trendline both above and below price sloping up. Falling wedges have a trendline both above and below, but sloping down. Depending on the technical analysis material you read, you will see wedges that may look like channels, and that is fine – many do.

Wedge patterns should tell you one thing: the end is coming. Because wedges have two trendlines that point in the same direction, the slope of the move is often extreme and is indicative of a climax move. These are incredibly profitable and favorable patterns when you spot them – and they are horrible to trade against if you are trading inside of them. If you read Bulkowski’s work, you’ll know that he recommends at the trendlines in a wedge should be touched at least five times in order for the wedge pattern to authentic. This is true in the stock market as well as in the forex market.

 

Rising Wedge

Rising Wedge
Rising Wedge

You might think that a rising wedge pattern shows up at the top of a trend, and it often does. But you will also find the rising wedge appear at the bottom of a trend. When you see the rising wedge appear after a prolonged downtrend, be careful! The rising wedge that forms after a long bear move is often a continuation pattern. An easy way to think of the rising wedge is that it is an overwhelmingly bearish pattern. It doesn’t matter where it shows up in any trend – it is an extremely bearish pattern.

When I am trading the rising wedge, I generally take the initial breakout that moves below the second to last test of the bottom trendline. The example above shows that there is no immediate retest of the breakout lower. Retests do happen, but they are less frequent than what we see in the ascending, descending and symmetrical triangles.

 

Falling Wedge

Falling Wedge
Falling Wedge

The inverse of the rising wedge pattern is the falling wedge pattern. It can show up at either the end of an uptrend or a downtrend. If you see a falling wedge that occurs at the top of an uptrend, then you could we witnessing a false breakdown lower and see a resumption of the prior bull move. If you see the falling wedge at the end of a downtrend, then you can expect a swift reversal or deep throwback. Just like the rising wedge, the falling wedge is heavily biased towards one direction: overwhelmingly bullish.

On the image above, I’ve added an Impulse Wave to show how you can use Elliot Waves to help determine whether or not a wedge pattern is valid. Remember: Bulkowski said that that a wedge pattern is only confirmed when the trendlines have been tested at least five times. Another condition on the chart above that we didn’t see on the falling wedge is the attempted retest of the break. Again, retests are common in all patterns, but they are definitely less frequent with wedge patterns – that has been my experience with them in forex markets.

When trading the falling wedge, I like to enter when price moves above the second to last swing high. On the chart above, the entry would be above wave four.

 

Sources:

Kirkpatrick, C. D., & Dahlquist, J. R. (2016). Technical analysis: the complete resource for financial market technicians. Upper Saddle River: Financial Times/Prentice Hall.

Bulkowski, T. N. (2013). Visual guide to chart patterns. New York, NY: Bloomberg Press.

Bulkowski, T. N. (2008). Encyclopedia of candlestick charts. Hoboken, NJ: J. Wiley & Sons.

Bulkowski, T. N. (2002). Trading classic chart patterns. New York: Wiley.

Categories
Candlestick patterns Forex Candlesticks

Candlestick Reversal Patterns: Refresh your Knowledge

After our last articles on candlestick reversal patterns, test your kowledge.

After our last articles on candlestick reversal patterns, test your kowledge.

After our last articles on candlestick reversal patterns, test your knowledge.

If you need to give a second read, these are the links:

 

 

Let’s begin

 

[wp_quiz id=”59882″]

 

 

Reference:

The Candlestick Course: Steve Nison

 

Categories
Chart Patterns

Chart Patterns: Broadening Patterns

Chart Patterns – Broadening Pattern & The Diamond Pattern

Chart Patterns – Broadening Pattern & The Diamond Pattern

Chart Patterns – Broadening Pattern & The Diamond Pattern

Broadening Top
Broadening Top

This pattern is also called a funnel or a megaphone pattern. It’s an inverse symmetrical triangle. This pattern is definitely not that common, and it’s a tricky pattern to trade. The behavior of price in a broadening pattern is to increase swing ranges where new higher highs and new lower lows are made. In my opinion, it is best to ignore this pattern. The breakout and retest of the upper or lower trendlines are the prevailing trade strategies utilized for this pattern. Of all the patterns, to trade, this is one of the least profitable. However, I’ve learned that the breakouts are often false, due to the nature of the final swing in the pattern being mostly overbought or oversold. It is not uncommon to see megaphone patterns turn into a triangle pattern – which results in a rare but profitable pattern known as a Diamond.

