Categories
Forex Elliott Wave Forex Market Analysis

EURAUD Advances Supported by the RBA Minutes

Technical Overview

The EURAUD cross advanced on the overnight trading session, expecting the minutes from the last Reserve Australia Bank (RBA) interest rate decision meeting, where policymakers decided to keep unchanged the rate at 0.1% for the second month in a row.

Source: TradingEconomics.com

On the technical side, the following 12-hour chart shows the short-term market sentiment unfolded by the 90-day high and low range, which illustrates the cross consolidating in the extreme bearish sentiment zone

The bullish candlestick formation developed during the recent trading sessions carries to suspect the possibility of a short-term bounce. This bounce could find strike the level 1.62374 that corresponds to the resistance of the extreme bearish zone.

On the other hand, the short-term primary trend plotted in blue shows the bearish bias that remains in progress. The secondary trend also shows the intraday downward acceleration, which dragged the price until 1.60408, where the cross found support. Likewise, the bounce observed on the EMA(60) to Close Index carries to support the possibility of a limited recovery.

Technical Outlook

The short-term Elliott wave view for the EURAUD cross shows the downward progress of the incomplete five-wave sequence of Minute degree labeled in black, suggesting a limited recovery in the following trading sessions.

The next 4-hour chart shows the bearish movement subdivided into a five-wave sequence of Minute degree identified in black. It began on October 20th at 1.68273 and found its temporary bottom at 1.60408 on December 11th.

The previous figure illustrates the price looks advancing in its fifth wave in black, which after the bottom reached on the last Friday 11 session completed its wave (iii) of Minuette degree labeled in blue. In this context, according to the Elliott wave theory, the price action should start to develop a corrective formation, which could find resistance in the supply zone between 1.61786 and 1.62271.

On the other hand, considering that the wave ((iii)) in black looks like the extended wave, the fifth wave could have a limited extension. In this context, the lesser degree structure of the wave ((v)) could pierce slightly below the end of wave (iii) in blue.

In conclusion, the EURAUD cross shows the possibility of a limited recovery, which could strike the supply zone between 1.61786 and 1.62271, where the price could start to consolidate in a sideways range with support at the end of wave (iii) at 1.60408. On the other hand, if the cross surpasses the supply zone, it would indicate further recoveries, and the price could start a bullish rally. Finally, the invalidation level of the current bearish scenario locates at 1.62872.

Categories
Forex Indicators

The Williams %R Indicator: Winning Custom Interpretation Twists

There are special ways we can take signals out of an indicator, ways not described by default. In many cases we find an indicator that is not very good for its role in our system, we have better-performing ones. We try different settings to improve it and this may take a lot of time when we backtest, especially if there are many settings. 

Now, if you are a veteran in technical analysis, you probably have tested many indicators and know about adding Moving Averages on top of indicator data. If not, we have done an article about this customization that could generate very accurate signals out of simple, mediocre indicators we have scratched as bad on our top list before. Whatsmore, even indicators that have a different role by default can be converted to other roles just by adding MAs. 

The Williams %R is a reversal type indicator, an oscillator with overbought and oversold signals. In theory, it does not fit into the trend following method of trading and we might just skip it because our system is designed and needs trend confirmations. When we discuss exit indicators, the reversal type indicators fit very well into this exit signal role. Yet Williams %R is probably not good enough even as an exit indicator for your trend following system. Thorough analysts do not move on until they exhaust all possibilities out of an indicator, be it by adding MA if possible, changing settings, or interpreting signals for other, unorthodox uses. In this article, we will tackle how a mediocre indicator in all categories can become our top indicator just by having a different view of its signals. 

Very few reversal indicators can be made a good trend indicator. They are simply not made for that role. Williams %R is a rare diamond by accident that can be made useful. Williams %R is not in the Bill Williams indicator family where you can find Awesome, Alligator, Fractals, MFI, and others, which are generally not great for trend following algorithms according to professional prop traders. Williams %R is made by Larry Willaims and it is already integrated into the MT4 platform so you do not need to look for it. The settings by default are not optimal if you want to trade it using our algorithm structure but you can try and test different settings, every system is unique. As our traders say, typically they do not test indicators with lower period settings than by default. It is usually done with defaults or a bit longer to smooth the indicator, but Williams %R is another exception.

According to our tests and testimonies from professional technical traders, the daily timeframe is the best choice for many reasons, not only performance-wise. However, Willimas %R seems to be better at lower frames than the daily. This does not mean that if you trade on a daily only Williams %R is not useful. You will need to test. Lower timeframes, even 4 hour is good enough just do not go lower than 15 minutes. Williams %R is a confirmation indicator with the way we use it, but it is not great for continuation trades. The way we use it is completely the opposite of what it is made for. Let’s get into more detail.

In the picture below we have already included Williams %R with a modified period setting to 8, the Kijun-Sen from the Ichimoku indicator on default settings as our baseline and we are on the 4-hour timeframe. Williams %R has another interesting fact – it has a scale from 0 level and below. The area from 0 to -20 is regarded as the overbought area and the area from -80 to -100 is the oversold area. It is rare to see indicators with these values but do not be confused, if you want to add the “zero” line to experiment just add a horizontal at -50. Similarly to the popular RSI indicator, Williams %R generates a signal once the oscillator line crosses the overbought and oversold levels into the middle range. 

When applied on the BTC/EUR chart above we see a lot of signals that didn’t end well, most likely in a loss when interpreted in a classic way. On certain occasions, the signals were very good, as the bullish trend on the left side of the picture. False signals frequency is hard to eliminate here, even if we add the volume filter. Simply, Williams %R has a choppy behavior by default so we need something to counter this issue.

When we observe how and when trends start, it is noticeable every trend starts when the line enters either the oversold or overbought area of the indicator. In the picture below we have marked all entries allowed by the baseline. Out of 6, only one was a losing trade, and that one was a small loss compared to the trends captured. This way gives out interesting and consistent results, even though the indicator was never designed for it. For those not familiar with the baseline element in our analysis, only when the price crosses and closes above or below it we look at the Williams %R for a trade entry signal. If you go to lower timeframes such as H1, 30M, and 15M, this way continues to give you good signals. Beginner traders that like trading on lower timeframes deviate from our algorithm principles, however, Williams %R is a good to go indicator which will likely outperform their current confirmation indicators. When the market is ranging, this indicator will rarely give you a signal, often the line will stay in the normal range, making it a great loss eliminator. When you par it up with the volume filter, you can scratch almost every fake signal in a ranging market

To conclude, we flip the original signal interpretation. A classic way of trading this indicator is going long when the Williams %R line exits the oversold range into the normal -20 to -80 area and going short when the line exits the overbought, upper area. Now we flip this into going long when the line enters the oversold and overbought areas. This is similar to the CCI, and some momentum oscillators, but Willimas %R does the job better according to our testing. As for exit signals and continuations, it does not prove to be as efficient, however, we encourage you to test this out. Finds like this are not so rare if you try to research and test every interesting indicator. When you see it is very bad at its first intention, a small twist in settings, Moving Average addon, or another signal interpretation can flip it into a top indicator. Adding Moving Averages on this indicator is possible which brings a whole new area for interpretations across different roles. Note you need to select Apply to “First Indicator Data” first so the MA is on top of the indicator window.  

Categories
Forex Fundamental Analysis

AUD/USD Global Macro Analysis – Part 3

AUD/USD Exogenous Analysis

In the exogenous analysis, we will compare the differentials in the US and the Australian economies at an international level. We will use:

  • The differential in GDP growth in the US and Australia
  • The US and Australian interest rate differential
  • The differential in the US and Australian balance of trade

The differential in GDP growth in the US and Australia

Domestically, the value of USD and AUD are pushed by the changes in the macroeconomic factors that drive GDP growth. The dynamic of the AUD/USD exchange rate is affected by the difference in the GDP growth rate. The country with a faster GDP growth will see its currency appreciate more than the one with slower growth.

In Q3 of 2020, the Australian GDP increased by 3.3% compared to the 7% drop in Q2. The US economy expanded by 33.1% in Q3 2020 compared to a 31.4% drop in Q2. In the first three quarters, the US economy has contracted by 3.3% while the Australian economy has contracted by 4%. Therefore, the GDP growth differential between Australia and the US is -0.7%. Based on the correlation analysis with the AUD/USD pair, we assign a score of -2.

The US and Australian interest rate differential

This measures the difference between the interest rate set by the Reserve Bank of Australia (RBA) and the US Federal Reserve. In the forex market, carry traders tend to be bullish when a currency pair has a positive interest rate differential and bearish when it is negative. That is because more investor funds flow towards the country with a higher interest rate.

At the onset of the COVID-19 pandemic, the RBA cut interest rates from 0.75% to 0.1%, while the Federal Reserve cut interest rates from 1.75% to 0.25%. That makes the interest rate differential for the AUD/USD pair -0.15%. Based on correlation analysis with the exchange rate for the AUD/USD pair, we assign a score of -2.

The differential in the US and Australian balance of trade

The difference between the balance of trade for Australia and the US will help determine which currency is in higher demand in international trade. Note that increased demand in the forex market also increases the value of that currency.

In October 2020, Australia’s trade surplus increased to AUD 7.46 billion compared to 5.82 billion in September. However, it is still lower than the highest recorded AUD 9.62 billion surpluses in March. The US had a trade deficit of $63.1 billion in October, which has been expanding since January. The balance of trade differential is $68.633 billion between Australia and the US. Based on the correlation with the AUD/USD exchange rate, we assign a score of 6.

Conclusion

The exogenous score for the AUD/USD pair is 2. It means that we can expect that the pair will be on a bullish trend in the short-term.

In technical analysis, the short-term bullish trend is supported by the fact that the pair is trading above the 200-period MA and breaching the upper Bollinger Band. Cheers!

Categories
Forex Fundamental Analysis

AUD/USD Global Macro Analysis – Part 1 & 2

Introduction

In the global macro analysis of the AUD/USD pair, we will look at the endogenous economic factors that drive GDP growth in both Australia and the US. We’ll also analyze the exogenous factors that affect the exchange rate dynamic between the AUD and the USD.

Ranking Scale

We will use a sliding scale from -10 to +10 to rank the impact of the endogenous and exogenous factors. When the endogenous factors are negative, it means that they resulted in the depreciation of either the USD or the AUD. When positive, it implies they resulted in the appreciation of the individual currencies. Similarly, negative endogenous factors result in a bearish trend for the AUD/USD and a bullish trend for when they are positive.

USD Endogenous Analysis – Summary

A -19.1 score on Endogenous analysis on USD implies a deflationary effect on this currency. It means that the US Dollar has lost its value since the starting of 2020.

You can find the complete USD Endogenous Analysis here.

AUD Endogenous Analysis – Summary

The endogenous factors have an overall score of 3, implying that the AUD has appreciated in 2020.

  1. Australia Inflation Rate

The consumer price index in Australia is calculated quarterly. Housing accounts for 22.3% of the total CPI weight, food and non–alcoholic drinks 16.8%, recreation 12.6%, transportation 11.6%, household goods and services 9.1%, alcohol and tobacco 7.1%, healthcare 5.3%, financial service 5.1%, clothing, education and communication 10.2%.

In Q3 of 2020, the YoY Australian CPI increased by 0.7% from a drop of 0.3% in Q2. The QoQ CPI rose by 1.6% compared to 1.9$ in Q2. Note that the Q3 CPI is marginally lower than in the pre-pandemic levels in Q1. Based on inflation’s correlation with GDP growth, we assign a score of -1.

  1. Australia Unemployment Rate

The unemployment rate is the percentage of the labor force that is actively looking for employment opportunities. The unemployment rate can be used to show the state of the economy. When high, it means that the economy is shedding jobs faster and can be said to be contracting.

In October 2020, the Australian unemployment rate was 7% up from 6.9% in September. The increase in the Australian unemployment rate can be attributed to the prolonged COVID-19 crisis. Note that during the period, the employment rate increased to 61.2% from 60.4% in September. This was mainly driven by the surge in full-time, part-time job numbers coupled with a drop in the underemployment rate to 10.4% from 11.4% in September.

From January to date, the unemployment rate has increased by 1.7% while the employment rate has dropped by 1.4%. Based on its correlation with GDP, we assign a score of -5.

  1. Australia Mining Production

The Australian economy significantly relies on mining, which accounts for up to 11% of the GDP. Australia is among the top producers of precious metals in the world. Therefore, a significant portion of the labor market is dependent on the mining sector.

The YoY mining production increased by 1.2% in the second quarter of 2020, down from a 5.1% increase in Q1. In Q3, it is projected to increase by at least 2.5% and 5% by the end of 2020. This would mean that the end of year levels would be equivalent to the pre-pandemic levels.

Based on our correlation analysis, we assign Australia mining production a score of -3.

  1. Australia Business Confidence

The National Australia Bank (NAB) surveys about 350 leading companies in Australia to establish the prevailing business conditions. Typically, the present business sentiment can be used as a leading indicator of future business activities such as hiring, spending, and investments. We can say that business confidence is a leading indicator of GDP change.

Reading above 0 shows that business conditions are improving, while below 0 shows that business conditions are worsening.

In October 2020, Australian business conditions improved to 5 from -4 in September. The October reading is the highest since August 2019. The increase was primarily driven by improvement in sentiment profitability and employment in the mining and transportation sectors.

Based on correlation with GDP, we assign a score of 8.

  1. Australia Consumer Confidence

The Melbourne Institute and Westpac Bank aggregate consumer confidence in Australia. The survey 1200 households representative of the entire households in Australia. The index is based on the five year average of these components: anticipated economic conditions, personal finances, and purchase of essential household goods. Consumer confidence is a leading indicator of consumer expenditure, which is a significant driver of the GDP.

In November 2020, the Australian consumer confidence increased to 107.7 from 105 in October. This is the highest level in 7 years, indicating that consumers are highly optimistic about the future despite the COVID-19 challenges.

Based on correlation analysis with the Australian GDP, we assign it a score of 5.

  1. Australia Government Debt to GDP

This measures the levels of indebtedness of the Australian government. Domestic and foreign lenders use this ratio to estimate the ability of the government to service its debts without straining the growth of the economy. Generally, a ratio of below 60% is considered to be ideal.

In 2019, the government debt to GDP in Australia jumped to 45.1% from 41.5% in 2018. In 2020, it is projected to reach 50%. Therefore, we assign a score of -3.

  1. Australia Retail Sales

The change in retail sales shows the trend in household expenditure on final goods and services in the economy. An increased expenditure corresponds to an increase in GDP levels.

In October 2020, the MoM retail sales increased by 1.4% compared to a 1.1% drop in September. Based on the correlation with the GDP growth rate, we assign a score of 2.

Now we know that USD has depreciated and AUD has appreciated according to their respective endogenous indicators. In the very next article, let’s see if this pair is bullish or bearish according to the exogenous indicators.

Categories
Forex Technical Analysis

Why Is Everyone Talking About Renko Charts?

Is the Renko chart a revolution in forex trading? A game-changer? Or is it a dead-end that’s going to cost you time and money? Read this to find out!

A Jenga Tower Made of Renga

Renko charts, conceived and designed in Japan, are a potentially revolutionary trading tool and everyone’s talking about them. The basic concept is relatively simple but the ripple effects are not and they could have a huge impact on how you trade. So what is a Renko chart anyway?

In the simplest possible terms, a Renko chart is composed of bricks (rather than candles) that are called renga – after the Japanese word for “brick”. Each brick represents a given price movement – in forex trading, this is expressed by a pip value that you determine when creating the chart. The bricks form when the price moves enough in one direction to cover the pip value. That sounds simple enough, doesn’t it?  

The first knock-on effect of forming a chart this way is that it knocks out the timeframe. That’s not to say there isn’t a time component to a Renko chart – the time axis is still along X but the way bricks form is not the same way candles form in a traditional chart. We’re used to a candle forming once a set amount of time has passed, regardless of how much the price has moved during that time but on a Renko chart, this approach is turned on its head. The renga bricks form only when the price has moved sufficiently in one direction – which, if the price is moving sideways enough to stay within the pip value you selected for the chart, could take quite some time. Purely theoretically, the brick could take indefinitely long to form if the price stays level (of course, that’s never going to actually happen but isn’t there something a bit unsettling about the idea that it could?). Conversely, when the price moves sharply, a long line of renga bricks might form in a very short time. But, because there is no timeframe, looking back at a run of bricks, you won’t have any indication of how quickly events unfolded.

So if a Renko chart is such an inversion of the usual rules for the way your chart forms over time, how will it affect your trading? Well, that’s what we’re here to find out.

How to Navigate a Renko Chart

Charts, just like the maps used by seafarers of ye olde times, are your guide to sailing the waves of the market, and, just like the maps of yore, they will adapt and new innovations will appear over time. Renko is just such an innovation and knowing what it can do for your ability to navigate through choppy seas is vital. In fact, it is important to know what it is, what it does, and how it works, even if you don’t end up using it. This is down to the simple fact that, if you want to improve and grow as a trader, you need to understand the tools that are out there and how they can potentially improve your trading.

First of all, the rules underpinning a Renko chart are so different it almost calls out for you to forget everything you’ve ever learned about reading a chart. But at the same time, when you start out playing around with a Renko chart, it will feel like everything’s dumbed down and simplified. The fact that the bricks form at the pip value you set, will make everything look almost laughably simple – and that might not be a bad thing.

So your first task is to set the pip value. The lower pip values will, of course, make the bricks form more quickly as the price moves small amounts in any given direction. This means the chart will unfold with greater speed, which may make it seem daunting to anyone used to trading on the longer timeframes. And, indeed, the smaller pip values are used by traders who are using the Ranko chart for scalping. Traders who are accustomed to longer timeframes will want to slow the chart down by selecting larger pip values. Traders who use the daily chart might struggle with Renko and decide that ultimately this isn’t the tool for them. More on that later.

When you just begin playing around with a Renko chart, it’s probably worth your while setting the pip value quite low (say 10 pips, for example) because this will give you a chart that unfolds relatively quickly, which makes it easier to manipulate and test in a shorter time than a chart you set to, say, 50 pips. The 50 pip Renko chart will take too long to develop new bricks (unless you’re using it on a super-volatile currency), which will slow down your testing protocol.

The first thing you’ll notice with the Renko chart is that all of the bricks are the same length – that’s because you are the one who sets the pip value they represent. The second thing you’ll notice is that there are bricks of two different colours – one represents the price going long and the other represents the price going short. Depending on your platform, you’ll likely be able to go into the settings and change the colours if the default ones don’t suit you.

Renko and Reversals

You will immediately have noticed that no two bricks on the chart are next to one another. They always form at the corners. This has important implications for the way Renko charts record a change in the price direction and you will want to make sure you have your head wrapped around this properly so that it doesn’t trip you up.

For the direction in which the bricks appear to change, there has to be a significant change in the price direction. How does that work? Well, let’s say you’re looking at a Renko chart set to ten pips and the price of a currency drops thirty pips. That will form three bricks in the downward direction – that is, three bricks showing that the price is going short. But, from here, the price can drop a further nine pips before it forms a new renga brick in that direction. And if the price movement starts going long, it can make up those nine pips but it still won’t have formed a new brick. In fact, it can go long for another 19 pips (taking it all the way back to the start of the last brick that formed on your screen) and it still won’t form a new brick showing the upward movement. In fact, from our imagined point of nine pips below the latest downward brick, the price would have to go long for 29 pips before you’ll get a newly-formed brick in the other direction.

This feature of the Renko chart is really important to understand and to bear in mind when designing strategies that rely on using Renko. When the price changes direction – or reverses, you could say – it doesn’t just need to go back X pips, it needs to go back in the other direction 2X pips for it to show on the chart. This will, of course, impact how you determine your entry and exit points when actually entering a trade.

The Pros and Cons of Renko

While you’re sitting there, trying to get your head around this whole new approach to following price movements, it is also worth going over some of the pros and cons of using a Renko chart in your trading. We say “some of” because a lot of this is going to depend on the kind of trader you are and how you have set up your whole approach to trading. Renko is, after all, just one of the tools available to you and though it may seem revolutionary and even though everyone is talking about it, ultimately that doesn’t mean it will end up being something you use. This is worth bearing in mind when you look over some of the advantages it offers and some of the disadvantages inherent to using it.

The first pro is kind of a big one. It will be immediately obvious to you the moment you open up a Renko chart on your platform. This thing is easy to read! It cuts out all of the noise of a traditional chart and boils it down to its bare essentials. There are lots of people out there – and if you are one of them, there’s no shame in that – who even get distracted by the noise of traditional charts. Sometimes this can follow you for several years into your trading career. The fact is that noise can be a distraction and can muddle your decision-making particularly at the most critical junctures: choosing entry and exit points. Renko is basically designed with that fact in mind as a tool deliberately made to reduce noise down to a minimum. It does this by filtering out all price movements that are smaller than the pip value you selected for the bricks. There’s no way around it, this is a big deal. It enables traders to more clearly identify trends in price movements. One of the holy grails of forex trading. It makes it so that all you really have to keep an eye on is how the line of bricks is shaping up and which brick is coming next.

Now, while being able to more easily identify trends certainly looks like a huge pro for Renko, it does come with a proviso. Which is that with great simplicity comes great responsibility. In order to truly take advantage of the trends that show up in your Renko chart, you will have to formulate a strict set of rules for entries and exits and you will have to stick to them. And that’s where some of the cons start to wriggle out of the woodwork.

By taking away the noise, Renko charts also wipe out something that might be quite useful, they erase a lot of the detail. That can end up having a couple of effects that could seriously impact your trading. The first of these is that it can conceal sharp movements in the price that fall within the pip values of a brick. This can lead to sending you mixed up signals for trade entries and can also result in the whipsaw effect – where the price reaches the point at which a new brick is formed but then slips back the other way immediately.

To protect yourself from these effects, you’ll probably design a rule that means you enter the trade only once a trend is a couple of Renko bricks deep – that is, once two or more bricks show the price heading in one direction. The first side-effect of this is that it will eat into the profit you can take away from that trade (because you’ve already had to wait for two or more bricks to form before entering). The second side-effect is knowing where to set your exit.

Most people will probably see a trend until the bricks change color and direction. That’s not necessarily a bad way to do it but – If you remember that it takes a price reversal equal to two bricks worth of pips before you see a change on your Renko chart – you’ll realize that this will also cut into your earnings from a trade. In short, even if everything goes according to plan, you’re losing two bricks-worth from your entry and two bricks-worth from your exit. That can still result in a profitable trade if the trend runs far enough but it’s also worth remembering that things don’t always go according to plan.

If you open up a Renko chart for any currency pair, you’re sure to see these nice, runs of bricks going up and down across your screen. And, sure enough, Renko charts do identify some pretty nice trends from time to time. But, you will also see these places on the Renko chart where the bricks zig-zag, changing to one color and then quickly changing back. If you apply the rules we just discussed, waiting for two bricks to enter and a change back to the exit, then these areas of flux are going to seriously ruin your day.  

As well as cutting down on the detail of traditional charts, Renko also cuts down on the flexibility available to you. By setting the pip value that determines brick sizes on your chart, you are marrying your trading system to the volatility of the market at the moment you do that. As the volatility changes both in the market and across currency pairs, you’re going to want to adjust your Renko chart. Of course, switching the pip value is easy enough but the knock-on effects can be disastrous. As the volatility of a currency pair changes from day to day, you might find that the bricks on your chart are forming too quickly or too slowly but if you adjust the pip values, you are impacting the consistency of your system. Not to mention the fact that by increasing the brick size you are also losing more detail as far as the price movement is concerned. The alternative is to stick to one value and, ultimately, become a slave to it as volatility changes gear.

Finally, as far as the cons are concerned, there is the fact that Renko charts are only suitable for certain kinds of trading. They are more appropriate for traders who are looking to catch trends and who trade on shorter timeframes. Traders who are chasing reversals or those who prefer to trade on the daily chart are basically left out in the cold. Reversal traders will simply dump Renko as soon as they see it, simply because of the way Renko charts display changes in price direction. Daily chart traders, on the other hand, will feel they have to stay chained to their trading platform in fear of missing price movements on the Renko chart. With Renko charts, they simply cannot trade by logging in for half an hour each day and going over the day’s progress, because all they will see is the number of trades they have missed. In short, if you are a daily chart trader and you want to use Renko charts, you are probably going to have to completely change the way you trade.

Land of Opportunity

Just as a blank space on an old sailing map can represent both opportunity and peril to a seasoned mariner, so Renko charts can be both of those things to a trader looking for new territory to explore. Although there may be clear cons to the way Renko works with your current trading set-up, that doesn’t mean it is not a land of opportunity if you are willing to change up and develop new ways of doing things.

For example, the current set of indicators you rely on in your trading system will work completely differently on a Renko chart. Chances are, in fact, that they will probably turn out to not be applicable or will not work very well (if at all) with a Renko chart. However, there are literally thousands of indicators out there that might turn out to work even better. This is because of the hugely different way a Renko chart operates compared to traditional charts, resulting in the data it provides to an indicator being significantly different as well. This opens up so many possibilities – there are in actual fact an endless number of combinations that could turn out to be incredibly successful if you are willing to put the work in and try them out.

The only way to truly explore the potential of Renko is to devote the time and effort it takes to do some serious testing. Obviously, plenty of traders who have spent years on developing and fine-tuning a system that works for them (and, hopefully, works in an objective sense), will be unwilling to chop and change at this stage. On the other hand, of course, there is a huge cohort of traders out there who are still searching for a system that suits them and that works. Traders such as those will likely relish the opportunity to explore some uncharted waters and go in search of the undiscovered country.