 

Chart Patterns – Diamond Pattern

Diamond Top
Diamond Top

The diamond pattern is rare. It is also difficult to even notice if it exists. In fact, Thomas Bulkowsi writes on his site, ‘Let me clear about this. I don’t like diamonds. They are as tough to spot as nightcrawlers in the grass on a summer night.’ I believe that is a pretty accurate description. But, while diamond patterns are challenging to spot, they are a very powerful pattern that often results in fast and violent moves in the opposite direction – higher for diamond bottoms and lower for diamond tops. It is ok for the patterns to have one side that seems more slanted than the other and, in fact, they often do not appear as symmetrical as the example above. We trade a diamond pattern the same way we would any other triangle pattern.

 

Sources:

Kirkpatrick, C. D., & Dahlquist, J. R. (2016). Technical analysis: the complete resource for financial market technicians. Upper Saddle River: Financial Times/Prentice Hall.

Bulkowski, T. N. (2013). Visual guide to chart patterns. New York, NY: Bloomberg Press.

Bulkowski, T. N. (2008). Encyclopedia of candlestick charts. Hoboken, NJ: J. Wiley & Sons.

Bulkowski, T. N. (2002). Trading classic chart patterns. New York: Wiley.

Categories
Candlestick patterns Forex Candlesticks

Candlestick Reversal Patterns II: Let’s know The Engulfing Patterns

 

 

 

The engulfing pattern is a major reversal figure, and it is composed of two inverted candlesticks, as in the case of the Piercing pattern and the Dark Cloud Cover figure. Typically, this figure appears at the end of an upward or downward trend. It is common that the price pierces a significant resistance or support level, then making a gap up or down in the following session, to, suddenly, change its direction and end the day entirely covering the first candle.

The Bullish Engulfing

The bullish engulfing candle shows at the bottom of the trend. After several sessions with the price controlled by sellers, another black candle forms. The next session opens below the previous session close and closes above the last open, thus, completely covering the body of the black candle made on the previous session.

Criteria:

  1. The body of the second candlestick covers completely that of the black candle.
  2. There is evidence of a downward trend, even a short-term one.
  3. The body of the second candle is white and of the opposite color of the first candlestick. The exception is when the first candlestick is a doji or a tiny body. In this case, the color of the first candle is unimportant.
  4. The signal is enhanced if a large body engulfs a small body.
  5. a Large volume on the engulfing day also improves the signal.
  6. A body engulfing more than one previous candle shows the strength of the new direction.
  7. Engulfing also the shadows of the previous candle is also good news.
  8. In case of a gap, the larger the gap, the higher the likelihood of a significant reversal.

Market Sentiment:

After a downtrend, the next day, the price starts lower than the previous close but, after a short while, the buyers step in and move the price up. The late sellers start to worry, as they see their stops caught, adding more buying to the upward movement. As the price moves up, it finds a combination of profit-taking, stop-loss orders, and new buy orders. At the end of the day, this combination creates a strong rally that moves the price above the previous close.

 Fig 1- Bearish and Bullish engulfing patterns in the Bitcoin 4H  chart

The Bearish Engulfing

The Bearish engulfing pattern is the specular figure of a Bullish engulfing figure. And more so in the Forex market where assets are traded in pairs, making every move symmetrical.

The bearish engulfing forms after an upward trend. It is composed of two different-colored bodies, as in the above case. This time, though, the order is switched, and a bullish body is followed by a black candle. Also, the black body engulfs completely the body of the previous white candlestick. Sometimes that comes after the price piercing a key resistance, to then come back, creating a fake breakout.

Criteria:

  1. The uptrend is evident, even short-term.
  2. The body of the second day engulfs the body of the previous day.
  3. The body of the second candle is black, and the previous candle is a white candlestick, except for tiny bodies or dojis. In that case, the color of the first candlestick is unimportant.
  4. A large body engulfing a small body is an enhancement, as it confirms a change in the direction.
  5. A large volume on the engulfing day is also good for the efficacy of the signal.
  6. A body engulfing more than one previous candle shows the strength of the new direction.
  7. Engulfing also the shadows of the previous candle is also good news.
  8. In case of a gap, the larger the gap, the higher the likelihood of a substantial reversal.

Market sentiment:

After an uptrend, the price opens higher but, after a while, it reverses and moves below the previous open and below. Some stops trigger and add more fuel to the downside. The downward action accelerates on a combination of profit-taking, more stops hit, and new short orders. At the end of the day, the price closes below the open of the previous session, with the sellers in control. 