For those willing to put in the time and leg-work it will take to work this out properly, Renko charts could be a source of both adventure and success – as long as this exploration is undertaken in a level-headed way. Be aware of the downsides, make sure you know the potential pitfalls, keep your head screwed on properly but, by all means, go and take Renko charts for a spin and see if they suit your trading style.

Categories
Forex Psychology

The Forbidden Truth About Trading Mindsets as Revealed By An Old Pro

Thinking about forex trading in the right way is central to doing forex trading in the right way, yet it isn’t discussed nearly enough. But why learn things the hard way when you can start out with an awareness of the key issues?

Getting into the right headspace for trading is a pretty boring subject compared to the really exciting stuff like getting into your charts, actually pulling the trigger on trades, adjusting your stops, and taking profit. But getting into the right mindset and getting yourself prepared for trading is just as important as all of those put together.

There’s a ton of experienced traders out there who wish they had had someone to sit them down at the beginning of their trading career and explain to them a few of the key fundamentals that they have now learned the hard way – through bitter experience – but that they could have started out knowing. Most of the lessons this imagined trading guru would have taught them are about the mindset you develop going into trading in the first place.

The Right Mindset

This is one of those things that people have the hardest time getting their heads around and understanding to a level that really impacts their trading.

Think back to the first time you encountered trading. Not even the first time you thought about getting into trading yourself but the first time you even came across the concept of trading and investing and using your money to make more money. If you are anything like most traders out there, this would probably have happened to you when you were a kid and you first heard about these people out there who call out buy and sell orders over the phone or whatever and who track the price of some security or other online charts with crazy ups and downs. Chances are you would have seen this at the movies or on TV and which particular show or movie you first saw this in kind of depends on how old you are and what generation you belong to. For a certain (read: older) cohort of traders, it was those 80s and 90s movies about stockbrokers, like Wall Street or Other People’s Money. The point is that this era of TV shows and movies really inspired a whole generation of traders to think that they could get into stocks and shares and make big money overnight. That generation had to learn the hard way that overnight success takes years to achieve.

Put another way, they had to learn and understand that trading (whether its commodities, stocks, forex, or whatever) is much more like a genuine, bona fide professional career. A career that takes hard work, experience, learning, and commitment to master. Sure, there are a few outliers here and there who got lucky and rolled in some big bucks with little effort from the moment they started. But you have to remember here that at the other end of the bell curve there is a whole other set of outliers who just got wiped out immediately. For everyone else in the middle of that curve, there are no alternatives to learning the ins and outs of the craft – in the same way as you would learn any other profession or trade.

Knowing the Difference Between Good and Bad Trades

It is important to focus on making good trades. But what, when it comes right down to it, is a good trade? Now, lots of traders will have their own definitions but a few elements are essentially undeniable. One is that a good trade can sometimes be a trade that loses money. What? Say that again! Yup, that’s right, a good trade isn’t always a winning trade.

But how is that possible? Well, that’s why it’s important to understand what a good trade is. A good trade is one that you entered into having done all of your homework. You developed a system of indicators and technical criteria; you worked out how to manage your stake in a given currency pair based on things like volatility and risk; you calculated reasonable stops to take you out of the trade in case things turn sour; you stayed in the trade in line with the plan and system you devised to maximize your gains. In short, a good trade is one that you carried out in line with a comprehensive and rigorous system of your own devising that has been tested and adjusted in order to maximize gains and minimize losses.

Sometimes, not trading is an important element of making a good trade. There’s no rule out there saying you have to trade and staying out of a trade that would have lost you money is one of the best ways of avoiding losses. If you are knowingly and consciously staying out of trades because the tools and indicators that you have integrated into your system are telling you not to trade, you are exercising the kind of patience that is important to making good trades. An amateur or beginner trader will be tempted to enter into trades on the basis of boredom or because they are worried they haven’t traded in a while. They are not patiently waiting until all of the conditions are in place and all of their criteria are fulfilled before entering a trade.

A good trade that loses money, therefore, will also take you out of that trade in a timely manner that will keep that loss to a minimum. A bad trade that loses money will see you spiraling out and losing more than you planned for or more than you accounted for in advance. Every trader out there enters every last trade they make thinking that it will be a winner. In fact, most amateur traders out there will have more winners than losers but they will still be losing money in the long term. How’s that possible? Well, because their losers are often much bigger than their winners. This is because they fail to bug out of a losing trade on time and, on the flip side, they fail to stay in the winners long enough to take advantage of the gains. Because there is no way of knowing in advance which of your trades are going to be winners and which are going to be losers, you have to enter them with the same set of contingency plans in place to cut your losses should things go south and stay in the trade to the appropriate point that will maximize your gains. This is the basic concept of risk management. The way you trade has to be organized in advance to account for an unexpected shift in the market.

Going hand in hand with being ready to cut and run when things aren’t going your way is a well-planned approach to letting winners develop to take full advantage of the gains available. The way to understand this is to tell yourself that it ultimately doesn’t matter how you enter a trade. The criteria that lead you to enter a trade aren’t the key thing to making money from trading. What makes you money is managing your money and accounting for risk – i.e. staying in trades long enough to reap the rewards and getting out of them quickly if they are performing badly. If you can design and develop a system that does this reliably for you, you can still make money even if your win to loss ratio is 50-50 or less. 

Focus on the Pips

Pips are to forex traders what dollars and cents are to stock traders. In equities and commodities, you’re looking to profit from your trades in dollars and cents – if you buy a stock when it’s worth $4.30 and sell it when it’s worth $4.70, you made forty cents. Well, in forex trading you’re looking for your trades to make pips. Pips (or price interest points) are the smallest amount of a currency that can be traded. A pip is one one-hundredth of one percent – the smallest amount by which the difference in value between two currencies can change. 

Focusing on pips is one way to shift your focus away from the actual money you are making (or losing) on a given trade. But why would you do this? Well, part of the answer is that this helps you to focus on making good trades. Over-focusing on the money does a couple of things that will hinder your trading. First, it clouds your judgment about which trades are good trades. The other thing that over-focusing on the money does is introduce a completely unnecessary emotional element to your trading. Without consciously wanting to, you will start thinking about what that money means in the real world – whether it’s the bills you can pay or the things you can buy – and suddenly but imperceptibly you’re experiencing an emotional response to the trade you’re entering or the stop you’re adjusting or the exit you’re planning. If you could remove money from the equation completely and focus instead on the success of each trade on an abstract level, your trading would improve automatically. This is why focusing on the pips helps to remove you at least one step away from thinking about the money involved in trading.

Avoiding Bad Trades

Just as a good trade can lose money, a bad trade can make money… Usually completely by accident. A bad trade is one that you entered into on a feeling, with a sense that it would pan out how you hope. Usually, if you’re making bad trades you don’t even have a well-worked-out system in place to regulate your trading or, if you do, you’re not sticking to it on the back of some emotional response you’re experiencing. There is a multitude of factors that go into what makes a trade a bad trade but they include not accounting for risk; improperly sizing your stake based on how you feel this trade will go; placing stop or take profit orders based on fear or adrenaline, or even failing to even place a stop order at all because you have a hunch that any pullbacks won’t be full reversals.

It’s actually very simple really. Traders who lose money in the long term are the ones who either don’t have a system in place to manage their trading or don’t stick to their system if they have one. Because you know what will happen from time to time? You’ll hit a run of losing trades and that’s when you’re in real danger of reacting emotionally and overriding the system you have put in place to stop you from doing just that. Let’s say for example that you run up five losses in a row. That’s when you start to question everything. Is your system failing? Are you sticking to it too rigidly? Here’s a common reaction.

Lots of traders will look at their sixth trade after a run of five losers and begin rethinking their position size. Some will lose confidence and cut their position size because they’re worried they’re heading into another loss. Others will try to use that sixth trade to win back their losses and will up their position size to compensate. Both of these responses are mistakes. You are letting your emotions override what is otherwise – if you’ve done it properly – a reliable and robust system that has been tested to death both by looking at historical market movements and by being run through a demo account.

Another common emotional response is when you’re in a trade and you see the price heading in the opposite direction to the one you were banking on. You’re watching the price move and you can see it approaching your stop-loss. Many inexperienced traders – especially those coming into the trade on the back of a losing streak where the price burned through their stops and then recovered – will be tempted to panic and cancel their stop order hoping to stay in the trade until it swings back in the direction they need. Sitting here, calmly reading this, you can immediately see the problem with this – the price doesn’t recover and your losses run out of control. It’s having the presence of mind to see this happening in the heat of the moment and exercising enough self-control to stick to your system.

Lastly, those traders who have stopped listening to their system (if they even have one) and are letting their emotions rule their trading, will also make this mistake. Sometimes, when you get in on a good trade and the price goes your way, you lose track of your charts and indicators and you start looking at the money. It’s probably happened to most of us early on in our careers. The price moves quickly after we pull the trigger on the trade and our gains start going up. You get lost in the excitement and start making quick calculations in your head that go something like this: “Oh man, can’t believe it, I just made 500 bucks and before breakfast too! I can put down that payment on my car/pay those bills/buy that thing I’ve had my eye on”.

In other words, you over-focus on the money and you pull out of the trade. It’s only later when you look back at the price movement that you realize you could have stayed in longer and increased your gains even more. That kind of emotional moment of getting out of a trade too soon is literally the opposite of what you should be doing. You should be exciting your trades based on a rational assessment of what your system is telling you. If your indicators are telling you the price movement still has legs, then stay in and adjust your stops accordingly. Exit only when your system tells you to. 

So, to sum up, if you can get your head around the fact that bad trades are bad for your trading even when they make money, you are well onto your way to never making a bad trade ever again. If you can focus on making sure you trade according to your system and that every trade you make is a good trade, as we’ve set out in the previous section, then you are on the first rung of the ladder towards becoming a successful, professional trader.

Get Some Perspective

Another important element of getting yourself into the right mindset is maintaining perspective. This is a hard one, especially early on in your trading career. Because this is something that usually comes with experience, it is hard to explain to traders who are still on that steep learning curve. That said, it’s well worth talking about because being aware of it as a factor is going to help you to get there faster.

The fact is that every trader goes through a process where their state of mind depends on their last day of trading. You trade for a day and if that day went well, you feel great. But if it didn’t go well, your mood suffers and you start to lose hope. Sometimes, after a couple of days of losses, even if they were just minor losses, you can go into a weekend feeling really blue. Now, there are a couple of problems with that. The first is that it is downright exhausting. You feel emotionally drained and that can have knock-on effects in your life outside of trading. And here’s the thing – that’s not the point of trading at all. If forex trading is having that effect on you, if it’s getting you down or even making you feel depressed, you’re no longer enjoying it and you begin to see it as a chore or a burden.

The other problem is that these mood swings can affect your trading. You become a confidence trader – one who’s trading starts to depend on how confident they’re feeling at that particular time. And the more that happens, the harder it gets to stick to your system, and the less you stick to your system, the more bad trades you’re going to get into. If you find yourself making bad trades, pretty soon you’re going to be losing money. It’s a cruel spiral that you can fall into if your mood becomes dependent on how your trading is going. Which is why it’s important to maintain a bit of distance and perspective.

Introducing Regularity

One way to help yourself maintain perspective is to introduce some regularity into your trading. If you find yourself trading too often, getting online as soon as the markets open, and regularly getting into trades as soon as it is at all possible – then you are probably trading too much. Of course, everybody will have a different rhythm to their trading and some people will be trading twice as often as others, that’s perfectly fine and you should find your own pace. But the thing to watch out for is if you start trading too often, out of boredom or because you’re chasing an unrealistic profit target or goal.

Obviously, setting yourself goals is important but people start to give them too much importance. They start focusing on whether they hit their target over the last week or the last month. But they forget that everybody has a bad week or a bad month here and there. Even most successful traders have one or two months where they lose overall. Not that they fail to hit their goals but they lose overall during that month. And yet, when you look at their balance for the year, they’re making great profits.

Those traders are the ones who have managed to rein in their trading out of boredom or desperation, they’ve managed to focus on their system and – whether they win or lose – they’re making good trades time and again. If you can do that, over time you will get to the point where you aren’t relying on having a good trading day to be in a good mood because you will have realized that your trades from today don’t affect your score for the month or for the year. Once you know that your next trade or even all of the week’s trades will not affect your performance over the long haul, you can get some emotional distance between the trade you’re going into or the one you just exited and how you feel about yourself and your trading. Ultimately, that distance and perspective is going to be good for your trading too, and probably for your bottom line.

Trading by the Numbers

Understanding the numbers that underpin your trading is probably the most important thing in forex trading or any other kind of trading. If you don’t understand the numbers behind trading, you’re not trading, you’re gambling. And not only are you gambling, but you’re also gambling without knowing the odds.

Understanding the numbers means having a good sense in advance of what kind of win/loss ratio you can expect from the system you’ve developed. Of course, the market being what it is, you’ll never know fully but with a robust testing regimen, you should have a good overview of what to expect.

Coupled with having an estimate of your win/loss potential calculated ahead of time, you should also have carried out a risk to reward assessment. That means that you should have worked out how much you are willing to risk for a given profit, taking into account such factors as the size of your portfolio. Here you can also factor in such things as your profit factor (how much you gain compared with how much you lose) or the Sharpe Ratio.

Before you start trading in the real world, you can take your system for a spin through a simulator and get all these numbers. Until your system is reliably producing positive numbers, you’re not going to be a successful or winning trader. If you take a system that doesn’t produce positive numbers into the real world, there is no other way o putting it than you are going to lose money. That’s a fact.

Once you’ve tweaked your system to the point that it produces positive numbers in simulators and demo accounts, you’re ready to give it a run-out in the real world. But if you think that’s where the learning curve ends, you’ve got things backward. That’s where the real learning begins.

Evaluation and Evolution

In a sense, being a trader is about always being honest about your past mistakes so that you can keep on learning from them. In the same way, it’s important to develop and design a system that reliably produces positive outcomes and that you test that system thoroughly before you let it loose in the real world, you will also want to go back and reanalyze and reassess that system so that you can keep improving it. If you can keep adapting and evolving, you can continually improve your skills as a trader and go from success to success. As with anything else in forex trading, this is much easier to say than to achieve. It takes work, organization and it takes an investment of your time but the rewards can be handsome. 

You’ll never learn from your mistakes if you don’t know what your mistakes were. So, the first step is to get in the habit of keeping a trading diary. This doesn’t have to be anything too fancy or complicated, just a record of your trades and just a short note on what your reasons were for going into each trade. These days, people don’t bother to do that because the platforms everyone is using to trade these days will keep a record of every trade. And, to be sure, that’s a good starting point. However, you will find that you’re looking back at a trade you made at the beginning of last year and that your system has changed in the meantime and there’s a good chance that you won’t be able to remember what criteria led you into that trade. That’s why keeping a note for each trade is a really valuable tool. Also, it will help you to stay out of emotional trades because you’ll find it harder to justify these to yourself and your trading diary.

If you’re able to keep a regular trading diary over a given period – say the first six months of real-world trading – you will be able to see the benefits as soon as you look back over that period. Even after just six months of trading, you will be able to look back at your past performance and spot a multitude of mistakes that you can learn from and eliminate. But more than that, you will be able to see patterns in when and how you trade. You might surprise yourself and see that you trade more rashly following a run of losing trades or that you are more focused and successful at the start of the week as opposed to the end of the week where you get sloppier.

There’s probably a huge number of ways to keep a trading diary or to track your trading – some people have complicated spreadsheets with charts and ratios, others keep physical diaries they write out by hand. But the key to successfully tracking your trades so that you’ll be able to go back and evaluate your outcomes isn’t how you keep the diary or how you organise your records. The key is being honest with your future self. If you’re prone to bending the truth (even if it’s by omission) when you keep your records, you won’t be able to learn from your mistakes as effectively. And it’s easy enough to do, especially after a really big losing trade or a run of losing trades when the temptation is to say you stuck to your system and that it was just the whims of the market that meant your trades didn’t pan out. But, if you’re honest, it might reveal that you had traded rashly or that you oversized a stake in the hope of making up for past errors. When future you looks back on that, the learning experience will be more valuable than any gain you could have made from that rash trade.

Applying R&D

If you want your trading to be a system that is undergoing a constant cycle of evolution and improvement, one way of achieving that is to constantly be running testing. All experienced traders will talk about testing until they’re blue in the face but, when you’re just starting out, you tend to hear that and understand it to mean that you should test all the components of your system and your system as one functioning whole. And sure, you should definitely do that. But the successful traders out there will constantly be testing something. Whether it’s a new indicator they came across or a slightly different variation on their current system. Or sometimes a radically different approach that they’re just taking for a spin in their demo account to take it apart and see how it works.

You can think of yourself as a part-time trader, part-time R&D specialist. Because while you’re trading with your system in the real world, you can also tinker with a host of tools or other systems in demo accounts and simulators. This way you’ll keep the learning centers of your brain ticking over and avoiding getting stuck in a rut. But also, this will enable you to keep your trading system up-to-date and always finding new ways to do things better and better.

Parting Shots

The best and most successful traders out there are controlled, calm under pressure, disciplined, consistent, and rigorous. Very few people out there manage to be all of those things naturally, while they’re still dreaming of a career in forex trading. For the rest of us, it takes time, diligence, hard work, and a seemingly unending cycle of learning from past mistakes and making new ones to learn from down the road. But if you know and understand that going in, you can also do a few relatively simple things to make life easier for yourself. Or, better yet, make it easier for yourself to do the hard things that are indispensable if you want to make forex trading work for you. Because, at the end of the day, your only real job as a trader is to mold trading into something that makes your life better.

Categories
Forex Elliott Wave Forex Market Analysis

NZDUSD Could Reach a New Yearly High

The NZDUSD pair continues extending its gains, testing the psychological barrier of 0.71, helped by the US Dollar weakness. The Oceanic currency outperforms over 5.4% during the current year. Also, the pair advances over 27% since it confirmed its bottom on March 22nd at 0.55862.

Technical Overview

The big picture of the NZDUSD illustrated in the following 12-hour chart shows the primary upward trend, its trendline plotted in blue, intact since March 22nd when the price confirmed its bottom at 0.55862 and began the rally that remains in progress to date. Likewise, the secondary trend and its green trendline reveal the acceleration of the price testing by the third time the psychological barrier of 0.71.

Considering that the NZDUSD pair currently re-tests the 0.71 level, the price could extend its gains, reaching a new yearly high, to find resistance in the next psychological resistance of 0.72.

Short-term Technical Outlook

The short-term Elliott wave view for the NZDUSD pair unfolded by its 4-hour chart led us to observe an incomplete impulsive sequence of Minute degree labeled in black, which began on October 22nd price found fresh buyers at 0.65529.

The previous chart illustrates the impulsive structure that continues progressing and looks to develop its fourth wave of Minute degree labeled in black. Moreover, in the chart, we should remark that the third wave, which looks like the extended wave of the incomplete impulsive sequence identified in black, has found resistance at 0.71043 on December 03rd. 

Once the price topped the yearly high at 0.71043, the pair began to develop a sideways corrective formation, still progressing. In this regard, considering both the alternation principle stated by the Elliott Wave Theory and that wave ((ii)) in black looks like a simple corrective pattern, the current wave ((iv)) of the same degree should be complex in terms of price, time, or both.

In this scenario, the price action might retrace until the demand zone bounded between 0.69462 and 0.68970, where the Kiwi could find fresh buyers expecting to boost the pair toward a new yearly high. This high could strike the potential target zone between 0.71618 and 0.7260.

In summary, the short-term Elliott wave perspective for the NZDUSD pair reveals the advance in a bullish trend that currently moves mostly sideways in an incomplete corrective formation. The fourth wave in progress could find support in the demand zone bounded between 0.69462 and 0.68970. Likewise, fresh buyers could boost the price toward 0.71618 and extend its gains until 0.7260. Finally, the invalidation level of the current bullish scenario is located at 0.68106.

Categories
Forex Risk Management

How to Avoid the Forex Drawdown Trap and Come Out On Top!

Drawdown is an extremely important benchmark of one’s development as a forex trader which is why it is the topic of today’s article. Shortly defined as an investment or fund decline, drawdown is in fact a much broader term that requires additional attention. While definitions range from less to more detailed, they generally confirm one thing – that drawdown is an important element for performing account measurements.

The challenges concerning this subject do not truly stem from the inability to understand what the term essentially represents, but they do have a lot to do with its scope. The existing variations anyone can find on the internet may not do enough justice to the topic of drawdown and, thus, forex traders as well who want to do things the right way. Due to these nuances in interpreting drawdown, we are exploring how to properly measure it and set some healthy boundaries in order to fight vagueness, prevent future problems, and boost traders’ careers right from the start.

Drawdown Loss

Some definitions state that drawdown is the loss expressed in percentages that one has taken over a specific period of time. Therefore, should an individual’s account drop from $50,000 to $48,000, it could be interpreted as a 4% yearly drawdown. Nonetheless, what would happen if a trader only had experienced wins in the beginning, without ever going below the initial $50,000? This question is both interesting and necessary because the odds of backtesting and forward testing processes being predominantly positive experiences are not that low at all. This further makes the initial definition void of depth, as it is likely to mislead those curious to improve their trading and accurately measure their performance.

If any trader is offered an opportunity to trade on behalf of another individual, receiving an exorbitant sum of $2 million as a part of the deal, what is the right drawdown percentage that he or she should offer on their end? Interestingly enough, if the trader suggests a 0% drawdown, the investor will probably walk away, feeling that the other party is trying to pull off a scam. The reason for this likely scenario lies in the differences in understanding how to calculate drawdown. Therefore, we will not see drawdown as a percentage of an account’s total number of losses but as the number of drops a trader experiences at any point in time within a year.

This piece of information is something any investor would like to know in advance so as to properly assess the likelihood of growth and the overall progression. Hence, if you state that your value equals zero, you would come off as fraudulent and insincere, if not even silly, because the big players understand the natural oscillations of the market, accepting the decline as part of the game.

Maximum Peak-To-Through

Most investors will always be interested in discovering what maximum peak-to-trough decline is, so the right question to ask oneself would be as follows: What is the highest percentage you have ever lost before you started to win again? Your account may go from $50,000 down to $49,000 only to go back up to $53,000 and drop again to $51,000, which then points to a drawdown of $3000 or 5.5% as your maximum account declines. Aside from this piece of information, those in demand of your trading services may also be inquiring about how much time it took you to recover the drawdown, so you may want to start recording this data as well.

In addition to proper measurement and interpretation, traders may be curious as to know what acceptable or appropriate drawdown may be. For example, if a person spirals down from $50,000 to $40,000, we are talking about a staggering 20% drawdown, which would require skills better than those Warren Buffet can offer. In this case, one would then need to achieve a 25% return just to reach break-even, which is not only practically impossible but also points to a bigger problem in the person’s trading system.

If someone manages to experience a 20% drop, this should immediately signal that their risk management is out of control. This further points to a very real possibility of a trader wasting away all of the client’s money, which is opposite from their requirement of receiving a consistent return each year. If you are currently experiencing a similar problem, it is time you stopped trading and started to reevaluate in order to make some important conclusions. On the other end of the spectrum, a drawdown that we can find to be acceptable is that which equals up to 10% at any point in time, understanding that if the limit ever goes beyond this value, you will need to look into what caused the major losses in the first place. 

Minimizing Future Losses

The process of striving to make things right is crucial for trading in every way possible, and if a trader is capable to stop and isolate each case where he/she could have done better, the prospect of minimizing future losses is immediately boosted. You may discover here how your volume indicator has been misleading you or how your exit indicator is not telling you the best possible time to exit, so any attempt to improve will inevitably lead to debunking false beliefs that caused poor judgment and the drop in the account. An additional piece of advice that each trader should take into considerations is related to the time and testing ratio – we need to go back and forth with testing and not be impatient or superficial because the amount of time and focus we assign to our testing will be proportionate to the success we get afterward. 

You will also find that some forex prop traders who boast about their experience in trading currencies online came forward with their less-than-glorious experiences with some other markets, where their drawdown almost reached 10%. These testimonials are exceptionally valuable because we get to learn that developing a new system, or improving an existing one, takes a lot of adjustment and patience as well. While we can all make mistakes in trading, it is absolutely necessary to understand where these problems stem from, despite how grave or minute they seem to be.

Last but not least, it is of vital importance that all traders take the standpoint of trying to always minimize the damage because no matter how great your wins can get, it is your losses that hold the power to destroy your account and possible business deals. Therefore, whether you are a beginner or an experienced forex trader, always aim for a maximum drawdown of 10% or less at any given point. While people at the beginning of their trading careers may be more aware of these numbers, this topic is in fact relevant for all traders, regardless of the width of their portfolios or their capacity and skill range. While measuring may pose a challenge for some, understand that the willingness and ability to correct what is faulty is your one way to experience the lucrative side of this business.

Categories
Forex Indicators

SSL Indicator Methods that You Can Put to Use Today

As any forex trader worth their salt knows, there are a bewildering number of indicators out there to choose from – which is why you need a quick and handy overview to give you the lowdown.

Introducing the SSL Channel Chart Alert Indicator

Popularly known as the SSL, the Semaphore Signal Level Channel Chart Alert (can you see why everyone knows it by a shorter name?) is an indicator that combines moving averages to provide you with a clear visual signal for dynamics in price movement. In short, it seeks to show you when trends in the price emerge.

It does this by showing you two different-coloured lines that appear on your chart and track price movements. We say they appear on your chart because in most iterations this indicator is overlaid onto your chart, though there are off-chart versions available too. This is really down to your own preferences as a trader – would you rather your chart be clean and simple and have your indicators appearing separately in another window or do you like everything to be displayed in one place, making it easier to cross-reference? There is another thing to factor in here, which is whether you can find a good off-chart SSL. It has been primarily designed as an overlay indicator so if you do opt for an off-chart version, it goes without saying that you should make sure that it works as advertised.

When the two lines intersect, the indicator is signaling that the price movement is changing direction or is about to change direction (from long to short or from short to long). When setting up the SSL on your platform, you will have an opportunity to choose the colour of the two lines – make sure you select colours that make sense to you and don’t clash with anything else you have set up on your chart. Having a cluttered chart can be distracting enough without also having to squint to see colours that are too similar to one another or that clash in some other way.

Another thing to bear in mind when setting up the SSL is that it will have some alerts built-in – it is, after all, called the SSL Channel Chart Alert. Now, it depends a little on how you like to trade but our recommendation is that you turn these alerts off – especially until you have a good sense of how the indicator works and what you want to use it for. There is another reason why switching the alerts off is probably a good idea. And that’s the fact that the indicator might give you false signals as the price teeters back and forth before a candle closes. This would probably result in you getting alerts popping up before you can really use them and also could be confusing and even misleading. Plenty of technical traders who make heavy use of indicators will advise that you wait until a candle has closed before taking a reading or signal from your indicator and this applies just as much to the SSL as to other indicators.

Quick and Simple SSL Strategy

Ok, so the SSL is doing its darndest to show you trends in the price movement but when it gets down to it, how do you actually use it?

Well, first things first, as with any indicator you are considering using as part of your trading system, you are going to want to run this one through a pretty robust testing regimen that includes both backtesting and forward testing through a demo account. And what you will discover when you run the SSL through testing is that here and there it picks out some pretty juicy price trends. Remember, when the two lines intersect, the SSL is telling you that the price movement is changing direction and you can use this as an entry signal if you are confident that this change of direction – or reversal, for want of a better term – is likely to develop into a trend.

But – there’s always a but isn’t there – the other thing you will notice is that the SSL will also lead you down some blind alleys that would result in losses if you traded on them. You’ll notice this particularly when the market is ranging or going sideways, where the SSL will pick out changes in direction that don’t develop into trends.

Now, there’s a chance that in your testing process you will find that these losses are outweighed by the gains made when the SSL does successfully pick out a trend. Nevertheless, you will still want to minimise those losses and the way to do that is to pair the SSL with a second indicator that will help you to eliminate at least some of those losses without also holding you back from getting in on the gains.

The best way to do this is to pair the SSL with a volume or volatility indicator and some strategies will also suggest using a momentum indicator. Examples of indicators the SSL is commonly paired with include the ATR, Force Index, Volume Oscillator, and the Stochastic. Whichever one you go for, the outcome you are looking for is for this second indicator to tell you whether a change in the price direction flagged by the SSL has the strength to turn into a price trend. All of these approaches have their various merits and choosing between them will depend on the indicators you are comfortable with and other aspects of your trading system.

So, how might a typical trade with the SSL look? Well, you will be on the lookout for the two SSL lines to converge and intersect, this will give you your initial signal that the price movement is changing direction and that a trend could emerge. At this crossover point you will want to check what your confirmation indicator is telling you – if, for example, there is an insufficient volume in the market at that point, you should hold back and avoid entering a trade. If, conversely, the volume is there to indicate there would be the strength behind the move, this is an entry signal. You may want to hold back until an extra bar completes before you enter a trade as this will additionally protect you against the price dithering or backtracking. Pairing the SSL with a good second indicator to filter out price movements that lack strength could halve the losses it would otherwise generate.

The SSL and Exit Signals

One other rather neat feature of the SSL is that it provides both entry and exit signals. As described above, you would enter a trade when the SSL lines cross over (assuming your other indicators confirm the trade signal) and that will hopefully take you into a nice price trend. Just as with the trade entry signal, the SSL lines will then again converge and intersect. As we know, this indicated that the price movement is about to change direction – if you are in a trade, this neatly provides you with an exit signal. 

In a sense, if you do end up using the SSL, it kind of ties you into using it both to enter and exit trades. But this doesn’t have to be a bad thing at all. As you will see if you run it through your testing ground, the SSL has the potential to take you into some nice trends and, assuming you are sticking to the system as you design it, you should be able to ride those to grab gains that outweigh the smaller losses that it will also throw up from time to time.

Key Takeaways

The SSL can be used as a combined entry and exit indicator that will lead you to trends in price movements and, if properly paired with a secondary confirmation indicator, can help you to take advantage of those trends. When the market is not trending, the SSL will definitely throw out false signals that could lead you to losses but these can be mitigated by using it in conjunction with a good volume or volatility indicator.

Even if you don’t end up using it as part of your system, the SSL is a great little learning tool. Just taking it for a test-run and seeing which other indicators it pairs well with can help you to develop as a trader. What’s more, it is a useful asset to have around and once you start tweaking it, adjusting the settings, and playing around with combinations of secondary indicators, you might find that this is an indicator that has some real value to it.

 

Categories
Forex Indicators

A Detailed Look at the CCI Indicator, Warts and All

Some market indicators are single-purpose juggernauts that resemble something designed in a Soviet tractor factory to inflexibly do one job and one job only and others look on the surface like sleek, adaptable, multi-function jet fighters that can serve a number of purposes and be used across different markets. But does that make them better? Or even good? Is it good as a confirmation or trade exit indicator? Read on to find out.

What is the CCI?

It’ll take you no time at all to figure out that the Commodity Channel Index – popularly known as the CCI – was originally developed for commodity trading. It was developed back in the 1980s, at a time when spot forex trading wasn’t even a thing, to help commodities traders identify changes in long-term market trends. However, as anyone and everyone in the social media forex sphere (and beyond) will tell you, it isn’t used just for trading in commodities and forex traders regularly make use of its adaptability to hammer it into several different roles. 

Indeed, one of the praise-worthy things about the CCI is how it can be adapted to perform various tasks and how you can use it in different ways. This is partly a result of how it was designed. In short, the CCI takes the current price of a stock or currency and compares it to an average price for that stock or currency over a period that you can adjust. This means that what it’s ultimately telling you is how much from the mean the price is deviating at the moment. Coupled with lines offset at deviations of +100, +200, +300 and -100, -200 and -300 and with the fact that it is used across different timeframes and scooping up different periods to generate the average (typically 14, 20, 30, or 50), which means it can suit numerous different applications.

Common CCI Strategies

If you go online and search CCI strategies or how to use the CCI you will easily find a plethora of different approaches. There are probably about five or six main ways The CCI gets packaged but of those, there are three dominant categories that will crop up again and again – which is why these three merit a closer look.

Before we get started, however, it is worth pointing out a few basics. As mentioned, the CCI is pretty flexible – meaning that adjusting its settings allows you to use it in different ways and with different outcomes. One aspect of this is that the strategies below often rely on the CCI to be set up differently and to be used in different approaches to trading, including different timeframes and trading styles.

A crucial setting of the CCI that you need to adapt to the way you are using the CCI is the period it covers. It is important here that you are aware of the trade-off you are making when adjusting the indicator’s period. The CCI uses the period to generate the average price from which the actual price of the currency is deviating. It is fundamental to how the CCI works. A short period (for example, 14 or 20 – both of which are common CCI defaults) will give you more signals and they will appear earlier in the price movement but they will contain more inaccuracies. And inaccuracies here could spell more failed signals so that’s something to really watch out for.

Increasing the time period the CCI scoops up to generate its average price will result in more accurate signals but the downside is that they will often appear late when the price movement is already well underway. So while this might mean you are getting more reliable trade signals, you are not necessarily getting them on time to make the most of your trades. It’s a trade-off you will need to play around with to get the hang of it but it is also something that affects how you will end up using the CCI in your trading. 

Another thing to bear in mind is that CCI trading signals usually come in the form of it crossing the +100 line into “overbought” territory or the -100 line into “oversold” territory. In forex trading, currencies can’t be overbought or oversold in the same way as commodities but these signals nonetheless remain the crux of using the CCI to trade forex. It is worth remembering that some strategies will rely on an even more cautious approach where the trade signal is defined as the CCI crossing the +200 or -200 line and that some traders also use a zero-line cross strategy.

By covering some of the more popular strategies here it is not our intention to recommend any of them – they are here to give you a basic overview of how the CCI is commonly used and what it can potentially do. It should go without saying that you are not advised to start using the CCI – or any other indicator, for that matter – without first taking it through a rigorous testing phase (including both back and forward testing) where you will check and double-check both that it works as you need it to and that it suits your own personal trading style.

The Zero-Line Cross

In most cases, the zero-line cross strategy with the CCI is used on short or very short timeframes to catch price movements that develop into small mini-trends. This approach gives better results during those times when the market is particularly active and are also better at catching trends on short timeframes than they are on longer timeframes.

A popular version of this approach would be to combine two CCI indicators operating on different periods (for example, 20 and 50) with an exponential moving average on a short timeframe – say, the one-minute chart. An entry signal would then be generated when the 50 period CCI crosses the zero-line and is confirmed by the shorter-period CCI and the moving average. If the price movement is long and the 50 CCI crosses the zero-line, the confirmation should come in the form of the 20 CCI line remaining below the zero-line and the price is above the moving average. If either one of these confirmations fails to occur, the trade signal is false and you should not enter the trade.

This same set-up will also generate a handy exit signal. If you entered a long trade, like in the above example, and you are still in the trade when the indicators line up again to give you a short trade signal, this is your cue to close the trade. The kicker is that this will sometimes happen before your trade has had a chance to become a winner. To mitigate against this, you should be particularly careful about the market conditions when entering into short-term trades. It will take a great deal of backtesting and time spent on your demo account before you be comfortable about when this approach is likely to reliably and consistently give you winners.

Reversal Hunting with the CCI

Another popular trading strategy that is advertised for the CCI across online trading guides is its use in reversal trading. Reversal trading is an inherently risky business and should not be entered into lightly. Whether the CCI is the right tool for this approach or not is something that is hotly debated and only those who have thoroughly tested a reversal strategy to the point at which they are happy with its results should attempt it. That said, there are a huge number of reversal strategies out there relying on the CCI so it is worth looking at what a typical one might involve, even just for completeness sake.

In most of these strategies, you are waiting for the CCI line to cross the +100 line or the -100 line and then cross back. As you can already guess, this will throw up a lot of failed trades so most strategies seek to limit those by adding in more lines for the CCI to cross. If you do this your trade signal will be generated when the CCI crosses one of these outlying lines (say the +250, for a short trade) and then drops back down to cross the +100 line as well. Reverse this for a long trade, where the line crosses the -250 line, crosses back, and then also crosses the -100 line. Adding in that extra line will, of course, drastically reduce the number of trade signals you get out of this thing but the hope is that it will also drastically cut down the number of false reversals it leads you into. Combine this approach with a filter indicator, such as a good volume indicator to further reduce the number of false signals.

Whether an approach such as this is viable is something you will have to figure out yourself through a robust testing regimen, which will also give you an opportunity to try out tweaks to the approach, such as the distance between the overbought and oversold lines or the period of the CCI.

Breakouts with the CCI

Of the three most common uses for the CCI, hunting down breakouts from low or high bases is probably the most workable. The neat thing about this approach is that it works on a greater variety of timeframes, making it more appealing to a broader range of traders. The crux of the strategy is to wait until the market enters a high or low base (i.e. it goes sideways and forms a base after a strong movement upwards or downwards). Here the hope is that a signal from the CCI will confirm that the price is about to break out of the base and continue its previous movement. 

As with most other strategies using the CCI, this one also relies on the overbought and oversold lines at +100 and -100 but here the market conditions and how the price has been moving before the signal are critical. To enter a trade using this strategy, wait until the price forms a base after a strong movement in one direction or the other. In this example, let’s assume the market has gone to a high base after it has trended upwards for a while. If that’s the case, you are looking for the CCI to cross the +100 overbought line – and that’s your trade entry signal. To catch low bases, you are simply looking for the mirror image of this to occur, where the CCI crosses the -100 line after a low base has formed. Again, this is your signal that a breakdown from here is likely. 

As with anything in forex trading, there are a couple of problems with this approach. The first of these is that you are relying on the market to provide you with the right conditions for entry and that might leave you hanging around and waiting for quite a while. This is because in a market where there isn’t a clear trend, you will still get these signals but they will burn you if you use them outside of the price movement pattern described above. This makes the CCI a potentially useful indicator to have as a backup. You can use your usual setup to trade in more varied market conditions and then only pull the CCI out for those occasions when you feel you can really put it to work. Getting this right will, of course, take a lot of testing and long sessions in a demo account, making sure that this approach fits with the system you have in place and with the way you like to trade. 

The second serious problem is that even if you wait until the ideal conditions are in place, the CCI will still throw up false signals that will lead you into losing trades. You can mitigate this somewhat by waiting for it to cross the +200 or -200 line (depending on whether you’re looking at a high or low base). But this is a trade-off where what you gain in risk reduction, you lose in responsiveness. So, if you’re waiting for it to cut across an overbought or oversold line that’s further out, you might miss trades that would have been winners and you also might enter winning trades later, which could cut into your profits.

A third problem with using the CCI in this way is that it will cause you serious angst once you are already in a trade. Let’s say you followed all the rules, waited for a high base to form, waited for the CCI to give you your trade entry signal, and pulled the trigger on that trade. Now you’re in it, wondering how long you should stay in to maximise gains. Well, this is where the CCI can easily trip you up by tumbling in the other direction and crashing through that oversold line. This will look like a pretty hefty exit signal and many traders would take that as a sign that it’s time to bug out. But even if you do get out when it looks like the CCI is telling you, you could easily end up watching the price simply carry on in the same direction it was already going as though the CCI wasn’t even there. Well, that’s not a happy sight for any trader, you feel like you’re watching money you could have made simply sailing away. The trouble is these exit signals are often false. The upshot is that if you used the CCI to get you into a trade from a high or low base breakout, you shouldn’t also use it as an exit indicator. It simply won’t give you reliable enough signals for that.

Troublesome Hurdles or Insurmountable Problems?

So as you can see from these preferred strategies for using the CCI in forex trading there are different things you can use it for. It’s clearly easy enough to adapt to a variety of trading strategies and the sheer volume of suggested strategies out there on the forex internet tells you that this thing is popular. But, here’s the catch, just because something is flexible and popular doesn’t automatically mean it’s any good.

The first red flag that should pop up in your head when you look at the CCI is that it was designed well over a decade before the spot trading of forex was even a thing. Now, on its own, that doesn’t necessarily have to translate into a major problem for the indicator itself. You might even wonder whether the fact that it was designed so long ago doesn’t lend it a certain kind of venerability. Like, if it was designed so long ago and is still used today, doesn’t that mean it has survived the test of time? Well, let’s put it like this, how many items of technology do you use on a regular basis that are from the 1980s? Are you still using an 80s cell phone? Are you watching shows on an 80s TV? You might still have an 80s car in the garage and you might even love it but you know that it is by now a classic car and that if you really needed a car to do a job – because ultimately that’s what you need from an indicator – you’re going to want something more up to date. At the end of the day, the age of this thing should at the very least make you think, “Hey, I wonder if there are more recent, better indicators out there that are designed for what I need?” And, of course, there are.

That’s another thing about the CCI – not only was it designed in the early nineteen eighties but it was also designed with commodity trading in mind. At its most basic level, measures whether a security is overbought or oversold and that alone should make you think twice. Because, while it’s important to know if stocks or commodities are overbought and oversold since they have intrinsic value, this isn’t particularly useful for forex. That isn’t to say that there are no limits on the price of a currency, that the price can go as high or low as it wants with nothing holding it back. If the price movement in either direction is drastic enough, then a government or national financial institution is going to step in and try to rein it in. But that isn’t the same kind of thing as the limits of supply and demand that perform the role of, let’s say, natural checks and balances in the equity and commodity worlds. Moreover, that intervention might take a long time to get agreed upon and could come many thousands of pips down the line and even when it comes, it will bear no relationship to the overbought and oversold lines on your indicator. 

Now, these are pretty fundamental problems with the CCI but if its age and the fact that the way it functions is basically completely divorced from the way forex markets work aren’t enough to give you pause, there’s another thing for you to think about.

Circular Popularity

Reading all of this, you might be wondering, if it’s old and designed for different markets, why in the world would the CCI continue to be popular. There are a couple of main reasons for this. The first is that it is pretty popular in commodity trading where it is used pretty commonly and is more suited to doing a good job. What then happens is that traders who come over to forex trading from commodities are familiar with it and want to go on using it. So they try to make it work by bashing what is basically a square peg into a round hole. But they don’t just stop there, in addition to carrying on trying to use it for forex trading, they also make tutorials about it for youtube and sing its praises on forex social media.

The second reason it’s popular is simply because it’s popular. The forex internet can sometimes become its own little group-think bubble. Not only do people happily regurgitate what they’ve heard without actually giving it a try but they also often tell each other what they want to hear. Now, the first part of this is a big enough problem on its own because when lots of people – even people with a certain standing in the community, for want of a better term – talk about a thing as though its good they can amplify it to the point where the voices of those people who’ve tried it and might have something critical to say get drowned out.

Add to that the fact that there are people out there trying to get likes and views and follows and that they can do this by telling you what you want to hear and you’ve got a much more serious problem on your hands. There are no magic bullets in forex trading and no one indicator can solve all of your problems but if you put out a video or blog saying, “Hey, this indicator is a magic bullet that solves all your problems” then people are going to tune in. And not just that but you’re going to get way more viewers or readers than the guy saying, “you know what, this indicator doesn’t work too well”.

Lastly, this vicious popularity circle gets compounded by the fact that people are not too willing, generally speaking, to own up to their own mistakes and failings. So even in the comments under a blog piece or video or social media post you won’t get too many people saying, “Hey, I tried this and it didn’t work at all for me, in fact, I lost money using it.” This is pretty understandable since most forex traders are more likely to assume they were doing something wrong with the tool they were using than that the tool itself was the problem. That and no one likes shouting from the hilltops about something that went wrong – we’d all much rather boast about the things that went right.

But it goes further than that even because sometimes you will see people skating over the losses the CCI generates even in the videos and posts they put out to sing its praises. Sometimes you can see these on the very chart they’ve pulled up to show you how well it works but they’ll just mention them in passing or not mention them at all. Now, this is kind of cherry-picking is downright misleading – especially for people who are new to trading and who might not spot those losses because they’re working so hard to understand the wins properly. As disingenuous as this is, it still contributes to an indicator’s popularity because it gets people talking about it.

Okay, so it’s popular but not necessarily because it’s genuinely good – you’ve got that by now. But, in this case, popularity is a problem all on its own. You see when an indicator is as popular as the CCI (or a few others out there that also seem to draw a crowd even though they aren’t very useful) then people coming into trading see it and get it into their heads that this is all there is out there. If you’re just starting out as a forex trader and you see thousands of people out there talking about the CCI, you’re going to start to think that there aren’t other indicators that can fill this role. But nothing could be further from the truth.

So What Now?

First thing’s first. There is no harm in trying to understand how the CCI works and how you might use it in its optimal role. By trying it out harmlessly and at no risk to yourself or others in a backtesting/forward testing trial, you can view the whole process as an incredibly useful learning experience. Not only will you see what it can and can’t do but you will also learn something more about your own trading habits and the system you use will naturally evolve as you become more experienced.

That said, by testing this thing thoroughly, you will also be able to evaluate whether it can be put to use in some limited scenarios and in specific market conditions – such as, for breakouts from high and low bases as described above. Ultimately, however, the best thing to do would be to take the contents of this piece and use them as a springboard from which you can embark on a search for newer, better indicators. Rest assured, there are indicators out there that perform similar roles to the CCI but are specifically designed for forex trading and for integration with the kinds of platforms forex traders use.

All you need to do is get out there, search around, and do your own research and testing. After all, why would you use an old jack of all trades indicator designed for the commodities markets at a time when personal computers were barely a thing when you could instead find more modern, better tools out there for free on the internet. You will have to put in the work, of course, but the rewards are out there for the taking. 

Categories
Forex Technical Analysis

Burning the Japanese Candlestick at Both Ends?

Japanese candlestick patterns are a popular forex trading tool but are they really useful or can they be more of a burden than an asset? Read on to hear both sides of the story and get insights you won’t find elsewhere.

Storytelling Candlesticks?

The first thing to say here is that this is a look at how forex traders use candlestick patterns as a technical tool and not about the use of Japanese candlesticks as an alternative to bar charts. Compared with the more traditional bar charts – that were used more heavily in the past – Japanese candlestick charts have only a slight advantage. Overall, both types display the exact same information, with the candlesticks perhaps making it a little easier to identify patterns and some people will also tell you that they are just easier to read and neater.

The other thing to remember about candlestick charts (though this does also apply to bar charts) is that – unlike, say, a line chart – Japanese candlesticks are telling you a story about how the price moved over a given time period. Let’s say you are trading using the one-day chart. Well, with a candlestick chart, for any given day you will know where the price was when trading opened, where the price peaked, where it bottomed out, and where it closed – all just by looking at a single candle for a second or two! All on its own, that’s magic. But the real story behind Japanese candlesticks isn’t about how they display price movements. It’s a little more involved than that.

History Lesson?

Japanese candlesticks go back a long way. Now, it is really not very interesting to most traders to read long histories of where their trading tools come from – most people just want to know how they work or if they even work at all. That’s pretty easy to understand and, in most cases, the history of an indicator or any other tool isn’t particularly fascinating and is generally pretty irrelevant. With Japanese candlesticks, it is actually pretty useful to know where the technique originates from, so as to better understand the role it plays today.

So, the story behind Japanese candlesticks is that they were originally developed in Japan a couple of hundred years ago to help traders track the price of rice on their own internal markets. They were popularised in the rest of the world in the early 90s when a guy called Steve Nison who wrote a hefty book about them and how recognizing patterns in the candlesticks can be used to analyze patterns in the prices of equity, commodities, and forex. The key part of the book’s success back when it was originally published is that it detailed how these patterns can help traders to discern, if not always predict, possible future price movements. 

Supply and Demand

Some traders say that being able to use candlesticks to predict what’s coming down the road in terms of price movements is more of an art than a science. That may or may not be true but, if it is, it is definitely an art that you can learn. As we said before, each candlestick on your chart is telling you a story but put together they are telling you a larger piece of that story. Learning to recognize these patterns and being able to understand the story your candlesticks are telling you is where the art comes in. But one thing is for certain, the main characters in the story are always supply and demand. The story arc is always about the balance between sellers and buyers.

When it comes to trading, it is easy to forget the fundamentals that underpin how the market works. We all get lost in indicators, tools, charts, news events, and a plethora of other distractions and we just forget that the fundamental elements that drive price in one direction or the other is the balance between buyers and sellers. In short, supply and demand. Now, of course, there are a million factors that drive supply and demand – some big news story, government intervention in the market, the machinations of big players, and so on – but these factors are all expressed by how they affect the relationship between buyers and sellers. Say the UK government decides to curb government borrowing and the Bank of England decides to do nothing in response – well, this might undermine confidence in GBP and the price drops relative to the dollar and the euro. That’s all very well but the real driving force bringing the price down is that people who were worried about the breaking news and decided to sell their GBP outnumbered people who were looking to buy GBP at that time. Sellers outnumbered buyers and the price dropped. 

All the other indicators we use ultimately derive all of their data from this one simple fact. From whether there were more buyers or more sellers over a given period. Now, the beauty of Japanese candlesticks is that they give you a much more stripped-down view of the true nature of things. The stories they tell have all the noise stripped away and just show you the relationship between buyers and sellers.

The best way to show you how they do that is to take a look at a couple of examples. Now, this is nowhere near being an exhaustive list of Japanese candlestick patterns – there are literally hundreds of these things out there and very few people know more than a few. This is more of an opportunity to give you a sense of how they work so, before you take these and start applying them to your trading, be aware that any real use of these patterns will require your own research and testing (as well as making sure you use them in conjunction with other indicators as part of a broader trading system that includes risk analysis and money management). You just don’t get anything handed to you in this game, you have to put the work in.

Another thing to bear in mind is that these patterns work better on the longer timeframes. On shorter timeframes like the one-minute chart, you will still have these patterns emerging but their accuracy will be so low as to make them unusable. This is because the price is shifting around so fast it generates a lot of noise and makes the patterns unreliable. At the longer timeframes, the patterns will make more sense but the trade-off is that they will also be less timely, which will delay your entry and exit signals. This is a trade-off between accuracy and timeliness that you’re making with every indicator out there so you have to be aware of it and compensate for it with the way you manage your trades.

Examples – The Hammer

A hammer is a candlestick with a short body, a long lower shadow, and a small or no upper shadow. The story the candlestick is telling you is that the price dropped after opening but rallied during the time period and ended up close to the opening price (sometimes over and sometimes under).

Typically, you’ll see hammers close to the bottom of a clear downward price movement and they indicate that sellers predominated but that, eventually, enough buyers came into the market to sway the price the other way. Of course, you might also see hammers when the market is ranging or moving sideways where they are more likely to deceive you about where the price is going to go. After a strong short trend, however, they often signal a change in the price direction.

As with all of these patterns, they are a signal – there is no guarantee about the direction of the price after a given candlestick pattern. You might see a hammer come in and think it represents a reversal but the price can easily just turn around and burn you afterward. Smart traders who suspect that a downward trend has concluded once they see a hammer will wait for one or even two confirmation candles to form before pulling the trigger on a trade.