—- 

References:

The Candlestick Course: Steve Nison

Profitable candlestick Patterns, Stephen Bigalow

Categories
Candlestick patterns Forex Candlesticks

Candlestick Reversal Patterns I: Overview and The Piercing Pattern

Candlestick Reversal patterns: An Overview

Candlestick Reversal patterns: An Overview

Candlestick Reversal patterns: An Overview

Candlestick reversal figures are composed mainly of bu two or three candlesticks, which in combination harness the psychological power to shift the market sentiment. 

Depending on the importance of the severity of reversal, their names vary. Japanese are very visual regarding the names they gave to them. Therefore, we can almost visualize them just by its name.

In this article, we will learn the following content:

  • Overview of the reversal candlestick patterns
  • how to identify a Bullish Piercing pattern and its specular Dark Cloud Cover pattern
  •  How important engulfing patterns are and how to recognize them
  • Experience how counterattack figures lead to swift trend reversals.

The predicting power of two candle figures is sometimes astonishing. For a sample to be statistically significant, scientists need more than 20 samples for normally distributed phenomena, sometimes more. A reversal figure only shows eight data points. 2x (OHLC), and besides that traders most of the time, the reversal figure warns about a trend reversal or at least the end of the current trend.

The typical reversal pattern is a two candle figure that begins with a topping or bottoming candle followed by an opposite candle that erases partially or totally, the price action of the first one.

Piercing pattern and Dark Cloud Cover

The Piercing Pattern and the Dark Cloud Cover are specular patterns. The Piercing Pattern warns of a reversal of the bearish trend, whereas the Dark Cloud Cover heralds the end of a bullish trend.

 Candlesticks are not always good predictors, and the Piercing Pattern is a weak signal, especially if the trend has not moved too deep yet. Of course, the most oversold is the price, the better a Piercing Pattern predicts a reversal. The Dark Cloud Cover, though, is seen to show much more predicting power.

Timeframes

The Japanese used them mostly in daily and weekly timeframes. The use of these two patterns in intraday trading must be confirmed with other signals, as, for instance, the Piercing Pattern occurring after hitting a significant support or a Dark Cloud cover as a result of a strong resistance rejection. The use of short-term oscillators such as 10-period stochastics or Williams percent R in combination with these two signals will improve the likelihood of success while trading them.

Recognizing a Piercing Pattern

 

The bullish Piercing Pattern is composed of a large bearish body forming after a broad downtrend. The next candle begins below the low of the first black candle, and closes above the midway up, or even near the open if the preceding bearish candle. 

Criteria:
  1. The first candle shows a black body
  2. The second candle shows a white body
  3. The Downtrend is clear and for a long time
  4. The second day opens below the range of the previous day
  5. the second white candle closes beyond the 50% of the range of the last day.
  6. The longer the candles, the better their predicting power.
  7. If there is a gap down, the greater, the better
  8. The higher the white candle closes, the stronger the signal
  9. A large volume during these two candles is significant.

The Dark Cloud Cover

Apply the specular conditions to the Dark Cloud cover. We also should remember that trading forex pairs make both patterns fully symmetrical.

Criteria:
  1. The first candle shows a white body
  2. The second candle shows a black body
  3. The upward trend is clear and for a long time
  4. The second day opens above the range of the previous day
  5. the second black candle closes below the 50% of the range of the last day.
  6. The longer the candles, the better their predicting power.
  7. If there is a gap up, the greater, the better
  8. The lower the black candle closes, the stronger the signal
  9. A large volume during these two candles is significant.

 

Final words

lease note that the Forex and crypto markets rarely have gaps. Therefore, the condition that the second open being below the range of the first candle is almost impossible to satisfy. In this case, we rely solely on the relative size of both candlesticks and the closing above 50 percent of the range of the black candle. Of course, it is almost impossible to get gaps in intraday charts except for spikes due to sudden unexpected events.

 

References: 

The Candlestick Course: Steve Nison

Profitable candlestick Patterns, Stephen Bigalow

Categories
Forex Elliott Wave

How to Start a Wave Analysis – Part 3

In our previous article about the preliminary wave analysis, we commented on the relation between price and time and distinguished the difference between directional and non-directional movement. In this educational post, we will extend new concepts to develop a wave analysis.

In our previous article about the preliminary wave analysis, we commented on the relation between price and time and distinguished the difference between directional and non-directional movement. In this educational post, we will extend new concepts to develop a wave analysis.