Examples – The Shooting Star

Just as a hammer signals a possible change of direction in the price movement after a downward trend, so its mirror image, the shooting star, signals a possible change of direction when it appears at the peak of an upward trend.

Since it is fully a mirror image of the hammer, the shooting star has a long upper shadow, it is also possible to glean a sense of the strength of the turnaround from the length of this shadow – a short shadow likely signals a dampened change of direction while a long upper shadow (sometimes many times longer than the body) is a sign of a more bearish pullback. The best examples of a shooting star will form above the previous candle – that is, its open, lows and close should all be above the shadow of the previous candle.

It is important to be aware that a shooting star pattern and an inverted hammer pattern both look exactly the same but that they differ in one crucial detail. A shooting star will appear at the top of an upward trend and signals a coming downturn, while an inverted hammer will appear at the bottom of a downward trend and, much like its sibling, the hammer signals a change of direction for the price movement. 

Examples – The Doji Star

A doji star or just plain ol’ doji is a candlestick that forms when the open and close price is so close that the candle looks like a cross. The name doji comes from the Japanese word for error or mistake, which is apt given what this candlestick is signaling. There are several types of doji but they are all telling you more or less the same thing – the price has reached a balance point and there is no strong trend in either direction.

You’ll see them in all sorts of contexts, so no matter what the market is doing at any given time, you could have a doji forming. That said, they are still giving traders a signal to be aware of and think about. Though they often crop up when the price is moving sideways – that is not the doji you are looking for. They are much more useful to you when they form after a strong move in either direction. Dojis represent indecision at the best of times but after a healthy trend, they are telling you that equilibrium is being reached between buyers and sellers and that could be a sign that the trend is losing strength. 

Of course, a doji doesn’t always mean there is going to be a turning point and you should watch out for those moments when a trend wavers a bit for a time and then simply carries on going because that could easily kick up a doji. 

Examples – The Hanging Man

The hanging man or hangman is, in many ways, a similar candlestick pattern to a shooting star – in the sense that it represents a possible reversal of sentiment at the top of an upward price movement. Don’t be fooled, however, because there are differences.

A typical hanging man will look much like a hammer or an inverted shooting star – with a relatively small real body, a long lower shadow, and little or no upper shadow. The longer the lower shadow, the stronger the candlestick is as a signal. But the context is important because, unlike a hammer, a hanging man appears at the peak of an upward trend. Also important is the story the candlestick is telling us. From the shape of the candle, we can tell that buyers managed to rein in a sell-off that occurred between the open and close. Though you could read this to mean that the buying sentiment prevailed in the end, most traders will see this deep sell-off as a sign that the trend is losing strength.

There are many traders out there who think of the hanging man as being more useful for short-term changes in direction and that, as such, it should be used more as an exit signal than as an entry into a short trade. In that sense, it could be a useful addition to your toolkit as a way of maximizing wins by preventing the price from dropping through your stops.

Examples – The Bullish Engulfment

The bullish engulfing pattern or engulfing bull is a Japanese candlestick formation made up of two candles rather than one. It forms when a smaller bearish candle is followed immediately by a larger bullish candle whose body is bigger than the real body of the smaller candle. You don’t need to worry too much about the shadows of the smaller candle – the main aspect is the second candle’s large body being bigger than that of its little predecessor. The story that this tells us of the first candle representing a slowing downward price movement, the price opening lower still on the second candle but then closing near the period’s highs (which is why the second engulfing bull candle will often have small upper and lower shadows). This is important, especially for the upper shadow because it then indicates that the price was still heading upwards when the candle closed.

Since the bullish engulfment is telling you that buyers clearly won out during the second candle’s formation, it is usually taken to mean that the downward sentiment is losing strength and that a reversal could be imminent. This is why it is important for the open price of the second candle to be lower than the close of the first – this means that the downward trend continued but was eventually reversed by bulls winning out over bears.

The Other Side of Japanese Candlesticks

Understanding the patterns of Japanese candlesticks and using that knowledge to assist your trading (in conjunction with other indicators and tools) is hugely popular in forex. But although it is true to say that it is popular, that doesn’t mean that there are not those out there who think that Japanese candlesticks are either ineffective to the point of being meaningless or that they could actually be hurting your trading.

Supply and Demand?

The first of these criticisms of candlestick patterns as a tool in trading goes to the very heart of the power of what Japanese candlesticks are all about and it goes a little like this: Japanese candlesticks were originally developed and also later adapted as a tool for trading commodities (rice, in the original iteration) and stocks – both of which conform to the rules of supply and demand much more closely than forex. And there are elements of truth to that criticism. In forex trading, demand is certainly a factor but the supply side of the equation works rather differently than in commodities and stocks because the supply of a currency isn’t as limited – in theory, it is completely unlimited.

However, though there is some truth in there, that doesn’t mean that the story Japanese candlesticks tell traders about the relationship between sellers and buyers during a given time period is completely invalidated. Forex is still subject to the principle that price increases when buyers outnumber sellers and decreases when the reverse is true. But, and here’s the clincher, while it doesn’t invalidate the candlesticks approach, it is still something to bear in mind. You will see times when a candlestick pattern that unfolds just perfectly on your screen still doesn’t go on to give you the price movement you were expecting.

Well, as a trader, what does that tell you and where does that leave you? Ultimately, if you’re a smart trader, it leaves you pretty much where you started. It means that you cannot rely solely on following Japanese candlestick patterns without combining them with a well-worked out trading system that includes other indicators and a host of highly honed risk and money management techniques that you have adapted over time to suit your trading style.

The Big Players

Another – and very closely related – criticism of Japanese candlesticks comes from those that see the actions of big, powerful market players lurking behind every price move and directing the ups and downs of the market in the short term but also, and especially, in the longer term. That may initially sound like conspiracy theory hogwash to some readers but there is more to it than that. In forex, just as in most markets (but perhaps, at the end of the day, more so in forex), there certainly are huge and powerful financial institutions, funds, and so forth that influence the prices on forex markets. Traders need to be aware of that and the fact that this undermines to some extent the purity of a simple supply and demand equation.

There’s another side to this to also be aware of. Japanese candlesticks have become so popular now among retail forex traders that their huge popularity is also one of the main things that hold them back. They are so widespread now as a technique that they have been analyzed to death by the big players in the market and the algorithms and software they use that their reliability has been seriously degraded. The big players will happily use software that recognizes a pattern in the blink of an eye – a million times faster than any human trader would – and uses this advanced knowledge to analyze how the vast majority of traders will react to the emergence of this pattern relying on popular patterns. This essentially traps you – the slow human – in a computer-laid trap where you following the received wisdom in responding to a given pattern will be your ultimate undoing. 

Pattern Blindness

A third major criticism of using Japanese candlesticks – and perhaps the most valid – is based on how our brains work. Humans evolved over millions of years to be able to pick out patterns. Back when we were hunter-gatherers, this helped us to survive, to spot the tiger among the bushes, to find food, and generally to get by. Over time we became masters at it – second to none. But the thing is, being able to see patterns in the modern world isn’t quite the question of life or death that it once was. In fact, it’s of limited application. And then, along comes forex trading and Japanese candlesticks and suddenly we’re back in our element again. So, sure, our innate ability to spot patterns comes in handy sometimes but there’s also a downside.

The drawback of being such fine-tuned pattern identifiers is that we also tend to see them even when we shouldn’t. Sometimes that might mean seeing the savior of your choice in a piece of toast or getting creeped out by random shapes in the dark, but at other times it could be seeing an inverse hammer or a bullish engulfment on a chart. But there’s another couple of elements to the pattern recognition that could also really get in your way when using Japanese candlesticks in trading.

One of these is that you start looking at charts and seeing the candlestick patterns on it but because you’ve become so convinced by all of the hype around Japanese candlesticks, you start only seeing the wins and allowing your eyes to simply skate over the losses. This happens partly because Japanese candlesticks are so popular and so talked about on the forex internet and people become kind of indoctrinated to seeing their successes. You spend so much time watching videos or reading blogs that tell you over and again that these things work that it gradually becomes harder and harder for you to see the times when they don’t.

This generates a kind of belief because, well, wouldn’t it be great if this worked as advertised? You could just look at a chart, see a pattern emerging and you’d know what the market was going to do next – just in time to enter a trade and make a handy little profit from what you know. Once that sense of belief and hope is ingrained, you lose your objectivity and your ability to see things for what they are. And once you’re in that territory, you forget that belief and hope cannot replace a well-tested and well-thought-through strategy. Moreover, once you’ve gone deep enough and trained your brain to see these patterns, you can become blind to all of the other approaches to forex trading there are out there. 

A final piece of the pattern-seeing puzzle is that when you’ve trained your brain to pick out patterns of Japanese candlesticks, it becomes very difficult to untrain your brain again. Even if you stop using them actively as a tool, you’re still going to be seeing them everywhere while you’re trading. In a sense, using this approach to trading lures your brain into a trap from which it can become difficult to escape. Even when you think you’re free because you’ve stopped using candlestick patterns, you go on seeing them and they introduce doubt at a subconscious level, affecting your trading decisions.

Testing Yourself and Your System

Ultimately, whether there is any value to scanning the charts for patterns of Japanese candlesticks is something you will have to decide for yourself. The one thing that’s for sure is that you can’t fully trust your own brain to be objective about it. The only way to be truly and, above all, objectively sure whether any given approach or tool is valid and performs the way you need it to is to test it.

Believing and hoping that something is going to work – even believing other people’s judgment about it – leads to all kinds of problems. Not least of which is the fact that when it almost inevitably fails to work in the long term, the first person you’re going to blame is yourself because your instinct will tell you that you must be doing something wrong: “How can all these people be having success with this tool but it isn’t working for me – there must be something I’m not doing right”. The only way to combat that doubt is to make sure the tools and approaches you’re using have been tested by you and that you are comfortable with how they work.

Now, that doesn’t mean backtesting an approach once on a single currency pair and then clunking it into your system right away. No, if you want to test to remove the fallibility of your subjective and imperfect human brain, you have to put the work in. That means backtesting each tool you plan to use, comparing them with one another, and testing them in conjunction with each other. Then, when you feel like you’ve backtested thoroughly enough, it’s time to take your tools and your trading system out on the road – but in a demo account. Because forward testing is just as important as backtesting and can be even better at highlighting the weaknesses in a tool or indicator.

All of this is just as true with Japanese candlesticks as it is with any other tool that you’re thinking of using. The advantage of backtesting Japanese candlestick patterns, however, is that any individual pattern actually doesn’t crop up all that often. Not only does this make it quicker to backtest them but also you can backtest a whole slew of patterns all at once, just by picking them out of a chart going back a significant amount of time. Conversely, however, they will take longer to forward test than signals that crop up with greater frequency.

At the end of the day, it’s important to have a good overview of how a particular trading tool works but you should take nobody’s word for anything. Believe neither the proponents of a tool nor the detractors – ultimately, be careful about how much you believe your own subjective thought processes – because nobody is going to tell you as much info as you can learn by putting a tool through a robust testing regimen.

Categories
Forex Technical Analysis

Prop Trader’s Use of Moving Averages

Moving Averages are very versatile in ways how you can interpret them for signals. Whatsmore, adding more than one creates a plethora of ideas as many patterns and shapes emerge in conjunction with the chart. Therefore, traders can make complete systems out of these indicators and all of them are unique in their way.

Some MAs are used more often, such as 100-period MA, 20-period Exponential MA, or 9-period EMA, still, signal interpretations are subjective and MAs are used with other indicators and analysis. This article will address how one professional prop trader uses MAs as an element in their trading system and it should give you an idea of what other uses MAs have aside from traditional trading signal generation. We will present opinions that should not be considered as a fact or trading advice, just as an example of how it is used for technical trend-following systems. 

A trader who wants to have a robust and universal system looks to implement measurements of different factor types on the market, covering areas of importance on their trades. According to one such system structure example used by professionals, MA is one element of 6 others. Other elements or tools focus on volume indicators, two trend confirmation indicators, a trade exit indicator, flat markets filter, and volatility measurement for risk management purposes (ATR indicator). Moving Average can double as an Exit indicator when the price cross-closes it but for our example, it is used as a higher probability direction filter. We will go more into this function later, let’s first address the use of the MA as a Trailing Stop.

Trailing Stops

Trailing Stop can be regarded as a trade Exit function with adaptive movement to the price, it will follow the price in real-time and automatically move the level at which a position will be closed if that price level is hit. Most trading platforms or clients like the MT4 have this implemented. Although, Trailing Stops can be calculated based on the moving averages rather than just using the points distance trailing which is a basic Trailing Stop calculation. Now, as there are many types of MAs it means Trailing Stops can also be customized in various ways.

Such tools exist for MT4 and MT5, most of them are a form of Expert Advisor script that expands the way you can use real-time trailing stops for your exits, and more often than not it is more effective than the standard, distance-based trailing stop. Of course, you do not have to use such tools if you do not need real-time custom trailing stops, instead you can just add MA of your choice to your chart and move the Stop Loss order level to it. This is very easy to do if you are on the daily timeframe but gets very demanding if your target timeframe is below M30, especially once you have multiple positions to trail. 

The way we can trail on the daily chart is simple. Once our Take Profit target is hit, we move the Stop Loss to the moving average of choice. Or, we can just wait for the price to cross the MA and close the order manually. There are differences here, the first way is more aggressive because if the currency pair becomes more volatile it is likely your stop loss level will be triggered even though the close price has not crossed the MA. So the second method will not “accidentally” close the position prematurely because of the volatility increase, still, it leaves room for flash crashes or other sudden moves to negate gains we might have got from the trend.

In this case, MA has a trade exit function, while trailing the MA with the stop loss order will ensure our profits from the trend. You should pay attention to the MA period settings and set to single-digit numbers as this is what prop traders recommend for the daily chart systems. Trailing stop or exit function MA should not follow the price to the point it is almost the same, the moving average should average the price value and absorb price volatility to some degree but not lag too much. 

MA Lagging

Talking about the MA lag, it leads us to mention why some technical prop traders are not fans of MA crossovers. You probably know that MA crossovers are very common signal generators unless you are just starting to trade. Moving Averages absorb volatility so we have a cleaner insight where the trend is emerging, ending, stalling, and so on. When we use MA crossover as trend confirmation indicators, the signal they generate is not optimal. It either lags or if we set low periods – fake signals are overwhelming. No matter what type of MA you use, they seem to always be late to the party. Using popular MAs mentioned above, you may have heard about the Golden Cross and the Death Cross.

200 EMA (red line) and the 50 EMA (blue line) on the EUR/USD chart

It is obvious from the picture above that these MAs do not cross often on the daily chart our system is using. Golden Cross is a signal when the 50 EMA crosses the 200 EMA and Death Cross is the opposite, short trade signal. These are used often in stocks trading, creating a kind of uniform traders’ behavior once the crossovers happen, putting more pressure on the price momentum. This phenomenon is waited for by investor traders and the strategy has some success because of this coordinated move to dump or hype a stock. Unfortunately, forex is not a good market for these strategies. You may notice trends once the crosses happen but it is not related to the trader sentiment. Whatsmore, the signals are so spread apart you may have to wait for years to happen. If we zoom out the EUR/USD chart you can notice this, meaning even investor-type forex traders will use other trading options for trend confirmations. 

Daily EUR/USD with EMAs zoomed out

Now we need something that moves faster so we can have signals in a more reasonable time span. We can also use the popular 20 and 50 period EMAs. 

NZD currency basket with the 20/50 period EMAs

The trend confirmation signals on the MA cross are now more frequent and can be applied to a currency basket, for example, for currency strength analysis. This setup can be used on a currency pair too, however, for a professional, these signals are not good enough. Notice that the cross signals lag to the point they are too late for the bigger trends on the NZD basket picture, entering almost in the middle of the 4 visible confirmations. Smaller trends at the end of the chart are completely off, giving you signals when the trend is over.

Moving averages have this flaw when facing a directionless market, but your system should have a volume or volatility indicator/filter that should save you from these losses by giving you a signal to stop trading. Sticking to the MAs subject, a better option is a very simple adjustment on how we interpret the signal to enter. Let’s just focus on the 50 EMA and delete the other. The trend confirmation signal is when the price cross-closes the 50 EMA. Now we have a very different and much better entry point, capturing most of the 4 trends in the picture.

NZD basket with only 50 EMA

Notice that during the periods of trend exhaustion the signals are not always perfect. If we consider you have an indicator that filters flat periods, each trend entry is at an optimal point, providing you with profits even during smaller trends at the chart end. 

When you find an MA that does a great job crossing the price when the trends emerge, that one is absolute gold. Finding one needs a lot of searching and testing, and the MA element plays an important role in the prop trader systems. They also call it the Baseline. 

The Baseline Concept

The Baseline concept takes your signals from the first and second confirmation indicators and filters any that are not in line with the MA signal. By doing this, small corrections on the major trends are filtered in case your confirmation indicators are wrong. Once the corrections are exhausted, the major trend continues where you again reenter. This major trend is considered exhausted once the price cross-closes the Baseline and a new one emerges or a period of calm, trendless action is about. Moving Averages are very bad in these flat conditions, so is your baseline, therefore volume or volatility tools need to step in. 

By going short only if the major trend is going down, and vice versa, you add up your odds of having a winning trade. Now, this is only one of the baseline functions. In your quest of finding a good MA as a baseline element in your system, you will find so many options and so many settings you can change you might not be sure it is the right one as something better is just around the corner. If you are not sure, take a zoomed-out approach. Your MA of choice should cross the price action at points where new trends emerge but allow smaller corrections of the major trend without fake cross signals.

It should be sensitive enough to give you optimal signals once a new trend starts, unlike 200 EMA for example, which is just too slow for our trading way on a daily chart. Some traders like MAs that are calculated in a way so they represent an average and signals you cannot see with eyes only by just looking at price action. A number of these MAs are developed by John Ehlers but you should aim for an MA that fits your system and take a holistic approach to it. 

The Baseline serves as a major trend filter but prop traders understand other concepts to it. Price actions always tend to return to the average value, once it deviates. Unless there is a strong driver (news event) to push the price out of the normal deviation range, the correction towards the baseline is likely. Technical Prop traders measure this distance the price has moved away from the baseline. According to it, they create a rule – if the price has moved too far away from the baseline once it crossed it, they will not make a trade. This signal to enter (if other indicators confirm) will not be optimal, the odds are not very good now. Now, how to measure and find out if the price has moved too far? One of the easiest ways is by looking at the ATR indicator. Measuring the price level pip range from the baseline and comparing it to the ATR (14) gives you an estimate if it is too far.

ATR

ATR measures the volatility of the currency pair and it will give you a measure of how much the price can move away from your baseline daily. If the price is above the daily ATR value, it is a mark it deviated from the normal ranges. This point is also where technical traders put their first Take Profit and move Stop Loss to breakeven. Another important baseline role is also measuring the distance where to put your initial Stop Loss when you enter a trade. According to some testing done by prop traders, the 1.5xATR range is most optimal on a daily chart, but this setting should be adjusted to your system as it may be more or less sensitive.

Of course, only back and forward testing can give you an answer to where the best point is for your system and 1.5xATR can serve as a starting setting. To make your testing process faster, there are tools (for MT4 and MT5) that plot ATR lines above and below the price levels so you can easily see if a trade can be made, if it hit the TP or SL, etc. These tools are not available by default in the MT4 so you will need to find one.

As we can see, the baseline is an important element not just for major trend gauging but also a base for your risk management. A combination of these creates a complete solution to your trading, excluding your guesses that are more often than not bad in terms of probability calculations. As MAs are abundant on the internet, the search for them will likely be easier than for the volume tools, for example. The much harder part is the long testing phase with different settings and calculation types.

Know there are interesting solutions on some specialized forum/websites where one tool can hold several MA calculations, such as TEMA, ADX, Athens MA, SineWave MA, DEMA, Jurik MA, many smoothing options, filtering, and other settings that make an incredible array of how you define your baseline. In conclusion, know MA crossover signals are not a very good option as trade entry signals, MAs are not very good in ranging markets and that there are multiple uses for them, you just need to test a lot. 

Categories
Forex Elliott Wave Forex Technical Analysis

EURGBP Soars!, More Gains Ahead?

The EURGBP cross soared on Friday session, surpassing the psychological 0.92 barrier, advancing until the target area forecasted in our previous short-term analysis (here.)

Technical Overview

Our previous analysis discussed the completion of the complex corrective formation identified as a double-three pattern of Minute degree labeled in black, which began on last September 11th at 0.92916 and finished on November 11th at 0.88610. Likewise, after the double-three completion, the cross completed the wave B of Minor degree identified in green.

Once the EURGBP found the bottom at 0.88610, the cross began a rally corresponding to wave C. We have seen in our previous analysis the price completed wave ((ii)) at 0.88667 on November 23rd. After this completion, both the breakout of the descending trendline of the second wave in black and the strong bullish long-body candlestick formation developed in the November 27th session confirmed the start of the third wave in black.

Technical Outlook

During the last trading session of the week, the short-term Elliott wave view for the EURGBP cross exposed in the following 8-hour chart reveals the acceleration in its advance, which surpassed the supply zone between 0.92008 and 0.92181, finding resistance at 0.92298.

The impulsive upward movement observed during Friday’s session allows us to distinguish the completion of the wave ((iii)) at 0.92298 and the beginning of the fourth wave of the same degree.

In this context, the current corrective formation identified as wave ((iv)) in black could decline until the previous supply zone between 0.90686 and 0.90446, where the cross could find fresh buyers. Once the fourth wave completes, the cross should advance in a new rally corresponding to wave ((v)), which would be subdivided into a five-wave sequence. The potential target for the end of wave C is within the next supply zone between 0.92568 and 0.92916.

In summary, the EURGBP cross appears moving in an incomplete wave C of Minor degree, which, in its lesser degree count, shows the beginning of the fourth wave in black. This corrective formation could decline until the previous supply zone is located between 0.90446 and 0.90686. The cross, then, could find fresh buyers expecting the continuation of the trend that would push up the price toward the supply zone between 0.92568 and 0.92916.

Lastly, the invalidation level for this bullish scenario can be found at 0.90031.

Categories
Forex Elliott Wave Forex Market Analysis

EURNZD Consolidates after Bouncing from its Recent Lows

The EURNZD cross is seen consolidating near the extreme bearish sentiment zone backed by the strength of the New Zealand dollar. This consolidation suggests a pause of the downward sequence that began on August 20th and ended heavily oversold after its latest decline that drove it to 1.69472.

Technical Overview

The following 12-hour chart illustrates the short-term markets participants’ sentiment bounded by the 90 high and low range, which shows the price consolidating in the extreme bearish sentiment zone after the cross found support on 1.69472 on November 24th.

Furthermore, the previous chart shows the primary trend outlined a blue trend-line that tells the bias remains mostly bearish. Likewise, the secondary trend represented with the green trend-line exposes the downward acceleration, and, shows also its consolidation range between the levels of 1.69472 and 1.72664.

Finally, as long as the EURNZD cross keeps moving below level 1.72664, the bias will remain bearish, so we could expect further drops, likely below 1.69472. Whereas, the breakout of the extreme bearish zone of 1.72664 to the upside could indicate the start of a recovery.

Short-term Technical Outlook

The short-term outlook for the EURNZD cross under the Elliott Wave perspective is shown in the next 2-hour chart and seen moving in an incomplete downward sequence. The current leg in which is moving corresponds to the wave ((c)) of Minute degree labeled in black.  Within that wave ((c)), the price is advancing in its fourth wave of Minuette degree identified in blue.

 

We see all that the wave ((c)) of Minute degree labeled in black came after the completion of the wave ((b)), which ends on 1.80212 where the cross found fresh sellers dragging it in an accelerated bearish movement. In this context, the current wave ((c)) should develop an internal structure of five waves.

Right now, the chart shows the action is happening in its fourth wave, in blue, which could be advancing in its internal wave b of Subminuette degree identified in green. This leg could possibly test November’s lows. Likewise, considering that the third wave, in blue, looks like an extended wave, the fourth wave should be complex in price, time, or both. Therefore, the current corrective wave could continue evlving likely until early 2021.

Concerning the fifth wave, in blue, and considering that the third one of the same degree was the extended movement, there are two potential scenarios for the cross:

  • First scenario: the cross fails in its downward sequence finding fresh buyers above the end of the third wave, in blue, at 1.69472.
  • Second scenario: the cross penetrates below 1.69472, creating a new lower low. In this case, this new leg down could continue until the psychological barrier of 1.68.

In summary, the EURNZD cross currently moves in a corrective formation in the extreme bearish sentiment zone. In this context, our principal bias remains neutral until the completion of the fourth wave in blue. Once the cross ends the current consolidation, we could seek short positions following the direction of the fifth wave. Finally, the invalidation level of the bearish scenario locates at 1.73606.

Categories
Forex Education Forex Risk Management

Are You Taking On Too Much Risk While Trading?

One of the phrases that you have probably heard the most since starting out with trading is risk management, but what does that actually mean, and do you do it? To put it into simple terms, risk management is about reducing the potential risks to your account and protecting your account from dangers and large losses. This sounds simple enough and quite an obvious thing, but you will be surprised at how many people throw it out of the window on their quest for bigger profits.