In our previous article about the preliminary wave analysis, we commented on the relation between price and time and distinguished the difference between directional and non-directional movement. In this educational post, we will extend new concepts to develop a wave analysis.

Finding the end of a Movement

Identifying the end of a movement is usually a tough task, especially when the wave analyst makes its first analysis.

To reduce the subjectivity in this stage, the basic rule to identify the end of a segment is: if the price action of the following section of a directional movement experiences a retrace for more than 100%, it is indicative that the movement has ended.

To illustrate this rule, let us consider the GBPNZD in its 8-hour chart. In the figure, we observe the bearish directional movement starts at 2.00187. The last directional segment that begins at 1.87283 and declines until 1.82790.

Once the price surges from the lowest level, and advances over 1.87283, reaching at 1.90588, we observe that the bearish directional movement has finished.

In the case of a non-directional movement, the segments series that conforms to the consolidation formation frequently tends to finish once the price exceeds the 161.8% level of the non-directional range.

The next chart exposes to NASDAQ e-mini futures contract in its 12-hour timeframe. The figure illustrates the non-directional movement that developed once the price reached 8,040.75 pts.

The e-mini NASDAQ futures price made a first bearish segment From 8,040-75 until 7,359.75 pts. From this low, the price action reacted, making a bounce that exceeded the 61.8% of the first bearish decline. In the same way, the third internal segment retraces more than 61.8% of the second non-directional move.

After NASDAQ surpassed 8,040.75 pts, the price continued developing a directional sequence that drove the e-mini index to reach several consecutive record highs to the date.

GBPJPY Continue Developing in a Non-Directional Move

The GBPJPY cross went bearish, starting from the 147.954 level in a five-segmented wave creating a directional sequence until 141.161. From there, the price found new buyers expecting the boost of the GBPJPY once again.

The surpassing of the previous high of segment “4” at 143.054 makes us perceive that the bearish directional movement ended with the advance of leg “6” that ended at the 144.364 level.

Once the top of segment “6” at 144.364 was reached, the price reacted bearishly, making a new decline that created a new lower low at 140.818. In view that the movement exceeded a retracement of 61.8% and was less than 161.8%, the sequence corresponds to a non-directional move.

The next movement, identified as “8”, brought the price to 144.524. This path corresponds to an additional segment of the non-directional sequence. Once that fresh high was reached, the price action reacted downward. The movement remains currently active and based on the previous analysis, the price action bias is bearish.

Conclusions

The identification of the beginning and end of each segment allows the wave analyst to reduce subjectivity in the study.

We must remark that directional and non-directional movements are not the same concepts as impulsive and corrective movements.

Suggested Readings

  • Neely, G.; Mastering Elliott Wave: Presenting the Neely Method; Windsor Books; 2nd Edition (1990).
  • Prechter, R.; The Major Works of R. N. Elliott; New Classics Library; 2nd edition (1990).
Categories
Forex Elliott Wave

How to Start a Wave Analysis – Part 2

In the previous article, we presented the wave identification process starting with the segment as the basic unit of the price movement. In this educational article, we will introduce some rules to support the preliminary analysis.

In the previous article, we presented the wave identification process starting with the segment as the basic unit of the price movement. In this educational article, we will introduce some rules to support the preliminary analysis.

In the previous article, we presented the wave identification process starting with the segment as the basic unit of the price movement. In this educational article, we will introduce some rules to support the preliminary analysis.

Price and Time in the Waves Identification

When an Elliott wave analyst decides to study a financial asset, he tends to choose a specific timeframe, and in consequence, he will visualize a defined group of waves. However, in view that the speed of price changes across time, the analyst must be flexible in the timeframe selection process.

The psychology of masses changes over time; this phenomenon can be reflected in the speed of price, making a market more volatile in a specific moment than another. For this reason, it is useful to analyze using different timeframes.

R.N. Elliott, in his work “The Wave Principle,” exposes the importance of selecting different timeframes when the speed of price doesn’t allow us to visualize the different waves adequately.

Directional and Non-Directional Movement Concept

Before starting to analyze the price through time, it is essential to distinguish the concept of directional and non-directional movement. The directional move contains a group of segments that produces a global increase or decrease in the value of a financial asset.

When the price action runs in a directional movement, the segment that moves in the opposite direction of the previous move, never retracing beyond the 61.8% Fibonacci level of that movement.

Directional and Non-Directional Movement in GBPJPY Cross

The following chart illustrates the concept of directional and non-directional movement. The GBPJPY cross in its 2-hour chart exposes the bearish directional movement started on December 13th, 2019, when the price reached 147.954 and ended when the price found support at 141.161 on December 23rd, 2019.

The bearish directional movement ended once the segment identified as “6” surpassed the origin of the last bearish section tagged as “5”.

The sixth segment climbed until 144.364, from there, the cross found fresh sellers, which drove its price to a new low at 140.817. This non-directional movement is identified as the segment “7”.

After this new support, GBPJPY bounced in a segment identified as “8” until 144.524, being the third segment of the non-directional sequence. Currently, the price is retracing in a bearish segment that still is active.

Conclusion

The price moves following a rhythm that changes through time. Sometimes, in a different timeframe, it isn’t straightforward to visualize the Elliott wave formations, in this case, the wave analyst has to be flexible to select a different timeframe to develop its study.

The identification of directional and non-directional movements will allow the analyst to understand and follow the rhythm of the market.

Suggested Reading

– Neely, Glenn. Mastering Elliott Wave: Presenting the Neely Method. Windsor Books. 2nd Edition.

Categories
Chart Patterns

Chart Patterns: The Head And Shoulders Pattern

The Head And Shoulders Pattern

Regular and Inverse Head & Shoulder Pattern
Regular and Inverse Head & Shoulder Pattern

The Head And Shoulders Pattern

The Head And Shoulders Pattern

Of all the patterns that exist in any market, the most well known is the Head And Shoulder Pattern. Kirkpatrick and Dahlquist’s book, Technical Analysis, detailed many studies on the performance of this pattern. The result of all the data is that the Head And Shoulder Pattern is the most profitable of all standard patterns. Interestingly, Dalquist and Kirkpatrick made no distinction between the performance of the head and shoulder pattern and the inverse head and shoulder pattern (sometimes called the bottom forming head and shoulder pattern). While this pattern is successful across many markets, it is also the pattern that causes the most losses to new traders. We’ll get into the specifics of why this pattern destroys a good number of traders. First, we need to understand what the pattern is.

Regular and Inverse Head & Shoulder Pattern
Regular and Inverse Head & Shoulder Pattern

The image above shows two head and shoulder patterns, the regular pattern and the inverse pattern. It just so happened that the daily chart of the AUDUSD conveniently had both of the patterns right next to each other – not a common occurrence. Now, you can and will read a lot of rules and theories behind the head and shoulder pattern. I could go into the behavior of this pattern, the psychology behind the three triangles that make up the broader pattern, the symmetrical nature of the left and right shoulders, etc., etc., etc., but we don’t need to complicate a pattern that can be very easily understood.

There’s a great book by Larry Pesavento titled Trade What You See. While the book Trade What You See is focused primarily on Harmonic Patterns, the title always stuck with me. If you were to stand in front of a mirror, you would more than likely notice the symmetrical nature of your left and right shoulders (unless you’ve had some significant injury or disease. There’s a good number of people who believe that both the right and left shoulders need to be as exact as possible – but this isn’t necessary.

Here’s a simple rule to follow:

If it doesn’t look like a human head and shoulder, then it probably isn’t a head and shoulder pattern.

 Are you familiar with the poker game Texas Hold’em or any other form of poker? There are several maxims that poker players follow, one of them is ‘Don’t chase the straight or the flush.’ Why? Because when you get dealt a hand that is missing just one card for your straight or one more suite to complete your flush, the odds are overwhelmingly against you getting that final card to complete the straight/flush. Head and shoulder patterns are the same way. The head and shoulder pattern is only complete when the neckline has been broken. Let me repeat that three times for you:

A head and shoulders pattern is not complete until the neckline is broken.

A head and shoulders pattern is not complete until the neckline is broken.

A head and shoulders pattern is not complete until the neckline is broken.

Failed Head & Shoulder Pattern
Failed Head & Shoulder Pattern

 

Many a trading account has been the victim of trying to anticipate the completion of a head and shoulder pattern, only to have it be broken. In addition to being the most profitable basic pattern, the head and shoulder pattern is also one of the most rejected patterns. We don’t chase straights or flushes in poker, and we don’t chase patterns in trading. In addition to the information above, here are some other factors that can help you interpret the head and shoulder pattern:

  1. If the volume in the left shoulder is greater than the right shoulder, there is an increased likelihood of the head and shoulder pattern completing.
  2. If the volume in the right shoulder is greater than the left shoulder, failure rates are higher.
  3. Horizontal necklines increase the probability of a head and shoulder pattern completing.
  4. The more dramatic the slop of the neckline, the more likely the pattern will fail to develop.
  5. Aggressive entries can be taken immediately when the price breaks the neckline.
  6. Conservative entries can be taken after the neckline has been re-tested post-breakout.
  7. If price breaks the neckline, retracements occur almost 70% of the time.