Risk a Set Amount

One way that people reduce the amount of risk that they have on each trade is to limit the potential losses of each trade, they do this by setting stop losses on each trade that they make. A number that we see a lot of 2%, people seem willing to risk 2% of their overall account on each trade that they make, this would mean that the account would be able to survive up to 50 losing trades on a row without any wins, something that is very unlikely if a proper strategy is being implemented properly. It is important that if you set yourself a maximum loss per trade that you stick with it or if you deviate, only to deviate lower, going higher will put your strategy out of sync and could potentially damage your account equity quite a bit.

Adding to Trades

Something that a lot of people do is to add positions to an already winning trade. This basically means that when a trade is going the right way, you add in an additional trade to make the overall trade size a little larger. While this may work for some, a lot of strategies have not taken this into account so you should be careful when considering it. When you do add an additional trade, you need to bear in mind that your overall risk is increasing, do you stick to a maximum 2% loss on that trade, or do you increase or reduce it? Unless your strategy has already taken these additional trades into consideration we would advise against adding to existing trades as it could mean you can lose more than you had anticipated on that trade.

The Right Trade Size

How are you working out your trade sizes? Is it based on your account size or your strategy? Whichever method of working it out that you use, you need to stick with it. More often than not, your trade size would be based on the percentage of the account you are willing to risk with each trade. There are trade size calculators available all over the web that can help you to work out the exact size of each trade that you should be using based on the pair being traded and the percentage of the account that you are willing to risk. It is important to stick to regular and similar trade sizes for each trade, as suddenly adding larger trades could completely throw your risk management out the window and could be endangering more of your account equity than you would normally be willing to risk.

Taking Profits

Something that people often don’t associate with risks is taking profits, knowing when to come out of trades is just as important to protect your account as restricting your losses. To put this into perspective, a trade has gone into profits, you feel that it may reverse but it is in profit so you will let it run to see if it goes any higher, it suddenly reverses and you are now back to a break-even level or even in the negatives. In order to protect your account, it should have been taken in profit, many people use take profit levels, others have a certain percentage where they move the stop loss levels into profits to guarantee the profits. The importance of doing this is that you will have wins and losses, but it is important that you are able to take those wins as they are there to help cancel out the losses, having them also become losses will put your account in danger.

So those are a few things to think about when looking at the risks you have to your account, there are of course many other things to think about, but those are some of the bigger ones. Think about whether you do these things, if you do, think about how you can improve on your own risk management for the future to help protect your account.

Categories
Forex Indicators

Top 5 Forex Trend Indicators for New and Experienced Traders

There are thousands of indicators out there. In fact, there are so many that it is impossible to look at them all. What you may find when going through them is that a lot of them are actually different variations of a few different major indicators, with the creator having simply made a few small changes here and there. The underlying principle and method behind the indicators are fundamentally the same, in fact, for most of them, you would not actually see much difference at all.

So we are going to be looking at some of the more widely used trend-based indicators that are out there. You most likely will have heard of some of them or even used a variation of one yourself. Let’s take a look at what these major and popular trend indicators are.

Price Action

This is probably the one that most people would have heard of. In fact, some people who know nothing about Forex or trading may well have heard of this one too. When it comes to trading, price is the number one variable that we will be looking at and it is one that dictates the majority of moves within the markets. So getting a good understanding of what price action does and how the trends work is often the first thing that people set out to learn.

There are multiple different ways to look at price action. There are higher highs or lower lows and it is something that every trader should understand. We are not going to be going into detail here on how you actually analyse it, but there are hundreds of indicators out there that you are able to add onto your charts which give a fantastic overview of the current price action that is going on within the markets. The current price can tell you a lot about the current trends. The good thing about some of the price action indicators is that they also include trend lines, making it far easier to see where the current price sits within the current trend, a valuable tool for any trader or any experience level.

Moving Averages

One of the most used indicators when it comes to trading forex would have to be the moving average indicator. It is used to help identify the trends within the markets. There are multiple different forms of moving averages but they all follow the same ideas and aim to plot the average prices of a currency over a specific period of time over the price itself.

What the indicator suggests is that if the current price is above or below the current average price. It should indicate whether the markets are currently bullish or bearish. You are also able to work out the possible strength of a trend by looking at the steepness of the moving average slope. The steeper that the slope is, the stronger the trend would be. More often than not, you would use a long term in a short term moving average at the same time to help confirm any possible bullish or bearish movements.

The moving averages indicators are often used in conjunction with other indicators to help set up trades for specific strategies. Even if you do not use it for your trading, having a general idea of the current trend and where that trend sits above the average price can be invaluable to your trading, including both entry and exit positions.

The Parabolic SAR

Parabolic SAR, which stands for Stop and Reverse, is a great indicator that a lot of people use. The way it works is by identifying the short term trends within the markets. It will simply place dots on the charts which will be either above or below the high or the low in the price.

It works by using a number of different variables to help calculate its values. It uses things like acceleration factor and extreme price to do this. It is extremely useful when looking at the short term trends and the changes that are happening within these trends. It can be used to help with both entry and exits of trades as it is good at showing where the reversal could happen. It should also be used multiple times to enable for better correlation and confirmations of the short term trends and the changes that could be taking place.

The MACD

Also known as Moving Average Convergence, divergence, it is an oscillator which means that it will usually measure variables and changes in things like momentum and volatility. The MACD indicator is slightly different though because it also acts as a trend indicator, as well as calculating the momentum in the price of a currency.

The MACD indicator includes a histogram which will oscillate around the 0-level. The fast and slow lines are known as the MACD line and the signal line. The indicator gets its values from the exponential moving average indicator with a setting of 12 and 26 periods. The trends that are shown in the price charts are validated by using a combination of variables in the MACD indicator. MACD is widely used and there are a lot of indicators and expert advisors out there that have implemented it into their strategies and into their indicators, so you do not need to look far to see MACD being mentioned.

Ichimoku Cloud

This indicator is also known as Ichimoku Kinko Hyo, is a pretty unique one as it is a trending system within itself, not needing any additional input. It was developed to work as a trend following indicator which has a large number of variables included in it for customisation and adaptations.

The cloud within the indicator is often seen as the support and resistance level areas within the markets. The Chikou, Kijun-sen and Trinjensen measure the 9-period and 26-period levels on the charts. The Ichimoku Cloud indicator is fast becoming one of the most used trend indicators and is now getting used more and more by new and experienced traders. On first impression, it can look a little daunting due to the vast numbers of options and variables available, however, during a time of sustained trend in the markets, the indicator is able to give very good and very accurate results, which is why it is now so highly used.

So those are some of the most popular trend indicators that are being used right now. Which one you should use is entirely up to you. Some match and combine with certain strategies while some do not, some are far simpler than others, but the decision of which to use will need to be based on what will work best with your current strategy. All we know is that they are all incredibly helpful and potentially powerful tools that you can add to your trading arsenal.

Categories
Forex Elliott Wave Forex Technical Analysis

EURJPY Consolidates Expecting the ECB Decision Ahead

The EURJPY cross consolidates in the overnight trading session expecting the ECB interest rate decision statement that will take place before the U.S. opening bell. The analysts’ consensus doesn’t expect changes both in the interest rate that remains at 0.0% and in the deposit facility rate that keeps at -0.50%.

Source: TradingEconomics.com

Technical Overview

The following 8-hour chart shows the EURJPY market participants’ sentiment, where the cross looks consolidating in the extreme bullish zone, developing a flag pattern. This chartist pattern suggests the continuation of the previous movement. In this case, the technical formation could be indicative of further upsides for the following trading sessions.

Moreover, the primary trend identified with the upward trend-line in blue remains on the bullish side. Also, the secondary trendline plotted in green reveals the bullish acceleration of the price action. This market context is confirmed by the EMA(60) to Close Index, with a reading above the level 2.000 that suggests the overbought levels and the potential correction or consolidation of the previous rally.

Short-term Technical Outlook

The EURJPY under the intraday Elliott wave perspective unfolded in its 2-hour chart illustrates the advance in an incomplete corrective rally corresponding to wave ((b)) of Minute degree labeled in black. The internal structure shows the cross advancing in its incomplete wave (c) of Minuette degree marked in blue, suggesting a further upside in the following trading sessions.

At the same time, the previous chart reveals the internal five-wave sequence of wave (c) in blue, which exposes the sideways progress of its fourth wave of Subminuette degree identified in green, which belongs to the wave (c) of Minuette degree. 

In this context, considering that the price action could develop a new upward movement, the cross could advance in its fifth wave in green to the potential target zone between 126.84 and 127.48, where the EURJPY cross could complete the wave (c) in blue, and the wave ((b)) in black. Likewise, once this corrective rally completes, the price could start to develop a downward movement identified as wave ((c)) in black.

In this regard, according to the Elliott Wave theory and considering that the mid-term structure corresponds to an incomplete corrective formation constituted by a three-wave sequence, after the completion of the wave ((b)) in black, the price should start to decline in its wave ((c)) with an internal structure subdivided into a five-wave sequence.

Summarizing, the EURJPY cross currently develops a consolidation pattern, which leads to expect a new upward movement with a potential target between 126.84 and 127.48. Once the price completed its target, the cross may start to decline in a five-wave sequence corresponding to wave ((c)) of Minute degree.

Finally, the invalidation level of the current bullish scenario can be found at 124.566.

Categories
Forex Elliott Wave Forex Market Analysis

GBPUSD Ending Diagonal Completion a Warning Sign for a Trend Reversal?

In our last GBPUSD analysis, we discussed its upward advance in an incomplete ending diagonal pattern. We said that the terminal Elliott wave formation progressed in its fifth wave of Minuette degree identified in blue that belongs to a wave ((c)) of Minute degree labeled in black. Likewise, the wave ((c)) corresponds to the third internal segment of the wave B of Minor degree identified in green. 

Technical Overview

The big picture unveiled the sideways movement in an incomplete corrective formation, which could correspond to an expanding flat pattern. In this regard, after the completion of wave B, the Sterling should start developing wave C, which should lead to a decline of this major pair in a five-wave internal sequence.

On the other hand, the following 8-hour chart reveals the market participants’ sentiment unfolded by the 90-day high and low range, which looks advancing in the extreme bullish sentiment zone. 

The previous chart illustrates the bullish failure in the Wednesday trading session, which couldn’t strike the last high of 1.35394. This failure added to the breakdown of the previous upward trendline plotted in green leads us to expect further declines in the coming trading sessions, likely to the ascending primary trend-line identified in blue.

Short-term Technical Outlook

The intraday Elliott wave view for the GBPUSD pair displayed by the following 2-hour chart exposes the breakdown of the ending diagonal pattern formed on December 07th, confirming the completion of the terminal formation unveiled in the wave ((c)) identified in black. 

Once the Pound found the intraday support at 1.32238, the price action began to bounce in an internal corrective rally subdivided in a three-wave sequence corresponding to wave ((ii)) in black, founding resistance at 1.34779 on the Wednesday trading session.

In this regard, the breakdown of the intraday trend-line that connects the waves ((i)) and (b) should confirm the downward progress of its wave ((iii)) in black, which according to the Elliott wave theory, should be the largest wave of the downward sequence.

The third wave in black could find support in the demand zone between 1.31296 and 1.31064. If the price action continues deteriorating, the Cable could drop toward the next demand zone between 1.29843 and 1.29144.

Summarizing

After the GBPUSD pair made a breakdown of its ending diagonal pattern, is currently moving in a corrective rally corresponding to wave ((ii)), which should give way to a new decline corresponding to the third wave of Minute degree. According to the textbook, this movement should be the largest decline of the current downward sequence and could find support in the demand zone between 1.31296 and 1.31064. Finally, the invalidation level of the current bearish scenario can be found at 1.35394.

Categories
Forex Fundamental Analysis

USD/JPY Global Macro Analysis – Part 3

USD/JPY Exogenous Analysis

In the exogenous analysis, we will analyze economic indicators that exhaustively compare the performance of the US and the Japanese economies. These factors impact the dynamic of the USD/JPY pair in the forex market. They include:

  • US and Japan interest rate differential
  • The difference in the GDP growth in the US and Japan
  • Balance of trade

US and Japan interest rate differential

The interest rate differential is the difference between the interest rate in the US and that of Japan. Investors would prefer to invest their funds in a country that offers higher returns. Furthermore, carry traders are often bullish on the currency with a higher interest, which ensures that they earn higher yields.

The Bank of Japan has kept the interest rates at -0.1% since 2016. The current federal funds rate in the US is 0.25%. Thus, the interest rate differential for the USD/JPY is 0.35%. Since there are no foreseeable changes in the interest rates in either country, we assign it an inflationary score of 2.

Balance of trade

Balance of trade determines whether a country has a trade surplus or deficit in international trade. A trade surplus results from a country’s exports being of higher value than that of its imports. A deficit occurs when the imports are of higher value than exports. Japan mostly exports machinery and electronics, which puts it at a significant advantage due to the value of these goods. On the other hand, the US is a net importer.

In October 2020, japan has a trade surplus of ¥872.9 billion, which has been steadily increasing since June. The US has a trade deficit of $63.9 billion, which has been growing throughout the year.

The balance of trade differential between the US and Japan has been widening in favor of Japan. Based on our correlation analysis with the USD/JPY, we assign it a score of -6. It means that if this trend persists, we expect the USD/JPY to be bullish in the near term.

The difference in the GDP growth in the US and Japan

Although the US has a higher GDP than Japan, we can compare the two economies based on their growth rates.

The US economy had a GDP growth rate of 33.1% in Q3 2020, while Japan’s economy expanded by only 5%. The US economy is seen to be expanding at a faster pace than that of Japan. Based on the correlation with the price of the USD/JPY pair, we assign an inflationary score of 2. This means that we should expect a bullish trend on the USD/JPY pair if the US economy keeps expanding faster than that of Japan.

Conclusion

The total score from the exogenous analysis of the USD/JPY pair is -2. This implies that in the near term, we should expect a bearish trend in the pair.

Technical analysis of the USD/JPY pair shows that the weekly chart is still trading way below the 200-period MA. Furthermore, the pair has failed to successfully breach the middle Bollinger band, which has served as its resistance level. All the best!

Categories
Forex Fundamental Analysis

USD/JPY Global Macro Analysis – Part 1 & 2

Introduction

Global macro analysis of the USD/JPY pair involves the analysis of endogenous factors that impact both the USD and the JPY; and exogenous analysis for the USD/JPY pair.

In the endogenous analysis, we’ll focus on domestic macroeconomic factors that drive the domestic growth in the US and Japan. The exogenous analysis will involve the analysis of global macroeconomic factors that define the dynamics of the USD/JPY pair.

Ranking Scale

We will rank both the endogenous and the exogenous factors on a sliding scale of -10 to +10. Whenever the ranking is negative, it means that the macroeconomic indicator led to the depreciation of the currency. A positive ranking means that the indicator had an inflationary impact.

USD Endogenous Analysis – Summary

A score of -19.1 implies a clear deflationary effect on the US Dollar. This means that USD has lost its value since the beginning of 2020, according to these indicators.

You can find the complete USD Endogenous Analysis here.

JPY Endogenous Analysis – Summary

The endogenous analysis for the Japanese economy resulted in an overall inflationary score of 3. Based on this analysis, we can expect that the JPY had appreciated marginally in 2020.

  • Japan Inflation Rate

The inflation rate in Japan is measured by the consumer price index  (CPI). The CPI weights various consumer expenditures depending on their level of importance. Food is weighted at 25%, Housing 21%, transport and communication 14%, recreation 11.5%, energy and water 7%,  medical care 4.3%, and clothing 4%.

A higher rate of inflation is necessary for economic growth. It also forestalls a possible interest rate hike, which is accompanied by currency appreciation.

In October 2020, the MoM inflation rate in Japan decreased by 0.1% constant change since August. The YoY inflation rate decline by 0.4%, the first decline in about four years.

Based on our correlation analysis, we assign Japan’s inflation rate, a deflationary score of -2.

  • Japan Unemployment Rate

The unemployment rate measures the number of Japanese citizens eligible for employment who are currently seeking gainful employment opportunities.

An increasing rate of unemployment means that more jobs are lost in the economy faster than new jobs are being created. That’s an indicator that the economy is contracting.

In October 2020, Japan’s unemployment rate increased to 3.1%, representing 21.4 million people, the highest recorded since May 2017.

Due to the high correlation between the unemployment rate and GDP, we assign it a score of -5.

  • Japan Manufacturing PMI

The Japan manufacturing PMI is also known as the Jibun Bank Japan Manufacturing PMI. The PMI is compiled through a series of monthly questionnaires surveying about 400 manufacturers. The manufacturers are segregated depending on their industry’s contribution to GDP, and their responses aggregated into a diffusion index. When the index is above 50, it means that the manufacturing activity increased while a below 50 reading implies a slow-down in the manufacturing sector.

Japan is a highly industrialized economy, and its manufacturing activities have a high correlation with its GDP growth rate.

In November 2020, the Japan Manufacturing PMI was 49, inching closer to the highest recorded 49.3 in January. Since the manufacturing PMI has been steadily increasing from the lows of 38.4 in May, we assign it an inflationary score of 6.

This PMI is also known as Jibun Bank Japan Services PMI. It is a survey of over 400 services companies operating in the Japanese services industry. A Survey of the purchasing managers is used to track industry changes in employment, inventories, sales, and prices. Sectors covered by the survey include transport and communication, personal services, financial services, hotel industry, and IT. The responses are weighted based on the sector’s size and aggregated into an index from 0 to 100.

When the index is above 50, it signals that there is an expansion in the services industry, while below 50 shows contraction.

In November 2020, the Japan services PMI dropped to 46.7 from 47.7 in October. Although the index is above the lows of 21.5 recorded at the height of the coronavirus pandemic, it is still lower than the levels observed in the pre-pandemic period.

Based on our correlation analysis, we assign Japan services PMI an inflationary score of 2.

  • Japan Retail sales

The monthly retail sales measure the change in the value of goods consumed directly by households. In any economy, the growth in GDP is primarily driven by the demand by households. Thus, retail sales can be considered a significant indicator of economic growth.

In October 2020, the MoM retail sales in Japan increased by 0.4%, while YoY retail sales increased by 6.4%. The increase in October is the first time the YoY retail sales have increased since February. This shows demand in the Japanese economy is growing after the easing restrictions implemented in the wake of the pandemic.

Due to its high correlation with the GDP, we assign Japan retail sales an inflationary score of 5.

  • Japan General Government Gross Debt to GDP

This is the ratio between the amount of debt, both domestic and foreign, that the Japanese government has accumulated to national GDP. Typically, lenders use this ratio to determine if a country’s economy is overly leveraged and if the government might default in the future.

Note that Japan has the largest national debt to GDP in the world. However, although it is heavily indebted, unlike many other countries, Japanese debt is denominated in Yen. More so, foreigners only hold about 6.5% of the total debt. That is why Japan can continue to accumulate such massive debts without any fears of hyperinflation or default risks. But that doesn’t mean that the debt isn’t weighing down on the economy.

In 2019, the Japan national debt to GDP was 238%, an increase from 236.6% in 2018. In 2020, it is projected to exceed 240% due to the measures implemented to fight the pandemic. Based on our correlation analysis, we assign it a deflationary score of -3.

Please check our next article to find the Exogenous analysis of both USD and JPY currencies. We have also come to a conclusion on whether you should expect a bullish or bearish trend in this pair.

Categories
Forex Elliott Wave Forex Market Analysis

EURUSD: is 1.22 at Hand?

The EURUSD pair advances in the extreme bullish sentiment range, consolidating the short-term rally that started on November 04th when the price found fresh buyers at 1.15615.

Technical Overview

The following 8-hour chart shows the short-term participants’ sentiment keeps pushing higher the price action. In this view, the common currency looks to consolidate the pair’s impulsive movement that began in early November.

In this chart, we can see that the current primary trend is clearly bullish. Simultaneously, the accelerated trendline identified with the green line shows the short-term bull market remains intact.

On the other hand, both the intraday sideways channel and the retracement observed in the EMA(60) to Close Index lead to a consolidation of the rally experienced by the common currency during the previous trading sessions.

Therefore, if the price action penetrates below 1.20338, the likelihood of a reversal movement in the EURUSD increases.

Short-term Technical Outlook

The short-term Elliott Wave view for the EURUSD pair unfolded in the next 4-hour chart reveals the advance in an incomplete bullish impulsive wave of Minor degree identified in green.

The EURUSD 4-hour chart illustrates the impulsive rally that began on November 04th when the price found fresh buyers at 1.16025. The price action currently looks to have completed its third wave of Minute degree labeled in black, confirmed by the broadest distance shown on the MACD oscillator

On the other hand, the consolidation structure in progress reveals the potential sideways advance of its fourth wave. Considering the Elliott Wave Principle, the fourth wave shouldn’t penetrate below the invalidation level located at 1.19201, which corresponds to the end of wave ((i)) in black.

Also, considering both the second wave, which looks like a simple corrective pattern, and the alternation principle on corrective waves, the fourth wave should be a complex correction. In this context, the fourth wave could be a triangle or a combination of simple waves grouped in a double-three or a triple-three formation.

Finally, the extension in terms of time should indicate the exhaustion of the bullish pressure; thus, the common currency could soon end its bullish cycle.

Categories
Forex Elliott Wave Forex Market Analysis

GBPAUD Consolidates in an Incomplete Correction

The GBPAUD cross continues consolidating in what is a corrective formation that continues in development since October 22nd when the price found fresh sellers on 1.85272. In this context, the current consolidation pattern suggests a coming rally in the following trading weeks.

Technical Overview

The next 12-hour chart illustrates the short-term market participants’ sentiment displaying the 90-day high and low range, which bounced in the bearish sentiment zone finding resistance in the neutral level of 1.80104, where the cross is still moving in the current trading session. However, as long as the GBPAUD cross doesn’t surpass and closes above the level of 1.80104, the bias will stay mostly bearish.

The primary trend identified in blue shows that the current uptrend remains in its formation process. In this context, the corrective movement in progress represents a secondary trend from the last upward move that carried the cross from 1.74935 to 1.85272.

Short-term Technical Outlook

The short-term Elliott wave view for the GBPAUD cross shown in the following 4-hour chart reveals the downward advance in an incomplete double-three pattern of Minute degree labeled in black, which suggests further declines for the following trading sessions.

The previous chart shows the GBPAUD developing a double three pattern. According to the textbook, this complex corrective formation follows an internal sequence subdivided into 3-3-3, where each three corresponds to a basic corrective structure.

Currently, the cross looks advancing in its wave (c) of Minuette degree labeled in blue, which belongs to the wave ((y)) of Minute degree identified in black. The movement developed until now fits two potential scenarios:

  • The first scenario considers the pause in the wave (c), which could see further declines to the demand zone between 1.7774 and 1.7716. The cross could even extend its drops until 1.7610 and 1.7554, where the price could find fresh buyers expecting a boost in its price to new highs.
  • The second occurs if the price ends its wave (c) in blue and rally toward fresh highs. In this context, the cross should confirm the breakout of the supply zone resistance at 1.8041. Also, the cross must break up the ((x))-(b) trend-line.

Finally, the invalidation level for this bearish sequence in progress can be found at the end of wave (b) in blue at 1.82144.

Categories
Forex Fundamental Analysis

EUR/USD Global Macro Analysis – Part 3

EUR/USD Exogenous Analysis

In the exogenous analysis, we’ll analyze the economic fundamentals that impact the Euro-US Dollar exchange rate. For this analysis, we’ll focus on:

EU and the US GDP Growth Difference

The primary drivers of GDP growth in an economy are domestic demand and international trade. When a country’s exports increase, it means that the demand for its currency also increases, which makes it appreciate.

The US and the EU GDP change are in tandem. In Q3 of 2020, the EU GDP expanded by 11.6%, while that of the US expanded at an annualized rate of 33.1%. Although this change seems much, the US GDP level is still about 3.5% lower than the pre-coronavirus pandemic levels.

Based on the correlation analysis of the GDP differential and the EUR/USD pair changes, we assign a deflationary score of -2. It implies that the difference in GDP growth between the EU and the US will lead to a bearish EUR/USD.

Trade Balance Difference

For each country, the trade balance shows if an economy is running on deficits in international trade. The trade balance is simply the difference between exports and imports. Surplus trade balance happens when an economy exports more than it imports. A negative trade balance means an economy is importing more than it exports.

The EU recorded a trade surplus of €24489.40 million in September 2020, while the US had a $63.9 billion trade deficit in the same period. The trade balance has a high correlation with the exchange rate of the EUR/USD pair. Therefore, we assign it an inflationary score of 7, meaning we expect a widening trade balance between the EU and the US to result in bullish EUR/USD.

EU and US Interest Rate Differential

This indicator measures the difference between the interest rates in the EU and that in the US. The economy with a higher interest rate will attract more investments from foreigners seeking higher returns.

In the US, the Federal Reserve has kept the interest rate within a range of 0% – 0.25%. In the EU, the ECB interest rate is 0%. Since the interest rate differential between the two economies is low, we do not expect it to impact the EUR/USD exchange rate. Therefore, we assign a deflationary score of -1. That means we expect it to result in a mild bearish trend for the EUR/USD pair.

Conclusion

The exogenous analysis of the EUR/USD fundamentals gives an inflationary score of 4. This implies that in 2020, the EUR/USD pair has had a bullish trend. In the short term, this bullish trend is expected to persist.

Note that the EUR/USD pair has formed a support level along with the middle Bollinger band. Therefore we can say that our Fundamental analysis is being supported by our Technical Analysis as well. Cheers!

Categories
Forex Fundamental Analysis

EUR/USD Global Macro Analysis – Part 1 & 2

Introduction

In this analysis, we’ll focus on endogenous economic growth factors in the EUR and the US. We’ll also analyze the exogenous factors that will help us compare the economic performance in both regions.