 

Sources:

Kirkpatrick, C. D., & Dahlquist, J. R. (2016). Technical analysis: the complete resource for financial market technicians. Upper Saddle River: Financial Times/Prentice Hall.

Bulkowski, T. N. (2013). Visual guide to chart patterns. New York, NY: Bloomberg Press.

Bulkowski, T. N. (2008). Encyclopedia of candlestick charts. Hoboken, NJ: J. Wiley & Sons.

Bulkowski, T. N. (2002). Trading classic chart patterns. New York: Wiley.

Categories
Chart Patterns

Chart Patterns: Flags and Pennants

Flags and Pennants If you’ve ever traded a chart and you’ve seen what looks like a reversal in the trend, but as soon as you enter the trend seems to continue, odds are you were trading against a continuation pattern. Flags and pennants are titles given to patterns that show up as small countertrend moves […]

Flags and Pennants
Flags and Pennants

Flags and Pennants If you’ve ever traded a chart and you’ve seen what looks like a reversal in the trend, but as soon as you enter the trend seems to continue, odds are you were trading against a continuation pattern. Flags and pennants are titles given to patterns that show up as small countertrend moves […]

Flags and Pennants

If you’ve ever traded a chart and you’ve seen what looks like a reversal in the trend, but as soon as you enter the trend seems to continue, odds are you were trading against a continuation pattern. Flags and pennants are titles given to patterns that show up as small countertrend moves that ultimately trap participants and then use their momentum to keep the price moving in the direction of the trend. Flags are represented as rectangular channels, and pennants are represented as triangles.

Before a flag or pennant can be identified, we first need a flag pole. A flag pole is any clear trending price action that, well, looks like a pole. See below:

Flags and Pennants
Flags and Pennants

 

The images above show examples of bearish flags and bearish pennants, as well as bullish flags and bullish pennants. If you are unfamiliar with how to trade triangles or rectangles, refer to the articles that discuss the various triangle patterns. But we can review the basics of entering these great continuation patterns.

Bearish Pennant
Bearish Pennant
Bear Flag
Bear Flag
Bullish Pennant
Bullish Pennant
Bull Flag
Bull Flag

 

Learning how to trade flags and pennants is one of the most useful and enjoyable things that you can learn – especially as a new trader. Flags and pennants help train your brain to get used to buying dips during bull runs and shorting rallies during bear moves. If you get to a point where you can profitably trade flags and pennants, then you have transitioned into a trader who is very near outperforming the vast majority of your peers. It may seem like an easy thing to do – but it is an entirely different thing to execute. Analyzing and identifying a flag or pennant is easy; trading it is difficult.

I can not stress enough how profitable these patterns can be – and how easily you can miss them even in plain sight. The problem resides with your brain – that ‘lizard’ part that kicks in when you are are fearful of your account. When you begin to feel the fear of your account losing money, that triggers a powerful part of your brain known as the limbic system. The limbic system controls fear and pleasure. And when your fear sense is triggered, it hyper focuses the synapsis across your brain. Things that you would passively identify like flags and pennants are tertiary in their importance when the limbic system is acting in your defense. You need to find ways to ‘pause’ the process with things like alerts. On the images above, you saw horizontal lines above prior swing highs and below prior swing lows. Placing alerts at those points may be enough to interrupt your primary fear response and allow you to make money on your emotions.

Because if you are feeling it, so is everyone else.

 

Sources:

Kirkpatrick, C. D., & Dahlquist, J. R. (2016). Technical analysis: the complete resource for financial market technicians. Upper Saddle River: Financial Times/Prentice Hall.

Bulkowski, T. N. (2013). Visual guide to chart patterns. New York, NY: Bloomberg Press.

Bulkowski, T. N. (2008). Encyclopedia of candlestick charts. Hoboken, NJ: J. Wiley & Sons.

Bulkowski, T. N. (2002). Trading classic chart patterns. New York: Wiley.

Categories
Chart Patterns

Chart Patterns: Symmetrical Triangles

Symmetrical Triangles

Symmetrical Triangle
Symmetrical Triangle

Symmetrical Triangles

Symmetrical Triangles

Out of all the triangle patterns, symmetrical triangles are perhaps the most common and the most common and the most subjective. Symmetrical triangles have a standard neutral bias; however, symmetrical triangles most often form after a prior trend, because they most commonly form after a prior move. The preference of their trading direction is determined by the direction from the previous move. If the preceding move was bullish, then the symmetrical triangle is viewed as a bullish continuation pattern. Like all triangle patterns that form after a trending move, they are known as pennants.

The construction of a symmetrical triangle is like any other triangle: it requires to trendlines that intersect: one upward sloping angle and one downwards sloping angle. Price action should touch both the upper and lower trendlines at least twice – but ideally three times. A lack of open space within the triangle is ideal. Breakouts often occur in the final 1/3rd of the triangle. Volume typically falls before the breakout.

I believe that understanding the psychology of how this pattern forms is essential. The symmetrical triangle is the result of a condition that is very common in any traded market: consolidation. It’s not just common; it’s normal. Consolidation is representative of two things: equilibrium on the part of buyers and sellers and indecision by active speculators. The psychology of price action inside a symmetrical triangle is different than what occurs in an ascending or descending triangle, which both have a marked bias during the construction. Symmetrical triangles are the epitome of indecision, and traders can very quickly fall victim to whipsaws.

Symmetrical triangles, while the most common, are also the most confusing. Take the image below:

Symmetrical Triangle

The symmetrical triangle on the daily chart for the AUDJPY is a bearish pennant – a bearish continuation pattern. While any triangle that forms after an established trending move has a high probability of pushing the price in the direction of the trend, it doesn’t always happen that way. As I wrote above, symmetrical patterns are inherently neutral – so it is important to watch them. We can see that this symmetrical triangle did not cause a continuation move south – it reversed. Regardless of the direction of the breakout, some rules should be applied when entering a trade based on a breakout of a symmetrical triangle.

Symmetrical Triangle - Long Entry
Symmetrical Triangle – Long Entry

First, unlike the ascending and descending triangles, we don’t enter on the break. We want to enter when price breaks the prior high (or low). For the chart above, we would enter long above the previous swing high that touched the downtrend line.

Symmetrical Triangle - Short Entry
Symmetrical Triangle – Short Entry

The short entry from a breakout below a symmetrical triangle is the inverse of the bullish entry. On the chart above, the short entry is when price moves below the prior swing low that tagged the uptrend line – not on the initial breakout.

Pullbacks and throwbacks occur 59% of the time. Symmetrical triangles are notorious for many false breakouts, so look for frequent wicks/shadows to pierce the trendlines. Dahlquist and Kirkpatrick wrote that volume that increases on the breakout increases the performance of the pattern, but it is otherwise below average in its performance.

 

Sources:

Kirkpatrick, C. D., & Dahlquist, J. R. (2016). Technical analysis: the complete resource for financial market technicians. Upper Saddle River: Financial Times/Prentice Hall.

Bulkowski, T. N. (2013). Visual guide to chart patterns. New York, NY: Bloomberg Press.

Bulkowski, T. N. (2008). Encyclopedia of candlestick charts. Hoboken, NJ: J. Wiley & Sons.

Bulkowski, T. N. (2002). Trading classic chart patterns. New York: Wiley.

Categories
Chart Patterns

Chart Patterns: Descending Triangle

[caption id="attachment_57098" align="aligncenter" width="3338"] Descending Triangle[/caption]
Descending Triangle
Descending Triangle
[caption id="attachment_57098" align="aligncenter" width="3338"] Descending Triangle[/caption]
Descending Triangle
Descending Triangle

The descending triangle is another version of the many triangle patterns in technical analysis. It is the opposite of the ascending triangle. This pattern is overwhelmingly bearish and is one of the more common bearish continuation patterns. If you’ve read Dahlquist and Kirkpatrick’s Technical Analysis, you will find that this pattern is treated with some considerable positivity. It was one of the best-performing patterns. But there is a caveat to why this is.

Descending Triangle
Descending Triangle

The two trendlines required for the formation of a descending triangle are a flat, horizontal trendline that acts as support with a downward sloping trendline that acts as resistance. Ideally, price should touch both the upper and lower trendlines twice. Volume typically decreases as price gets closer to the apex. Breakouts occur within the final 1/3rd of the pattern. Dahlquist and Kirkpatrick report that increasing volume is actually more favorable for this pattern. The most common breakout is lower at 64% of the time.