Endogenous economic factors are inherent within the domestic economy and are primarily driven by domestic demand. On the other hand, exogenous factors are external economic factors that result from a country’s participation in the international markets. Both of these factors influence the fluctuation of the currencies from both countries.

Ranking Scale

We will rank both the endogenous and the exogenous economic factors on a scale of -10 to +10. A negative ranking shows that the economic factor had a deflationary impact on the currency. Conversely, a positive ranking implies that it had an inflationary impact.

USD Endogenous Analysis – Summary

The USD endogenous factors recorded a score of -19.1, implying a deflationary effect on the USD. This essentially means that according to these indicators, the USD has lost its value since the beginning of this year.

You can find the complete USD Endogenous Analysis here.

EUR Endogenous Analysis – Summary

The endogenous analysis of the EU economy shows a modest deflationary score of -8.5. This means that in 2020, the Euro has shed some of its inherent value.

The endogenous economic indicators in the Eurozone are an aggregate of the 27 member countries in the EU.

  • Monthly retail sales

It measures the inflation-adjusted value of retail sales. About 40.1% of all retail sales in the EU are from food, drinks, and tobacco. Electronics and furniture account for 11.5%, while computer equipment accounts for11.4%. 9.2% of the retail sales are attributed to clothing and footwear,  while pharmaceutical and medical products account for 8.9%.

In September 2020, retail sales in the EU dropped by 2%. Given that retail sales account for about 70% of the GDP, our correlation analysis, we assign the EU retail sales an inflationary score of 2.5.

  • Industrial production

This indicator measures the total output by manufacturers, mines, and utility industries in the EU. The value is adjusted for inflation. Note that the industrial sector in the EU is among the top employers.

In September 2020, industrial production dropped by 0.4%, which is an improvement from the drop of 17.1% recorded in April. However, the change in industrial production has been steadily falling from a peak of 12.4% in May.

Based on our correlation analysis, we assign the EU change in monthly industrial production a deflationary score of -2.

  • Unemployment rate

This indicator shows the percentage of the total workforce in the EU who are seeking gainful employment. The data shows the monthly change.

In September 2020, the unemployment rate in the EU was 8.3%. Throughout the year, the EU has experienced a steady increase in the unemployment rate. This is due to the economic effects of the coronavirus pandemic. However, our correlation analysis shows the minimal impact of the unemployment rate on the EU GDP. Therefore, we assign it a deflationary score of -2.

  • Employment change

As an economic indicator, employment change shows the quarterly change in the number of EU citizens who are gainfully employed. This indicator can also be used to show the ability of the economy to create more jobs. It measures both full-time and part-time employment.

In the third quarter of 2020, the EU employment change increased by 0.9%, showing that the EU economy is recovering from the slump of Q2 2020. Our analysis shows a higher correlation of the employment change with the changes in GDP. Hence, we assign it an inflationary score of 4.

  • Business confidence

The business sentiment is also referred to as the Industry Sentiment. It measures the economic sentiment among manufacturers, consumers, and employers in the EU by rating the current and future economic conditions.

The lowest business confidence recorded in 2020 was -32.3 in April 2020. Since then, the indicator has been steadily improving to -9.5 in October. Based on the correlation analysis with the EU GDP, we assign business confidence a deflationary score of -3.

  • Consumer Spending

Consumer spending measures the quarterly amount that households spend on goods and services for personal consumption. As an economic indicator, it can be used to show households’ welfare and the prevailing economic conditions. Since consumer expenditure accounts for about 70% of the EU GDP, any changes in the quarterly expenditure are bound to impact the GDP levels directly.

In Q2 of 2020, consumer spending dropped to € 1511.14 billion from € 1716.59 billion in Q1 of 2020. It is the largest drop ever recorded in history and can be attributed to the pandemic-induced economic recession.

Due to its high correlation to the change in GDP, we assign consumer spending a deflationary score of -5.

  • European Union Government Debt To GDP

This ratio compares what the EU economy produces and what it owes. It shows the efficiency of the economic process and the capability of the government to service its debts without overstretching the available resources. Investors can use this ratio to gauge whether the debt in an economy is becoming unsustainable.

Increasing levels of government debt and a stagnating GDP results in a deflationary effect for the domestic currency.

By the end of 2020, the EU government debt to GDP is expected to reach 95% from 79.3% recorded in 2019. The higher government debt to GDP in 2020 is a direct result of the aggressive measures out in place to curb deep recessions from the coronavirus pandemic.

Based on our correlation analysis, we assign a deflationary score of -6 to the EU government debt to GDP.

  • EU Rate of inflation

In the EU, the inflation rate is best measured using the consumer price index (CPI). It measures the overall monthly change in the prices of consumer goods and services. The rate of inflation can be used as gauge the purchasing trends among households.

In theory, a rise in inflation implies that consumers’ demand for goods and services is increasing. Conversely, a drop in inflation implies that demand is shrinking hence corresponding to lower GDP levels.

In September 2020, the rate of inflation in the EU decreased by 0.2%. It is, however, an improvement from the -0.4% recorded in July and August. Based on its correlation with GDP, we assign the EU rate of inflation a score of 3.

In the next article, we have posted the Exogenous Analysis of the EUR/USD pair to have a clear idea of whether this pair is bullish or bearish market conditions.

Categories
Forex Elliott Wave Forex Technical Analysis

US Dollar Index Under Bearish Pressure. What’s next?

The US Dollar Index (DXY) consolidates on Monday’s session in the extreme bearish sentiment zone bouncing a modest 0.06% from the last Friday 04th, from 90.476 to 90.757. However, the technical perspective is mostly bearish for the DXY basket of currencies.

Technical Overview

The following 8-hour chart shows the mid-term market participants’ sentiment unfolded in its 90-day high and low range. The figure reveals the bearish pressure that carries the Greenback in the extreme bearish zone between 90.476 and 91.543. Likewise, the intraday sideways candlestick formation suggests the likelihood of a pause and the downward continuation for the following trading sessions.

Regarding the US Dollar’s trend, the primary trend plotted in the blue line reveals the bearish bias. The secondary trend identified in green suggested the downward acceleration since November 04th when the price failed its bullish advance at 94.316. Likewise, the broader distance between the primary trend-line and the price leads to a limited correction before continuing the bearish path.

Short-term Technical Outlook

The short-term Elliott Wave perspective for the US Dollar Index exposed in the next 2-hour chart suggests the incomplete downward advance of a five-wave sequence, which could be starting to consolidate in its fourth wave of Minuette degree identified in blue.

The current bearish sequence began on November 04th when the price found fresh sellers at 90.302 and began a decline that is still present to date. The previous chart suggests the completion of the third wave of Minuette degree. This Elliott wave context is supported by the broadest distance observed in the MACD oscillator.

On the other hand, considering that the second corrective wave seems simple in terms of price and time, the alternation principle suggests that the fourth wave in progress should be complex in terms of price, time, or both. In this context, the next corrective pattern could be a triangle pattern or a combination such as a double-three or a triple-three formation.

The implication of the fourth wave’s extension could be indicative of the exhaustion of the bearish trend, and the price action should reverse soon.

Finally, if the price action rises and closes above the supply zone between 91.412 and 91.580, the US Dollar Index could reveal a possible reversion of the current bearish trend.

Categories
Forex Psychology

BEWARE: These Excuses Could Be Holding You Back from Dominating in Forex

If you search “forex trading” on any search engine, you’re going to find a lot of frequently asked questions from users that doubt trading is profitable. For example:

  • “Is forex a scam?”
  • “Can you really make money trading forex?”
  • “Is the forex market illegal?”
  • “Is it really worth becoming a trader?”

As you can see, a lot of people online seem to feel apprehensive about opening a trading account thanks to online myths and speculation or stories about traders that have lost money. Sure, it is possible to lose money and there are scammers out there, but you shouldn’t let these common excuses keep you from trading:

Excuse #1: I Don’t Have Money to Invest

Many people want to start trading forex, but they imagine that the luxury is reserved for those that have a great deal of money to invest. In reality, you can get started trading on a demo account for free. It’s also possible to open a trading account with only a few dollars through a wide variety of brokerages, so you shouldn’t let a lack of money keep you away. Of course, you should expect to be limited to a micro, cent, mini, or standard account if you only have a small investment, but these accounts are actually beneficial for beginners. These accounts might not offer as many perks as elusive VIP accounts but they will allow you to trade, hone your skills, and make profits, nonetheless. Just remember not to invest more money than you can afford to lose – if it’s meant to pay bills or live on, don’t deposit it into your trading account. 

Excuse #2: I Don’t Have the Time

It’s true that some traders sit in front of their computer screen constantly entering and monitoring positions, but you don’t have to do this. In fact, there are many different strategies that benefit part-time traders that have other things going on in their lives. Swing trading is one example where you enter trades and let them go for days or even weeks in some cases. The flexibility of being able to trade from any device with an internet connection even makes it possible to monitor your account while you’re on your lunch break or from your child’s soccer game. It might seem like another annoying thing to keep up with, but it’s worth it when you think of how much money you could make if you carve out a little bit of time each week for trading. 

Excuse #3: It’s too Risky

Forex trading is an investment, meaning that there is risk involved, not unlike other investment opportunities. You really do have to give money to make money, but you shouldn’t think of trading as gambling. Before you ever start, you should have a good concept of what moves the market and how trading works. Then, you’ll develop a trading plan that tells you what to look for when it comes to entering and exiting positions, along with plans for managing your risks, and so on. All of this is designed to keep you safe if things go against you, although they don’t eliminate the risk of losing money entirely. Still, with a solid trading plan and background knowledge of what you’re doing, your risk will be significantly reduced. 

Excuse #4: It’s too Complicated

This excuse seems to come from people that just don’t want to invest the time into learning to trade. Sure, there are a lot of things you’ll need to know about, like terminology, how to work a trading platform, factors that affect prices, trading psychology, and so on. However, it’s wrong to say that these topics are complicated to learn. All of this information can be accessed online for free and you can even try learning through different resources if you have trouble understanding a certain topic. For example, some might learn better by reading articles, while others might prefer to watch videos. Some authors can also do a much better job of explaining concepts than others, so there’s no reason to give up.

Excuse #5: It’s a Scam

This myth likely comes from the idea that most brokers are scammers just waiting to steal your hard-earned money. As we mentioned earlier, there are some scammers out there, but there are a lot more reputable brokers than there are scammers. If you want to ensure that you’re opening an account with a trustworthy company, try following these steps:

  • Check to see if the company is regulated. (Double-check that the listed regulation company exists and check for a license number, as some scammers will post pretend regulation details. Also, if you’re located in the US, you might have to go with a company that isn’t regulated.)
  • Look at the broker’s website. Does it tell you in detail about the accounts they offer, available funding methods, applicable fees for funding, spreads, and commissions, etc.? Or are you left with more questions than answers? A detailed website is a sign of a good broker, while a lack of information suggests otherwise.
  • Read through the broker’s terms & conditions to ensure that there aren’t any crazy policies or hidden fees, like inactivity charges.
  • Look for customer reviews online. More popular brokerages will have a lot of feedback, while scammers may not have any at all or everything will be negative. Remember that some traders that have lost money at their own fault might leave bad reviews regardless.
Categories
Forex Technical Analysis

Using Moving Averages as Professional Traders Do – Here’s How…

Some traders use moving averages as resistance and support indicators or focus on whether a candle has closed above or below a specific moving average. The ability to use moving averages in the same manner as professional traders can make all the difference in the world with regards to your earnings. With that in mind, allow us to explain just how to do this.

Los Cruces

A cross is the most basic type of signal and many traders favor it because it eliminates the emotional element of trading. The most basic type of crossing occurs when the price of an asset moves on one side of a moving average and ends on the other. As we have commented, price crossings are used by traders to identify impulse changes and can be used as a basic output or input forex strategy. A crossing below a moving average can signal the beginning of a downward trend and will probably be used by traders as a signal to close any existing long position. On the contrary, a closure above a moving average from below may suggest the beginning of a new upward trend.

The second type of crossing occurs when a short-term average crosses through a long-term average. This signal is used by traders to detect when the momentum is changing in one direction and a strong movement is likely to approach. A buying signal is generated when the short-term average crosses above the long-term average, while a selling signal occurs when a short-term average crosses below a long-term average.

These methods are not the best way to use moving averages. In fact, they can be used much more cost-effectively if we use moving averages as impulse indicators, indicating the absence or strength of a trend, in company with other factors that recommend entry. This is how moving averages are often used by Forex market professionals.

Types of Moving Socks

There are several different types of moving socks and we should know each one before using them. Almost all graphics platforms offer all kinds of moving socks. Firstly, you should know that moving averages can be applied to the closing price, the opening price, or to high or low prices in a timeframe. They are usually applied to closing prices, and this is logical since closing prices are of great importance, and each opening price is also a closing price or a previous candle. Closing prices weigh heavily on the samples because it is often a level at which the price has settled.

At this point, let’s take a look at each type of moving average.

The simple moving average (SMA) is only an average of all the periods to which it refers.

The exponential moving mean (EMA) is calculated by giving more weight to the most recent value. In other words, we say that, for example, if the price has not moved, but starts to go up, an EMA will be demonstrating a higher level than an SMA for that same review time period.

The linear weighted moving average, sometimes referred to simply as a weighted moving average (LWMA or WMA), is like the EMA, being also calculated by giving more weight to the most recent value, but the weighting is proportional throughout the data series, while EMA only gives more weight to the most recent sample.

There are other types of moving stockings, but you don’t need to worry about them. These three types can provide you with everything you need.

Important Moving Stockings

There are some specific moving averages that are used by many traders. I will describe them here, but I do not suggest that much attention be paid where the price is related to any of them as if this were something very important in itself. The important moving averages are:

  • 20 EMA
  • 50 SMA
  • 100 SMA
  • 200 SMA
  • 200 EMA

Using Moving Stockings as Impulse Indicators

One of the best occasions to use moving socks like professionals is to use them as impulse indicators to determine if there is a trend and how strong it is. The best advantage that retail traders can take advantage of is to be able to trade in the direction of the trend if there is one.

One way to do this is to observe the slope angle of a moving average. For example, in a strong bullish trend, many traders will be looking at the angle of EMA 20. If the angle is consistent and strong, it is a sign that we have a trend in place. Note how, in the graph below, the EMA 20 is showing a rather strong angle, and also note that the price has remained largely below it in the graph. This is a sign of a downward trend.

Crosses of Moving Averages as Impulse Indicators

A more sophisticated way to do this is to check if a faster moving average is above a slower moving average and check this in several time frames. When you have bigger time frames that show a good trend, but a regression in smaller time frames, this could give you a chance to get in the direction of the trend, when moving averages cross again in the same direction as the time frame greater or smaller.

A combination of moving stockings that I like to wear is EMA 3 as a fast-moving average and SMA 10 as a slow-moving average. There is nothing especially magical about these numbers – beware of traders who swear that something like the LWMA 42 is a magic indicator -, but the difference between them tends to offer us an early warning of a change in the direction of the market. In fact, when we use this combination, I not only check several time frames, but I also need to see that the 10-period RSI indicator matches the address. This type of trading strategy using the moving average in various time frames can be very profitable.

In the example graph below, these two moving averages in all upper time frames are showing EMA 3 below SMA 10. In this 5-minute graph, while this quality existed within the larger time frames, EMA 3 retreated twice before crossing again below SMA 10 as indicated by the blue arrows. These two crossings could have provided profitable operations in the short term.

Deviation From Moving Averages

It is generally not sufficiently appreciated that almost all trend indicators are based on some sort of moving averages. For example, the Bollinger Band is simply the EMA 20 in the center with statistical deviation channels based on the historical price range.

Another way to use a mobile average is to take high probability quick pips following the following strategy. Let’s say that a very short-term moving average like EMA 20 is showing a strong angle and the price generally staying above it. If the price falls suddenly hard enough to get below the moving average, there is a high probability that the price will go back quickly to get back above it.

Another strategy is to look for a candle that is not touching the moving stockings at all, but that is indicating a movement back towards the moving stockings area. 

Frequently Asked Questions

How is the moving average calculated?

Basically, a moving average can be calculated by adding the last closing prices of “X” periods and then dividing that number by “X”.

What is EMA trading?

One type of essential tool for assessing trends in markets is the exponential moving average (EMA). In this article, we will present a specific type of stockings called Exponential Moving Media.

What is a mobile media filter?

Using statistics, a moving average is a calculation that is used to analyze a data set in point mode to create averages series. Thus the moving averages are a list of numbers in which each is the average of a subset of the original data.

Categories
Forex Psychology

Understand People and You’ll Understand the Markets

Every day the markets are more complex, more international, more liquid, with more people and robots operating in them. All this makes the current markets difficult to understand and above all, they are changing, but the people, the mass, and their way of acting change in a much slower way than the market.

A while ago and from this statement I thought that the best way to operate in the market would be to understand as much as possible people, if I achieved this I would be able to understand the market for a longer period than with any indicator. Today I want to show you some examples of how to understand people to understand the market, I do not say that this is the absolute truth, but it helps me a lot to understand the functioning of the market.

I have once told you about the volume and how to interpret it along with the price to discover how people move, today I want to take one more step and talk about how to create a stand or a resistance.

Technical analysts rely a lot on supports and resistances, but 95% have never thought about what these formations are or why they occur. Skeptics take the opportunity to say that seeing how the price bounces 4 times at the same level is the result of chance, if we apply statistics we will see that it can not be the result of chance, it is as if you play the lottery 4 times in a week, And so week after week, it can’t be a coincidence.

What Is a Stand or Resistance?

Visually it is the price range where the chart has trouble to pass, if you struggle to cross up we talk about price resistance and if you struggle to cross down we talk about price support.

Further deepening the resistance is that price range where we find a lot of offers, preventing the price from going up. Support is the area where there is a lot of demand, preventing the price from falling.

Why is a level of support or resistance generated? I will explain the logic that I find in these movements.

In the areas of resistance we find different interests:

  • The trader wants to sell because he believes there is a resistance and expects a price drop.
  • The trader who had bought below and arrived at the resistance decides to sell their purchases.
  • Traders unrelated to all this buy/sell for other reasons.

So roughly we have two groups willing to sell and another that we don’t know if will buy or sell. People who operate knowing the resistances and supports will never buy right under one, will always expect their break.

After 3 attempts to break the resistance we see how in the fourth attempt it succeeds, the price quickly crosses the resistance zone with many purchases, now we have the following groups of traders:

  • Traders who sold and put their Stop Loss right on top of the resistance (I remember in this case the Stop Loss is a buy!!!)
  • Traders who sold and hold a negative position are distressed and feel cheated by the market.
  • Traders who had their purchases up the resistance and have now entered the market.
  • A minority that sells for some obscure reason unknown to me.

In this new price zone, most want to buy and few want to sell, this creates the effect of a very fast price rise when resistance is broken. As you can see it is not a coincidence that happens, if we think about the different traders it is logical that breaking one of these zones will trigger the price so much.

Finally, there are the pull-backs, when the price returns to the resistance and uses support. At this time we have the following traders:

  • Distressed traders who sold and now see the opportunity to exit the market with 0 pips, make purchases and turn resistance into support.
  • Traders who know that there was resistance there and now take advantage of it as a support. They make more purchases.
  • Traders who want to sell would do so in case they break the new support, for now, they do not act.
  • As always there is a group of traders who buy/sell for other reasons and are foreign to the whole party.

From this moment on you can apply the same rules for the following levels of support and resistance. I hope it will help you to understand a little more that is the price, why it moves and so you can take advantage of the market.

Categories
Forex Elliott Wave Forex Market Analysis

AUDUSD Consolidates its Gains Expecting the US Employment Data Ahead

The price of AUDUSD reached a fresh yearly high at 0.74496 on the Thursday trading session expecting the last employment data release of the year for the US labor market corresponding to November. 

(Source: tradingeconomics.com)

Technical Overview

This year, as illustrated in the previous chart, Australia’s unemployment rate peaked at a record high of 14.7% in April, mainly boosted by the coronavirus lockdown. In this context, the analysts’ consensus expects the unemployment to drop to 6.8% for November, from 6.9% reported last October.

The mid-term Elliott wave perspective displayed in the 12-hour chart below reveals the upward progression in an incomplete five-wave sequence of Minor degree labeled in green. This bullish impulsive move began on March 18th when the Aussie found fresh buyers at 0.55063.

The previous chart also shows the Aussie’s advance in a third extended wave, suggesting that the price action could be moving in its fourth wave in green, still in development. 

This scenario considers that the Aussie moves in its internal wave (c) of Minuette degree labeled in blue, developing an ending diagonal pattern. Likewise, the wave of the upper degree corresponding to wave ((b)) of Minute degree identified in black should correspond to an expanded flat pattern, and the price should realize a new decline,

The alternative count considers the advance in the fifth wave of Minor degree in green is developing an internal ending diagonal pattern. In this case, the Aussie should start a decline corresponding to wave A in green.

Technical Outlook

The short-term Elliott wave for AUDUSD exposed in its 4-hour chart shows the advance in an ending diagonal pattern, which looks developing its fifth wave of Subminuette degree labeled in green.

Although the ending diagonal pattern suggests completing the fifth wave or wave (c), the Aussie must confirm its completion through the breakdown of its base-line that connects the waves ii and iv, in green. Also, the price should confirm the close below the intraday demand zone between 0.73492 and 0.73571.

Finally, if the price confirms its downward correction, the potential target area for this movement is from 0.7265 and 0.7144. If the area fails to hold, and the bearish pressure extends this downward movement, the Aussie could visit the base of its sideways channel on the psychologically key level of 0.70.

Categories
Forex Elliott Wave Forex Market Analysis

Is GBPUSD Preparing a Reversal Move?

The GBPUSD pair is seen advancing in an ending diagonal pattern inside an incomplete flat pattern of Minor degree, identified in green, which is in progress since September 01st when the Sterling found resistance 1.34832. 

 

Technical Overview

The previous 8-hour chart exposes the advance in a potential flat pattern (3-3-5), which currently develops its wave B of Minor degree identified in green. In this context, once the current corrective rally ends, the next potential move, according to the Elliott Wave theory, could correspond the wave C. This movement should follow an internal structure subdivided into five wave segments.

Analyzing wave B’s internal structure, currently, we see the price advancing in its wave ((c)) of Minute degree labeled in black. In this context, according to the textbook, the pattern identified in the current wave ((c)) has the shape of an incomplete ending diagonal pattern.

On the other hand, looking at the price and time relationship presented in the first chart, it is interesting to compare the elapsed time of the current wave B with wave A. This comparison suggests that the current wave B can be thought of as a corrective rally; thus, the next move could become an aggressive decline. 

Nevertheless, considering that the current wave B remains in progress, the short-term bias is still on the bullish side.

Technical Outlook

The next 8-hour chart shows the GBPUSD advance in its fifth wave of Minuette degree, labeled in blue, which belongs to the wave ((c)), in black, suggesting a terminal movement.

In this context, the price’s test of the upper sideways channel trendline suggests that the Pound Sterling could develop an expanded flat pattern. This Elliott Wave pattern’s implication makes us consider a strike over the origin of wave A located at 1.34832, where the pair should start to decline, developing its wave C in green.

Finally, both the ending diagonal pattern and the expanded flat pattern requires the pair to confirm the breakdown below the demand zone between 1.33135 and 1.32876. If the pair’s price action confirms this breakdown, it could move down up to the level of 1.29144.

Categories
Forex Psychology

Mistakes and Fears of the Modern Trader (and How to Correct Them)

Probably a lot of you know how to drive. If you don’t drive, surely you can find some similar perceptive-motor technique that you have ever mastered-cycling, skating, swimming, etc.- If you remember the first time you tried to master the technique, you will discover many things that you had to attend to at the same time.

The hands did several things -to handle the steering wheel, the gear lever, the turn signals, the lighter, the radio…at the same time they had to pay attention to what the feet were doing, responsible for a complex task in which space-time coordination was fundamental -accelerator, clutch, brake-. All this complex network of coordination was only the beginning of the task since outside there were the keys to “good driving”, the awareness of traffic, the state of the road, traffic lights, pedestrians…

Narrated in this way seems an “almost” impossible or at least extremely difficult task, and yet, with the passage of some months and the accumulated experience, what does that task become?

The key to such a change in effectiveness, in performance, in dexterity for the development of the task is, as you may have concluded, in “experience” and in an appropriate process: “the path of learning”. It is not a skill that requires a very sophisticated technical qualification, rather they are simple gestures “accompanied” in a “harmonious” way. A beautiful and precise dance -sure that once they have felt it, the publicists of BMW know it- in which everything “flows” without resistance, and that makes us “enjoy”.

The easiest way to acquire any skill is to practice small fragments one by one, just as we learned the task of driving a car, what is needed is to organize the task into small elements or parts, in order to practice each part to the point of turning it into an “automatic”, “effective”, “unconscious” activity, this allows us to devote “attention” to other possibilities, other components of the task. Subsequently, we can practice these new elements until they also reach the same category of automated motor pattern to which we do not have to pay any conscious attention.

When I met Alfredo Rodriguez, I was immediately struck by the enormous amount of perceptual resources available in the task of trading, even when it came to speculating on a 1 min chart. On a product like Dax. For my work in the virtual consultation, I have had the opportunity to know many “styles” of trading, many tempos, many ways to live the pressure or fear.

We have worked for a long time on these elements, always trying to answer a key question:

What are the right tools to achieve these automatisms?

How to get an approach to trading with plenty of available capabilities?

How to enable the existence of surplus resources that help us maintain flexibility and mental agility, at levels that allow us to make appropriate decisions in tenths of a second?

We have set up a “virtual consultation” where, as a “laboratory”, our clients “investigate” the essential bases of its characteristic structure, an unavoidable preliminary step if we aspire to the creation of “custom” instruments, individually optimized. Unfortunately, there are no “universal recipes”, simply because “control”, “stop”, “fear”, “risk”, are words that take their content from the deep roots of the human being, each of us recreates them and gives them meaning by always drinking from the source of their history, of his fantasy, of his own existence.

G: Could you list the mistakes you feel you made?

X: Precipitation, entering the market without analysis (of any kind), not holding the position -that is to say, getting well and rushing into closure-, in general when I am inside I become obfuscated. Lately, I can’t stand anything, for or against, but much less for.

G: You go in compulsively?

X: Yes, I often enter by entering, I get very nervous. The worst thing is that before the losses increase the trade and everything is even worse. Now I have started taking Seroxat, I had never taken antidepressants until now, I was used to solving things differently.

G: Could you look for an image or a descriptive metaphor of how you feel?

X: I’m like a mouse, which plays a cat…

G: Perfect, keep developing that image, how is the game? , how does it develop? , where is it going?…

All of you can imagine the possibilities of a mouse facing a playful cat and understand what is the most likely development of such a game. From our point of view, Mr X’s trading will be marked by this way of “feeling” the market, his subjective “perception” of trading creates -perhaps unknowingly- a whole “script” of what happens and what will happen until that script is modified.

That unspecified “text”, that way of living the market, the system, the times, the minutes with which one works, the indicators and signals are chosen, absolutely everything will be “catalyzed” by this special way of “seeing” and “feeling” markets.

G: It’s very important that we understand your “script,” what the spurious elements are. We have to check your “backpack” and identify the heavy elements that are not absolutely necessary and that activate those self-destructive “messages”. Look in your memories for a message repeated by your parents, friends, family…

Y: I remember that many times they told me not to try hard in the studies, I was not going to achieve anything…

G: How does that make you feel?

Y: Well, I think it influenced a lot that I didn’t try hard in his day, today I regret not having done it, but it’s already late… Thinking about this that you are proposing to me, I perhaps looked in the markets to show them all that they were wrong, that I am worth it, that I can do great things like for example make a lot of money in this.

G: Some kind of challenge?

And, Yeah, something like that.

G: And you think it’s the most correct position to build a profession? To do it out of spite?

Do you think resentment and anger will help you build a “healthy” role?

Y: Well, now that you mention it, I’m sure I don’t… In fact, I threw myself into the adventure without knowing anything of analysis, or means, indicators, anything at all. I was going with the bald price go. Talking to you gives me the feeling I started the house off the roof.

G: Why do you think that 90% of the people who start with this leave-ruined-the first year? There is a superb gesture in that, people come with the whims of a winner, believing that without training and without personal work can beat people who have been living on this for 30 or 40 years.

And: It is true, sometimes we sin of too naive in that sense, in that gesture, we are signing our sentence of ruin.

G: In what you were saying before the “rebound”, that “these are going to find out what I am capable of”, they take you to a somewhat “sinister” place. Your professional role as a trader is joined by an “immense” and heavy slab that you carry inside. That doesn’t depend on the market but on yourself. It’s an added challenge.

Y: I think I understand, it’s like I have the enemy at home.

G: That’s exactly it. On many occasions, there is an internal struggle with maternal or paternal messages, which is not explicit, but which is “marked” with fire in a very deep place of your mind. You end up living to “fight” with that message. Did you see the movie “Leolo”?

And, No, I haven’t seen her.

G: One of the protagonists is mistreated by a group of boys. From that day your life becomes a tireless race to make your body a perfect machine, weights, exercises… through tireless work you get a spectacular musculature. Many years later, already with a tremendously muscular body, he meets the same group of guys again… Do you know what happened?

And, He took revenge on them, I suppose.

G: They poked him again. His body was huge, his muscles seemed powerful. But his inner “message” remained the same. It was not an external force problem, but an internal one.

Y: I understand. And what can you do to correct those scripts?

G: Here we are, the first two exercises that I send you, are aimed at unmasking these messages. As you can see they are very simple exercises of execution but you will discover that they are very powerful if you respect the minimum rules. Constancy and patience.

Recently, I had the opportunity to work with a trader that I call “brilliant” in his technical training, in his analysis, in his way of reading the markets. His problem is that he “fails” over and over again on procedural tasks. After an excellent analysis he decides, for example, that he has to adopt long positions, and when entering the command in the TWS, he opens shorts, when he realizes, he enters a state of confusion that blocks him and prevents him from closing the open position by mistake, That makes it maintain a position that accumulates more and more losses.

When we worked on this problem, something obvious became clear to the naked eye, we are simply “boycotting ourselves”. We know how he does it, the most urgent task now is to know why?

Our proposal is a multi-level work:

At the deep level: give “permissions” to all internal folders that may be impeding good performance in the market. Detect the “gestures” and “routines” that hinder the development of a good “role” of trader -impatience, lack of discipline, impulsivity, fear, blockades-

At the technical level improve market analysis and advantageous positioning resources. It is about starting a path that should not only lead to knowledge of the markets but, more importantly, to self-knowledge. The market is a great teacher if you can hear it.

Categories
Forex Fundamental Analysis

GBP/USD Global Macro Analysis – Part 3

Introduction

The exogenous analysis will cover international aspects that impact both the UK and the US and how they influence the GBP/USD price. These factors include:

  • Good trade balance
  • Interest rate differential
  • GDP growth differential

GBP/USD Exogenous Analysis – Summary 

The score for the exogenous analysis of the GBP/USD pair is -3. This deflationary score implies that we should expect that the pair will adopt a bearish trend in the near term.

Goods trade balance

The goods trade balance is the difference between the value of goods a country imports and its exports. When the balance is negative, it means that the country is importing more than it exports. If the goods trade balance is a surplus, it means that a country’s value of exports is more than its imports.

In September 2020, the UK’s goods trade deficit increased to £9.35 billion while that of the US increased to $80.29 billion. Based on the correlation between t goods trade balance and the price of GBP/USD, we assign it an inflationary score of 2. It means if the goods trade balance keeps widening between the two countries, we can expect that the GBP/USD pair will continue being bullish.

The UK and the US Interest rate differential

This is the difference between the interest rate set by the Bank of England and the interest rate fixed by the US Federal Reserve. Capital tends to flow towards the economy with a higher interest rate since investors are bound to earn higher returns.

The BOE has set the interest rate at 0.1%, while the FED has it at 0.25%. therefore, the interest rate differential for the GBP/USD pair is 0.1% – 0.25% = -0.15%. Based on the interest rate differential, the GBP/USD pair should have a bearish trend. Therefore, we assign it a score of -3.

GDP growth differential

The actual size of the GDP varies from country to country. However, we can compare the rate at which they grow and analyse the impact of this growth rate on the exchange rate.

In the third quarter of September 2020, the UK GDP expanded by 15.5% while that of the US expanded by 33.1%. Over the years, we can observe that the US GDP growth has been at a faster rate than that of the UK. In this case, we assign a deflationary score of -2 on the UK and the US GDP growth rate differential. That means if the US economy keeps expanding at a faster rate, we can expect a bearish GBP/USD in the near term.

Our technical analysis also supports the forecasted bearish trend in the near term. Note that the GBP/USD pair has failed to breach the upper Bollinger band forming a resistance level for the past two years.

We hope you found this analysis useful and informative. Let us know if you have any questions by commenting below. All the best.

Categories
Forex Fundamental Analysis

GBP/USD Global Macro Analysis – Part 1 & 2

Introduction

To properly understand the dynamics of the price of the GBP/USD pair, we’ll conduct endogenous and exogenous analyses of the UK and the US economies.

The endogenous analysis will focus on the significant fundamental economic indicators that drive economic growth in either country. The exogenous analysis will dig deeper into how both the US and the UK economies interact with each other in terms of international trade that impact the currency exchange.

Ranking Scale

Both the endogenous and the exogenous factors that we will analyse will be ranked on a sliding scale from -10 to +10. A negative score means that the indicator resulted in currency depreciation, while a positive score implies that it led to currency appreciation.

USD Endogenous Analysis – Summary

The USD endogenous factors recorded a score of -19.1, implying a deflationary effect on the USD. This essentially means that according to these indicators, the USD has lost its value since the beginning of this year.

You can find the complete USD Endogenous Analysis here.

GBP Endogenous Analysis – Summary

The endogenous analysis of the UK economy results in an expansionary score of 2. Therefore, we could expect the GBP increased in 2020.

Markit Manufacturing PMI

This is a survey done on about 600 purchasing managers in the manufacturing industry, who rate the level of the business environment such as prices, new orders, inventories, supply deliveries, labour conditions, and production levels.

This is a leading indicator for the economy because businesses react almost instantly to the changing operating environment, and the purchasing managers have the most relevant insight. In November 202, the UK Manufacturing PMI was 55.2, showing that the economy is undergoing a sustained recovery. Due to its low correlation with the GDP, we assign an inflationary score of 3.

UK inflation

The CPI is based on a monthly survey done by the Office for National Statistics. This is done by comparing the current average of sample consumer items by the previous month’s prices. The BOE uses the data to adjust interest rates and QE levels to set inflation targets for the economy.

Rising inflation levels lead to higher interest rates, which makes CPI a vital currency valuation indicator. The UK inflation rate increased by 0.7% in October 2020 but is still lower than the rate in the pre-pandemic period. Based on our correlation analysis. We assign it a score of -4.

Manufacturing Production

It measures the change in the total value of inflation-adjusted output by the manufacturers in the whole economy. It is a leading indicator of the economy’s performance since production levels adjust quickly to the business cycles and heavily dependent on consumer conditions like employment changes and earning levels.

Manufacturing contributes about 80% of the UK’s industrial output and accounts for up to 42.4% of GDP changes. The year-on-year manufacturing production change in September 2020 was -7.9%. This marks the smallest decline since the onset of the coronavirus pandemic. Due to its high correlation with GDP, we assign it an inflationary score of 6.

Claimant count change

It measures the change in the number of people who are seeking unemployment benefits. Hence, it is the primary indicator of unemployment levels, which makes it a vital signal of consumer expenditure levels and labour market conditions. In the UK, claimant count change is considered the best measure of the employment situation, and it accounts for 30% of changes in the GDP.

In September 2020, the number of people in the UK who claimed unemployment benefits dropped by 29800. However, the unemployment rate remains at yearly highs of 4.8%. For this reason, we assign a score of -5.

Industrial Production

It measures the change in output from the mines, manufacturers, and utilities, adjusted for inflation. While manufacturing makes up 80% of the industrial production, mines and utilities make up 20%, and their effects on the real economy are thus overshadowed.

It is a significant leading indicator of the economy’s health since industrial activities correspond to labour market conditions and sensitive to business cycles. In September 2020, the UK industrial MoM production increased by 0.5%. However, on a YoY basis, it is down 6.3% from September 2019. In this case, we assign industrial production a score of -3.

Retail Sales

It measures the change in the inflation-adjusted value of all sales at the retail level in the whole economy. It is the primary measure of how much consumer expenditure accounts for most of the country’s economic activity.

In October 2020, the UK MoM retail sales increased by 1.2%, which is the 6th consecutive increase in retail sales from the slump recorded at the height of the coronavirus pandemic. Based on its correlation with GDP, we assign retail sales an inflationary score of 4.

Markit Services PMI

This is a survey on about 400 purchasing managers in the services industry, who rate the business environment using factors such as employment, new orders, pricing, inventories, and supplier deliveries. A score of above 50 signifies an expansion, while below 50 indicates a contraction in the services industry.

In November 2020, the Marking UK Services PMI was 45.8 – a significant drop from 51.4 in October. Although the Services PMI has increased from the April lows, it is still lower than in January 2020. Combined with its low correlation with the UK GDP, we assign a deflationary score of -3.

United Kingdom Public Sector Net Debt to GDP

This is also called Government Debt to GDP Ratio. Most investors, bilateral and multilateral lenders use this ratio to determine a country’s ability to service any debt they take on. Naturally, when the ratio is higher, it means that the government is piling on more debt, but the GDP is not increasing at the same rate. Since higher GDP would mean higher sources of revenue, if the GDP is not increasing at the same pace as the amount of debt, it implies that the government might struggle with debt repayment.

In 2020, the UK Public Sector Net Debt to GDP is projected to reach historic highs of 96.6%. This increase is mainly attributed to governments’ efforts to prop up the economy through aggressive expansionary policies during the pandemic. Based on our correlation analysis, the increase in the United Kingdom Public Sector Net Debt to GDP in 2020 served its purpose to avoid irreversible recessions. We, therefore, assign an inflationary score of 4.

In our next article, we will analyze the Exogenous factors of both USD and GBP to come to an appropriate conclusion.

Categories
Forex Fundamental Analysis

Understanding ‘US TIC Net Long-Term Transactions’ Fundamental Forex Driver

Introduction

When foreign investors prefer investing in the domestic economy, they strongly believe that they can get better returns than in any other market. The US is considered the leading economy in the world; therefore, hence US securities are highly trusted by most investors. Similarly, since the USD is the most traded currency in the international market, its value would fluctuate depending on investors’ optimism in the capital and money market of the US.

Understanding US TIC Net Long-Term Transactions

As an economic indicator, the US TIC Net Long-Term Transactions measures the net flow of financial securities in the US economy. The financial securities under consideration include; Treasury and agency securities, corporate bonds, and equities.

Therefore, the ‘net’ in the US TIC Net Long-term Transactions means the difference between US financial securities’ gross purchases and sales by foreign investors. This data provides a vivid overview of the participation of foreigners in the US capital and money markets. When the US TIC net long-term transactions data is positive, it means that more foreigners are buying into the US economy than those selling. Similarly, when the US TIC net long-term transactions data is negative, it means more foreigners are exiting the US economy compared to those buying into the economy.

So, what is TIC? TIC stands for Treasury International Capital, a financial report from the US Department of Treasury. It shows the flow of capital into and out of the US in both the short and long term. The TIC report is published monthly and quarterly; it details the flow of capital explicitly in the sale and purchase of US financial securities.

According to the TIC reports, the classification of foreigners does not necessarily mean individuals and institutions from abroad. Foreigners in this context also include foreign branches of US institutions. For example, if a US bank has a branch in London, that branch is considered a foreigner.

Using US TIC Net Long-Term Transactions in Analysis

The main point of the US TIC Net Long-Term Transactions Report is it shows the demand for USD stocks and investors’ sentiment towards the US economy. Let’s break down the US TIC Net Long-Term Transactions depending on the market.

If the US TIC net long-term transactions, it could signal that the US treasuries and bonds are in high demand. First, you should know why investors would demand more of US treasuries. The US treasuries and bonds are considered to be risk-free. The reason for this is because investors are guaranteed to receive a fixed amount of coupon rate until maturity.

More so, the US treasuries also come with an inherent guarantee that the US government will not default the interest payment and that investors will receive their principal upon maturity. Furthermore, the US’s interest rates are relatively higher than other developed nations; this means that investors in the US government securities stand to profit more by investing in the US.

The level of purchase of the US TIC net long-term transactions also says a lot about the expected inflation. In the long term, most investors worry that if the rate of inflation increases rapidly, it will reduce their profits. Thus, any investor would prefer to invest in a country with stable inflation, which would ensure that their returns are not severely affected.

Therefore, when the US TIC net long-term transactions are positively increasing, it means that foreign investors expect the US economy to be relatively stable over the long term. It is taken as confidence that the Federal Reserve will keep long term inflation in check.

Source: St. Louis FRED

Conversely, if the US TIC net long-term transactions are negative, it implies that there are more sellers than buyers. This scenario could imply that foreign investors believe that the long-term inflation rate will exceed the rate of returns they will receive from their investments. Since their expected real returns will be diminished, they prefer to invest their money in other economies.

The US TIC net long-term transactions can also be used to show impending recessions and optimism about economic recoveries. Let’s use the recent coronavirus pandemic as an example. In the first quarter of 2020, the US TIC net long-term transactions plunged to historic lows. It means that more foreign investors were exiting the US capital and money markets and presumably investing their funds elsewhere. This net outflow was a result of the uncertainty of what the pandemic might bring.

 Source: Trading Economics

In the second quarter of 2020, the US TIC net long-term transactions jumped back to positive territory, implying that foreign investors were pouring back into the US capital and money markets. Note that this net inflow coincides with the passing of the $2 trillion stimulus package. Therefore, we can argue that the net inflow of US TIC net long-term transactions was a vote of confidence by foreign investors that in the long term, the US economy will rebound from the pandemic-induced recession.

Impact of US TIC Net Long-Term Transactions on Currency

The impact of the US TIC net long-term transactions on the USD is pretty straightforward. In the international market, foreigners are obliged to convert their currencies into the USD. Therefore, an increase in the US TIC net long-term transactions means that the demand for the USD increases as well. Consequently, the increase in the demand for the USD makes it appreciate relative to other currencies.

Conversely, when US TIC net long-term transactions show net outflows, the USD will depreciate relative to other currencies. This is because when foreigners sell the US financial securities, they will convert the USD to their domestic currencies when repatriating their money.

Data Sources

The US Department Of The Treasury is responsible for collating and publishing the monthly and quarterly US TIC net long-term transactions. Trading Economics has detailed historical data on the US TIC net long-term transactions.

How US TIC Net Long-Term Transactions Release Affects The Forex Price Charts

The latest monthly publication of the US TIC net long-term transactions was on October 16, 2020, at 4.00 PM EST. The release can be accessed at Investing.com. Moderate volatility on the USD can be expected when the US TIC net long-term transactions report is released.

In August 2020, the US TIC net long-term transactions were $27.8 billion compared to $11.3 billion in July 2020. In theory, this increase should be positive for the USD.

Let’s see how this release impacted the GBP/USD pair.

GBP/USD: Before US TIC Net Long-Term Transactions Release on October 16, 2020, 
just before 4.00 PM EST

Before the publication of the US TIC net long-term transactions, the GBP/USD pair was trading in a subdued uptrend. The 20-period MA was almost flattened with candles forming just above it.

GBP/USD: After US TIC Net Long-Term Transactions Release on October 16, 2020, 
at 4.00 PM EST

After the publication of the US TIC net long-term transactions, the pair formed a 5-minute bearish candle. Subsequently, GBP/USD adopted a bearish trend showing that the USD significantly strengthened against the GBP. The 20-period MA steeply fell as candles formed further below it.

Bottom Line

From this analysis, it is evident that the US TIC net long-term transactions release has a significant impact on the forex market. The report shows the confidence of investors in the US economy and the demand for the US Dollar.

Categories
Chart Patterns Forex Daily Topic

Chart Patterns: Ascending Triangles

Of all the bullish continuation patterns that exist, few are as sought after as the ascending triangle. Like all triangle patterns, their development and construction are dependent on two trendlines that intersect and form an apex. The two primary identifying conditions of an ascending triangle I a flat, horizontal top and an upward sloping trendline.

Ascending Triangle
Ascending Triangle

In addition to the two trendlines, there is a specific kind of behavior that the candlesticks must perform. The upper trendline and the lower trendline must be touched at least twice. Ideally, and according to Bulkowski, there should not be much open space inside the triangle. The same volume behavior that occurs in other triangles occurs here in the ascending triangle: price often breaks out in the final 2/3rds of the triangle, and volume decreases before the breakout. The psychology behind the formation of the ascending triangle is essential to understand. The pattern represents an apparent battle between longs and shorts. Short traders are under the impression that because the resistance level has been tested and has held, it will remain stronger. Long traders are under the impression that prices will move higher because of the formation of higher lows and an upward sloping trendline. Ultimately, shorts cover very quickly, just before or immediately after the breakout of the upper resistance.

Bulkowski recorded that, in equity markets, the breakout direction of an ascending triangle is upwards 64% of the time. Dahlquist and Kirkpatrick recorded that upwards breakouts occur 77% of the time. Interestingly, the performance of this pattern is roughly average across all patterns – this is contrary to the belief of many traders who self-report a high positive expectancy of upwards breakouts. Dahlquist and Kirkpatrick did warn that there are many false breakouts and that failure rates are between 11% and 13%.

As with any pattern, it is essential to pay attention to price action first and then find tools to help you filter whether an entry at the breakout is appropriate. Additionally, be wary of throwbacks as they are frequent over 50% of the time – many conservative traders wait for a retest of the breakout to confirm a valid break from the ascending triangle.


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
Forex Fundamental Analysis

The Ugly Truth About a Potential Trade War

Donald Trump provokes China, but Beijing is no longer the same as at the beginning of 2020. When I look at some people, and in my head, there’s only one thing: how to get a gun license? The last thing the world economy that is fighting the pandemic needs is the resumption of the great trade war between China and the United States.

However, Donald Trump does not give up and continues to roll barrels in Beijing. Then it threatens import duties for the alleged origin of the coronavirus in the laboratory and the non-fulfillment of obligations to buy US products, likewise, it prohibits the largest federal pension fund in the US to invest funds in Chinese stocks, then raises its voice over the final breakdown of relations, which will allow the United States to save $500 billion. Doesn’t Donald Trump wear masks in the White House? They are necessary to keep quiet.

Meanwhile, China, aware of the benefits of its country’s position that brought the coronavirus to its knees, is no longer the same as at the beginning of 2020. China makes it clear that it cannot break the ties. Unless it is a barbed wire. And if the US is going to send her away, it needs to know that the Chinese are lazy, so the Americans themselves will have to take them. Beijing is increasingly moving from diplomacy to threats: it stops buying pork from Australia in retaliation for Canberra’s intention to conduct an international investigation into the origin of the coronavirus, spreading rumors about an American plot against his country, encouraging States loyal to him.

China’s belief that it will be able to defeat the rotten West, as it was after the crisis of 2007-2009, when thanks to the growth of Chinese GDP, the world economy managed to recover. It feels like we’re watching the second part of a 12-year-old action film “Before the World Stayed In Whales, Now In Chinese”.

As for Trump, Beijing has long chosen the same tactics as Fed president Jerome Powell. Ignore the angry speeches of the President of the United States. Everyone knows that ignoring is one of the oldest forms of emotional abuse. The relationship between the two countries increasingly resembles a family idyll, when the husband speaks and gives instructions, trying to prove that he is the head of the family, and the smart wife agrees with him but does everything in her own way. Like it didn’t get to the point where “my husband took me off the friend list, and told her to get out of my house “.

Trump’s discourse on a total breakdown of the relationship seems very much like a man’s desire to break the marriage bond:

– Why did you separate from your wife?

– We have no common interest, except for nine children…

China and the United States have a relationship too close to breaking without pain. And the removal of Chinese companies from supply chains, in which Americans participate, is seriously discussed in the White House, it is almost impossible to implement. Globalization reigns in the world and the solid rally of US stock indices speaks of no trade war. Where does the S&P 500 come from? The wisdom of the crowd… However, people are not always right. They are not always sober.

Categories
Forex Psychology

Forex Success: It’s All About the Winning Mindset

I have been wondering for some time now what role does our mind-brain play in trading? And I keep asking myself that because rivers of ink are written and written about the emotions we have when it comes to operating in the markets. And especially because I’ve seen with my own eyes newbies who lose their money because they put their sights on the anxiety of winning and earning money and do not prepare mentally for the journey you are thinking of starting.

I think there is a lot of confusion in this because if we have a fortified mind and extraordinary mental strength, that is excellent, those emotions that everyone talks about (Psychotrading) will be minimized to the minimum power or expression. I believe that all those emotions that we face are produced because we have a weak mind, a mind that has not been trained for the new challenges that we will face. What I am saying we can see in the athletes when they are going to hold the championship of their life they concentrate to face that great challenge. And how many times have we heard concentration…concentration…

WINNING MIND

And how many times have we heard that Rafa Nadal has a privileged mind, that even despite losing in some match he made a comeback. We must therefore have a prepared, fortified mind. A mind capable of assuming a losing point, that is unaffected and can continue to play as if it were starting from scratch.

A mind that, when it wins, continues to strive and give its best, as if it had just started the game. A mind, constantly resetting itself, a mind prepared to assume a loss or a victory without emotions dominating and influencing it.

“This possibility of self-observation when we prepare to operate in the markets and live those emotions that trap us is what allows us to detect thoughts, emotions and mental patterns that disturb or prevent us from getting what want.”

But the mind not only has the ability to observe itself, but at the same time it can regulate itself, modify thoughts, reduce or nullify emotions and modify behaviors, but if it does not regulate and train itself, can end up falling prey to the brain’s emotional system and losing control. Therein lies a key ingredient for success, applicable to Trading, and to other professions and aspects of our lives. Needless to say, this is totally opposed to human behavior and this is where we have to work and a lot.

“The brain controls all aspects of our life and today we can visualize more clearly the advantages and disadvantages of the mind and brain.”

DISCIPLINE

So if you have in your mind the winning patterns, clear and constantly visualized will help you to earn money and not lose it. Normally, we are influenced by everyday events that happen and they can change us the whole day. Let’s remember that phone call, that email, that conversation that left us somewhat dejected and made the rest of the day have another color.

It is very difficult to avoid this, we are not robots and things that affect us. So imagine something as emotional as earning or losing money, where other feelings are also mixed, such as ego, frustration, desire for revenge, anger,… it is an explosive mixture of emotions, which, it is not at all simple, separate yourself and continue there, without any influence, either positive or negative.