I’ve written in prior articles about the dangers of putting to much stock into technical analysis books where the initial testing of patterns and results have been in traditional equity markets (stock markets). I believe that one of the reasons that Dahlquist and Kirkpatrick have reported such powerful and swift moves with a downward breakout is due to the nature of bear moves in equity markets. Because markets like the stock market are exceedingly long-biased, any dramatic drop below crucial support will have an exceedingly more dramatic move when compared to the forex markets – which are primarily range bound. Another factor that may attribute to the overperformance of this pattern in stock markets vs. forex markets is the ease of shorting in forex vs. the stock market.

Sources:

Kirkpatrick, C. D., & Dahlquist, J. R. (2016). Technical analysis: the complete resource for financial market technicians. Upper Saddle River: Financial Times/Prentice Hall.

Bulkowski, T. N. (2013). Visual guide to chart patterns. New York, NY: Bloomberg Press.

Bulkowski, T. N. (2008). Encyclopedia of candlestick charts. Hoboken, NJ: J. Wiley & Sons.

Bulkowski, T. N. (2002). Trading classic chart patterns. New York: Wiley.

Categories
Chart Patterns

Chart Patterns: Pullback and Throwbacks

The most common term people associate with retracements in price that retest prior areas of support or resistance is a pullback. There is another term that goes with pullback, and that is a throwback. Let’s review the differences between these two definitions. Pullback Pullbacks occur after the price has moved lower. Think of any pattern […]

Throwback
Throwback

The most common term people associate with retracements in price that retest prior areas of support or resistance is a pullback. There is another term that goes with pullback, and that is a throwback. Let’s review the differences between these two definitions. Pullback Pullbacks occur after the price has moved lower. Think of any pattern […]

The most common term people associate with retracements in price that retest prior areas of support or resistance is a pullback. There is another term that goes with pullback, and that is a throwback. Let’s review the differences between these two definitions.

Pullback

Pullback
Pullback

Pullbacks occur after the price has moved lower. Think of any pattern or support line that has price breaking out to the downside. When price pulls back up to the price level of the initial break, that is known as a pullback. Pullbacks occur during breakouts lower.

 

Throwback

Throwback
Throwback

Throwbacks occur after the price has moved higher. Think of any pattern or level of resistance that has price breaking out to the upside. When the price is thrown back down to the first level of the break, that is known as a throwback. Throwbacks occur during breakouts higher.

While there are different definitions for retests of breakout zones, know that people will often call throwbacks, pullbacks. In practice, the description itself does not matter as much as you see the behavior that price exhibits after breaking out of support or resistance. The table below identifies the average occurrence rate for a pullback or throwback from the following patterns.

Pattern

 Pullback Rate (%)

Throwback Rate (%)

Ascending Triangle

56

60
Descending Triangle

55

50

Double bottom

 —-

56
Inverse Head-And-Shoulder

—-

57
Head-And-Shoulder

59

—-
Symmetrical Triangle

58

58
Triple Bottom

—-

58

Triple Top

 63

—

 

The table above comes from Thomas Bulkowski’s book, ‘Visual Guide to Chart Patterns.’ His book is part of the Bloomberg Financial Series. Bulkowski is, by far, the authority on the frequency of patterns experiencing pullback and throwbacks. His work focuses extensively on chart patterns. However, there is one problem, and it has nothing to do with his phenomenal work. This is a problem for anyone who focuses primarily on the Forex markets. Why? Because Bulkowski’s work and the broader technical analysis writer/education community focuses primarily on equity markets. This is a big deal because equity markets spend the vast majority of their time in one direction: up. This is especially true over the past decade. Again, this is not a dig towards the truly phenomenal authors and analysts who spend years creating their written work – it’s just a reality of the world we are in. It’s important to understand that the Forex markets, as we know them, are still a relatively new market – especially when compared to the stock market.

If you read Bulkowski’s work or any other work studying the frequency of throwbacks and pullbacks from patterns and support/resistance – I would recommend attributing the same rate of throwbacks to pullbacks in the forex market.

 

Sources:

Bulkowski, T. N. (2013). Visual guide to chart patterns. New York, NY: Bloomberg Press.

Bulkowski, T. N. (2008). Encyclopedia of candlestick charts. Hoboken, NJ: J. Wiley & Sons.

Bulkowski, T. N. (2002). Trading classic chart patterns. New York: Wiley.