Rafa Nadal says in his book:

“Being focused means doing at all times what you know you have to do, never changing your plan unless the circumstances of the game or the game change in such an exceptional way that they justify the appearance of a surprise. But in general terms, it means discipline, it means restraining yourself when the temptation to gamble arises. Fighting that temptation means having impatience or frustration under control.”

Having the emotions controlled, within oneself and without them activating a response, neither in your external behavior but also in the interior, is key and means that the emotions should not make you change your behavior and if possible, nor your mood. Not an easy task.

In forex trading, if you want to know your odds you must know your trading system very thoroughly and that is only achieved after thorough research on it. My advice is that you set yourself qualitative, never quantitative objectives and the former will take you to the latter and a much more direct and satisfying path.

KNOW YOURSELF

I remember in the past, in the attempt to achieve this longed-for mental discipline, recording myself with the computer camera. I wanted to see my expression when I lost an operation when I won, what my eyes said, my gestures… it was revealing. I discovered that everything affected me, when I lost an operation, sometimes my eyes became sad, I felt frustrated and other times, my expression was of anger and desire for revenge.

The first step to achieving that control is to know yourself. What seems obvious isn’t so much, let alone when your money’s at stake. Well, that’s the first job to do, getting to know each other, how do you react to a losing operation? Do you get scared? Or, perhaps, are you one of those who want revenge? Perhaps that answer depends on why that operation has been unsuccessful. And when an operation wins, do we get euphoria and become more confident? Needless to say when we win, for example, 300 € in an operation and then we lose them after 15 minutes.

Let’s analyze, study our behavior, be aware of what affects us, and why. This mental work acquires another dimension that is what makes the difference between a great professional tennis player or one who does not achieve success in this profession. Or between a successful trader and a loser. And this mental work will make the difference between getting to consistency or not. That’s right, it won’t be the system, it won’t be our enormous know-how, it won’t be the development of a trading strategy. No, it will be our mind. Obviously, all of the above are necessary ingredients, but not sufficient.

If we have a great system, but a weak mind, we will not succeed. If we have a simple system but a prepared mind, we can come to consistency. Let’s work in this direction, videotape ourselves while we operate, write in an emotional journal at the end of our intraday operation, explain to ourselves everything that happened, as if we were telling someone, Let’s go for a walk or a sport and let our minds clear and speak to us… Do you think Rafa Nadal was born with that winning mind?

This mental work is not a waste of time, believe me, it is the missing piece in our puzzle to get consistent trading.

Categories
Forex Market Analysis Forex Technical Analysis

NZDJPY Fills the Gap Unfilled Since May 2019

The NZDJPY advanced 5.70% in November, consolidating the price in the extreme bullish sentiment zone. Likewise, as illustrated in the following daily chart, during December’s kickoff trading, the cross reached the yearly high of 73.831, filling the gap that opened on May 06th, 2019.

Technical Overview

The previous chart also exposes the cross advancing in a mid-term uptrend drawn in blue, which remains active since last March 18th, when the price found support at 59.490. Likewise, we distinguish an accelerated short-term bullish trend plotted in green, which began in early November. 

The 2.774 reading observed in the EMA(60) to Close Index leads us to suspect that the impulsive bull market developed in the NZDJPY cross seems to be in an exhaustion stage. Therefore, the cross is likely to develop a reversal movement in the following trading sessions.  

Nevertheless, before taking a position on the bearish side, the price action must confirm the reversal movement. 

Technical Outlook

The following 12-hour chart presents the mid-term Elliott Wave view or the NZDJPY cross. The drawings reveal the cross advancing in an incomplete fifth wave of Minuette degree, labeled in blue that belongs to the fifth wave of Minute degree, in black.

NZDJPY’s price movements reveal an impulsive five-wave sequence of Minute degree identified in black, which began last March 18th, when the cross found fresh sellers after the massive sell-off developed in the global stock market. 

Likewise, once the extended third wave (in black) ended, the cross developed a sideways movement as a flat pattern, which found fresh buyers at 68.633. In this context, considering the Elliott Wave theory and that wave ((iii)) was the extended wave, the next impulsive wave ((v)) (in black) can’t be extended and should look similar to wave ((i)), also in black. 

On the other hand, watching the fifth wave’s internal structure (in black), the wave (ii) (in blue) looks like a complex correction, and the third wave is the extended movement. In this context, the current wave (v) (in blue), which is still in development, shouldn’t be an extended rally.

Consequently, the cross could complete its fifth wave of Minute degree in the area defined by the psychological levels between 74.00 and 75.00. Finally, until the cross shows evidence of a reversal, such as a bearish engulfing candle, we should consider the cross’ trend as bullish.

Categories
Forex Elliott Wave Forex Market Analysis

EURJPY Advances Toward Key Supply Zone

In our latest EURJPY analysis, we commented on its advance in an incomplete corrective structure identified as a triangle pattern, which remains in development since mid-2014.

Technical Overview

Also, we saw that the mid-term trend looks like an incomplete corrective structure, which seems to advance in a wave B of Minor degree, labeled in green. Moreover, the structure observed previously unveiled the progress in an incomplete wave ((b)), identified in black, which should develop a bounce toward the supply zone between 125.285 and 126.123.

The price action is currently seen advancing in its wave (c) of Minuette degree, labeled in blue, which has now reached the supply zone between 125.285 and 126.123 forecasted in our previous analysis.

On the other hand, the current wave (c), in blue, that remains in development could extend its gains toward the psychological barrier of 126, where the cross could start to decline to the wave ((c)), in black. This bearish sequence, possibly developed with five internal segments, should complete the wave B of Minor degree, in green.

Short- term Technical Outlook

The EURJPY in its 2-hour chart reveals the internal structure created by the wave (c), in blue, which shows the intraday ascending channel plotted in green. The price action that has surpassed the ascending channel’s upper line suggests the rise of the third wave of Subminuette degree labeled in green that is in progress.

In this context, according to the Elliott Wave theory, once the EURJPY completes the advance of the third wave, in green, the cross should experience a limited decline corresponding to the fourth wave in green. This drop could reach the demand zone between 124.931 and 125.128, where the price could find fresh buyers expecting the price to head toward new highs.

The fifth wave’s potential target zone, in green, is located between 125.939 and 126.497. In this area, the cross could complete the wave ((b)) of Minute degree in black. 

Finally, the invalidation level of this intraday bullish scenario is found at 124.566, which corresponds to the top of the first wave of Minute degree.

Categories
Forex Psychology

How To Make Forex Trading Comfortable?

Comfort in trading has several aspects, one is when we have a good trading practice, a system, or a strategy, yet we cannot find time for it to fully get effective. This is caused when our trading developed when we were just studying, for example, we had more time to devote to trading. After a while our lives could change, what once was comfortable now is a chore or we simply have more pressing matters. Certainly, traders found in this position are not professionals, trading is just a hobby or some other form of secondary income for them. It is rare to see professional traders move away from their careers if they are successful. Some things are out of our control and change our lifestyle, however, the title question does not relate to these traders. Part-time or hobby trading can still be profitable but how to make it comfortable just depends on each trader’s personality and lifestyle. 

If you value your time and do not monitor your trades yet still have a very good trading methodology, one solution could be to change your target timeframe. Starting from H4 and up really makes a difference in how much screen time you spend each day. Unfortunately, if your strategy was based on a lower timeframe, high-paced trading like scalping then it probably will not work on higher timeframes. Better try to create an Expert Advisor for it. If your developed trading style tolerates other timeframes, you may still need to have some adjustments before the transition. The daily timeframe, for example, does not require more than 30 minutes of management time, it is usually done once the day session about to end. Whatsmore, you do not even have to monitor what is going on during the day. This trading style is one of the most comfortable provided you have a strategy that is also adaptive. 

There is one more solution for cases like this, a more popular one, although established traders might be skeptical about it. It is an automated trading solution. Automation is not always possible, especially if your trading method is relying on subjective price action decisions no robot could replicate. Pure technical trading strategies that rely on indicators and exact thresholds will not have any problems making them automated. On the other hand, complex strategies may be very expensive to automate. Now, if you do not have coding skills you will need to decide if employing a coder is worth the effort. Also, consider you will probably have additional costs establishing a VPS, any additional work for the updates to the code, and unforeseen errors. Scalping and other high-frequency trading are often automated, for obvious reasons. 

How we can make trading more comfortable is probably asked once we cannot keep up with trading emotionally and even physically. And these situations are very closely related to our trading performance, responsibility, and high-frequency trading. This is a more common problem and another aspect of uncomfortable trading. Let’s say you have your first profitable strategy, you have perfected it and made consistent progress. Now it is time to put it to work with real funds. It is completely different psychologically right? Because you care and stress about the outcome unless you like that kind of excitement, you are out of your comfortable trading zone you have enjoyed while demo trading. There are so many ways to overcome this, the simple solution is to just keep it up without messing with your strategy and in time you will be back in the zone. Be confident you have something that works first, or you will take double hits when you start losing.

Another way is to have attention distractors. Have something to do to keep you busy while the trade runs. Create obligations that keep you away, like sports or classes. Depending on how “cold” under pressure you are it will become a routine practice, the money just becomes numbers. Interestingly, some traders completely cover the balance and P/L line even though they are experts. As a trader, you will have to face these issues and there is no way around it. According to experts, when they switch to a high amount of capital they were out of comfort zone, when they received even more money from others, it is another level of pressure. So, even if you overcome this stress once, it could come back again. 

Trading is a battle with your emotions and the markets will play with them. It will drive you away from trading if you do not have a strong anchor. Now, even the best of strategies will not work if you constantly get emotional about decisions you made and are about to make. When you start out, know your expectations about a particular strategy will get you disappointed. You will need to work for some time before you get some results out of your demo trading. Get used to failing, start over, and fail again process. Just take failures with a good attitude, think about what went wrong, analyze, test new things and rules. It will be just a matter of time when you stumble on a winning method. 

Getting out of your reasonable thinking and into the wild emotional decision making is when you do not have strong trading anchors: you do not have a developed plan, how much you risk per trade, routine, or not a clearly defined strategy. Trading without these is not only uncomfortable but also is not going to get you anywhere. There is a simple solution to this, do not trade with real money, even the one you can afford to lose before you have a defined approach to what you are going to do in every situation. Markets are chaotic, going in blindly is a great way to lose. Have a strict plan with optimal risk allowance to endure some losses before good trades come in.

Analyze the market with good tools/mechanisms and stick with them until you are sure they do not work. Then try new things until your complete trading strategy has all elements aligned – your money management, plan, toolset, and you are ready to go live. Some experts advise going live with the money you are ready to lose, just so you can stay in your comfort zone. Others want you to be ready to put in an uncomfortable amount. The reason is, of course, to get you used to the responsibility and the stress. Your strategy should not put your account in danger since it is based on long term endurance, however, you will make better progress in becoming comfortable with any amount as there are fewer surprises markets can throw at you. 

A simple recipe for getting comfortable does not exist, there is no drink or a remedy to run away from this. Whatever you do, great performing strategy or not, you will face your dose of stress. However, there is a difference in how you face it. You can have faith in your system as a channel for stress. That faith is as strong as the amount of work you put in and long term results. Without this foundation, you are simply going to be uncomfortable all the time for various reasons, and this probably is not just about trading, but how you approach other problems as well.

Categories
Forex Fundamental Analysis

Everything About ‘Economy Watchers Current Index’ Economic Indicator

Introduction

It has long been posited that in any economy, the first people to experience growth or contraction are those who provide basic-everyday services to the households. These service providers are considered to be “in touch” with the realities of the economy since they directly interact with their customers. While most people do not pay close attention to this index, its fluctuations could provide valuable insights into the economy.

Understanding Economy Watchers Current Index

For this analysis, we will focus on the Japanese Economy Watchers Current Index. This index attempts to measure the present economic conditions in Japan, especially from the perspective of households. From its name ‘economy watchers,’ it directly measures the mood of businesses who are in constant touch with the final consumers.

The index is compiled by surveying about 2050 employees in every sector of the economy. Here is the list of the sectors surveyed in the economy.

  • In household activity related sectors
    • Retail establishments like supermarkets and automobile sellers
    • Food and beverage establishments like restaurants
    • Services to households such as transportation, telecommunication, and leisure facility operators
    • Housing services
  • Corporate activity related sectors, including:
    • Operators in the manufacturing sectors
    • Employees and operators in the nonmanufacturing sector
    • Employees in the primary sectors like agriculture, mining, and fishing
  • Employee-related sectors such as;
    • Temporary labour placement agents
    • Job magazine editors
    • Staffing agencies
    • Professionals who understand labour market trends

In all the above sectors, the data is compiled as per the regions in which it was collected. It is to say that the survey is divided based on the area being surveyed in japan. It covers the 11 regions in Japan.

The people who are surveyed are well-placed in positions that enable them to observe first-hand the changes in economic activities. These are the questions that the survey asks.

  • How they assess the current economic conditions and detailed reasons for their answer
  • Their assessment of future economic conditions and their reasons for this assessment

The survey is conducted monthly from the 25th to the end of that month. Note that the Japanese Cabinet Office selects regional research organisations to administer these surveys. Based on the responses obtained, a ‘diffusion index’ is compiled. This diffusion index is then converted into a percentage to give the Japanese Economy Watchers Current Index. Here’s how the responses are weighted in the diffusion index.

  • Better is +1
  • Slightly better is +0.75
  • Unchanged is +0.5
  • Slightly worse is +0.25
  • Worse is 0

Using Economy Watchers Current Index in Analysis

Any value above 50 indicates that respondents are optimistic about the future, while values below 50 show that they are pessimistic. Now, note that a rise in the Economy Watchers Current Index doesn’t mean that all sectors of the economy are optimistic. It just means that majority of the sectors in the economy are optimistic.

For example, economy watchers in every other sector might be optimistic, but those in the nonmanufacturing sectors are pessimistic. This scenario means that majority of economy watchers are optimistic. Similarly, when the Economy Watchers Current Index shows pessimism about the economy, it doesn’t mean that every sector in the economy shows pessimism. Some economy watchers could be optimistic.

When the economy watchers are optimistic about the future, it means that they expect the economy to grow. Remember that these economy watchers are sampled from virtually every sector of the economy in every region of Japan. For example, let’s say that economy watchers in the manufacturing sector are optimistic about the economy.

This means that they expect the manufacturing sector to expand, which means that the output from the sector will increase. Going back to the basic knowledge of the economy, we know that suppliers and producers take their cue from consumers. Therefore, an increase in production in the manufacturing sector, or any other sector, means that consumer demand has also increased.

Let’s think of the factors that drive an increase in consumer demand. The primary factor is the increase in money supply in the economy, which is driven by easy access to cheap finance or an increase in the employment rate. Here, consumers have increased disposable income, which means that the economy is expanding.

Conversely, when the Economic Watchers Current Index is decreasing and showing increased pessimism, it could mean that the economy is contracting. Let’s use the example of household activity related sectors. When they are pessimistic, it means that they are experiencing a shortfall in demand for their goods and services. Since we have established that household demand drives these sectors, a decrease in demand could mean that households are cutting back on their expenditures.

This reduction in consumption is a direct consequence of lower disposable income in the economy. When households have reduced disposable income, they will prioritise expenditure on only the most essential goods and services. It means that consumer discretionary industries will take a hit, as will the overall economy – GDP will fall as the economy contracts.

Observe in the graphs below that the fall in the Japanese Economy Watchers Current Index corresponds to the drop in Japanese GDP in Q1 2020.

Source: Trading Economics

Source: St. Louis FRED

Impact of the Japanese Economy Watchers Current Index on the JPY

We have seen that the Economy Watchers Current Index can directly be linked to the money supply in the economy.; which means it can also be used as a leading indicator of inflation.

When the Economy Watchers Current Index is continually rising, it can be taken as a sign that there is increasingly more money supply in the economy. In this case, governments and central banks might step in to implement contractionary policies like hiking interest rates. In the forex market, this will increase the value of JPY. Conversely, when the Economy Watchers Current Index steadily drops, it might trigger expansionary policies, which will make the JPY depreciate.

Data Sources

The Cabinet Office of Japan is responsible for the survey and publication of the Japanese Economy Watchers Current Index. In-depth and historical data is also available at Trading Economics.

How the Japanese Economy Watchers Current Index Affects The Forex Price Charts

The recent publication from the Cabinet Office of Japan was on October 8, 2020, at 2.00 PM JST. The release is available at Investing.com. The publication of the Japanese Economy Watchers Current Index is expected to have a low impact on the JPY.

In September 2020, the Japanese Economy Watchers Current Index was 49.3 compared to 43.9 in August 2020.

Let’s find out how this release impacted the JPY.

AUD/JPY: Before Japanese Economy Watchers Current Index Release on 
October 8, 2020, just before 2.00 PM JST

The AUD/JPY pair was trading in a weak uptrend before the publications of the Japanese Economy Watchers Current Index. The 20-period MA was merely slightly rising with candles forming just above it.

AUD/JPY: After Japanese Economy Watchers Current Index Release on 
October 8, 2020, at 2.00 PM JST

The pair formed a 5-minute “Doji” candles immediately after the publications of the index. Since the index showed pessimism in the Japanese economy, the JPY is expected to be weaker compared to the AUD. As expected, the pair subsequently traded in a renewed uptrend with the 20-period MA steeply rising and candles forming further above it.

Bottom Line

The article has shown the importance of the Economy Watchers Current Index in the Japanese economy. More so, the significance of the index has been evidenced by the price chart analysis. Note that although the index is usually a low-impact indicator. However, its significance is observed in the current coronavirus pandemic since it can be used as a leading indicator of economic recovery.

Categories
Forex Elliott Wave Forex Market Analysis

Is AUDUSD Turning Bearish?

In our previous technical analysis of the AUDUSD pair, we mentioned the potential corrective formation that was developing. In particular, we warned about the progress of an incomplete fourth wave of Minute degree identified in black, in which the pair was advancing on the wave (b) of Minutette degree in blue.

Technical Overview

As the previous chart shows, the price action seems moving in a mid-term sideways channel. This formation has been evolving since early September, when the price topped at 0.74134. In terms of the Elliott Wave theory, the figure shows the progression of a likely incomplete flat pattern (3-3-5).

In this context, the bearish rejection below September’s high of 0.74134 should confirm the end of wave (b), in blue, and the beginning of wave (c). Also, according to Elliott’s textbook, the coming wave (c) should follow an internal sequence subdivided into five waves.

The big picture of the AUDUSD pair currently reveals the gray box’s rejection suggested in our previous analysis. From here, the Aussie could start to decline in a five-wave sequence corresponding to the already mentioned wave (c) of Minuette degree, labeled in blue. 

Moreover, after wave (c) completes, the Australian currency should also end its wave ((iv)) of Minute degree in black and giving way to a new impulsive wave corresponding to the fifth wave of the same degree.

Short-term Technical Outlook

The AUDUSD price exposed in the next 2-hour chart reveals the completion of wave c of Subminuette degree identified in green, which topped at 0.74076 on November 30th, as the price action developed an ending diagonal pattern.

Once the price touched the psychological barrier of 0.74, the price began to decline, developing a breakdown below the baseline of the ending diagonal pattern, piercing the demand zone between 0.73492 and 1.73571, where the Aussie started a consolidation in the current trading session.

Considering that the pair started to consolidate, we expect an intraday sideways formation, likely a flag pattern. In this context, if the price breaks and closes below the baseline of this flag pattern, the AUDUSD could confirm the bearish continuation, which could make it drop to the next demand zone between 0.72654 and 0.72801.

Likewise, the price could extend its declines toward the next demand zone between 0.71449 and 0.71651. The movement, developed into a five-wave sequence, should complete the wave (c) of Minuette degree identified in blue, which, at the same time, could confirm the end of wave ((iv)) of Minute degree labeled in black, as we said earlier.

The invalidation level corresponding to this downward scenario is placed at the high of wave c, in green,  0.74076.

Categories
Forex Elliott Wave Forex Market Analysis Forex Signals

Is EURNZD Developing a Terminal Formation?

The EURNZD cross presents a downward sequence in its 12-hour chart that began on August 20th when the price found fresh sellers at 1.82238. This sequence formed three internal segments and, recently, is likely forming a reversal movement in the following trading sessions.

Technical Overview

The previous chart illustrates the bearish primary trend identified with the descending trendline, drawn in blue. Moreover, the secondary trend, plotted in green, reveals an aggressive decline that is happening since October 20th when the cross found resistance at 1.80212. But we see all that the EURNZD price seems to have found support on November 23rd on 1.69472. Currently, the price action appears consolidating in a narrow range between 1.69622 and 1.70645.

In Elliott Wave theory terms, the cross is advancing in an incomplete downward corrective sequence of Minute degree identified in black, which currently is drawing its wave ((c)). Likewise, its internal structure suggests the progress in the fifth wave of Minuette degree labeled in blue.

The following 2-hour chart reveals the EURNZD cross is moving mostly sideways following a descending wedge breakout, or in terms of the Elliott Wave theory, an ending diagonal breakout. 

Nevertheless, the bullish reversal is still unconfirmed as long as the cross keeps moving below the level of 1.70486.

Short-term Technical Outlook

The EURNZD cross shown in its 2-hour chart below presents a sideways movement below the pivot level of 1.70486, which could correspond to the fifth wave of Minuette degree, labeled in blue. 

Considering that the cross remains in a consolidation structure, there are two potential scenarios:

  • The first scenario occurs if the price action breaks and closes above the 1.70486 pivot level. In this case, the EURNZD could develop an upward movement. According to the Dow Theory, the cross should make an upward motion to the area between 1.73016 and 1.76560. Likewise, the invalidation level for this reversal scenario is seen on 1.69472, which corresponds to the low made on November 24th.
  • The second scenario calls for the price to drop and close below the 1.69472 level. If that happens, the cross could continue its decline toward the lows zone made in January, near the 1.6650 level. The price could find support and complete the wave ((c)) of Minute degree labeled in black. In this scenario, the invalidation level would be located above the last relevant swing high of 1.70961.

However, let’s remember that as long as the price doesn’t confirm any breakout, bullish, or bearish, the bias should be kept neutral.

Categories
Forex Fundamental Analysis

Does ‘Retail Sales Monitor’ (RSM) Economic Indicator Impacts The Forex Market?

Introduction

The level of demand can be said to be the primary driving factor in any economy. In the long run, the fiscal and monetary policies that are implemented by governments and central banks can be traced back to the aggregate demand within the economy. The consumption by households accounts for over 65% of the national GDP. Since retail sales account for most of the consumption by households, monitoring retail sales data can provide a useful predictor of the GDP and inflation.

Understanding Retail Sales Monitor

The Retail Sales Monitor is a precise measure of the performance in the retail sector. The RSM is measured monthly in the UK by the British Retail Consortium (BRC), whose participating members represent about 70% of the UK’s retail industry.

Source: The UK Office for National Statistics

The BRC is comprised of over 170 major retailers and thousands of independent retailers. The BRC member businesses have sales of over £180 billion and with 1.5 million employees. Since the RSM measures the change in the actual value of same-store sales in BRC-member retail outlets in the UK, the data can be used as a confident measure of the UK’s retail sector health and the broader economy.

In the UK, the retail sector is the largest employer in the private sector, which means that tracking the retail sector changes gives an overview of the economy and business cycles and insights into the labor market.

Using Retail Sales Monitor in Analysis

The RSM data couldn’t be more relevant in the current climate of Coronavirus afflicted economy and post-Brexit operating environment. Here are some of the ways this data can and is used for analysis.

In any economy, growth is driven by demand. Household purchases account for over 65% of the GDP, which makes the RSM data a vital leading indicator of economic health. When the retail sales monitor shows an increase in households’ consumption, it means that more money is circulating in the economy.

Several factors can be attributed to increased demand by households. Firstly, increased employment levels in the economy or an increase in real wages mean that the economy’s overall disposable income also increases. As a result, households can now consume more quantities of goods and services. More so, the increased disposable income tends to lead to the flourishing of discretionary consumer industries and a general rise in the aggregate demand.

An increase in aggregate supply leads to the expansion of production activities hence overall economic growth. Secondly, increased demand can be a sign of easy access to affordable funding by the households. Generally, if households and businesses have easy access to cheaper financing sources, it forebodes an increase in economic activities, which leads to economic expansion.

As an economic indicator, the retail sales monitor can be used as an authoritative leading indicator of recessions and recoveries since its data covers over 70% of the retail sector. For example, when the economy is at its peak, it is characterized by RSM’s historical highs and lower unemployment levels. When the RSM begins to drop consistently, this can be taken as a sign that the economy is undergoing a recession. The period of recession is characterized by an increase in the rate of unemployment and lower disposable income, which makes households cut back on their consumption and prioritize essential goods and services.

Source: Retail Economics

Conversely, when the economy is at its lowest during recessions or depressions, it is characterized by historical lows RSM and a higher unemployment rate. In this scenario, when the RSM begins to rise steadily, it could be taken as a sign that the economy is undergoing recovery. This period will be marked by improving labor market conditions hence increased demand that drives the RSM higher.

Using the RSM as a leading indicator of recessions and recoveries can help governments and central banks implement fiscal and monetary policies. When the RSM drops and shows signs that the economy could be headed for a recession, expansionary fiscal and monetary policies could be implemented. These policies will help to stimulate the economy and avoid depression.

On the other hand, when the RSM is continually rising at a faster rate, contractionary monetary and fiscal policies could be implemented. These policies are meant to mop up excess liquidity of the money supply and increase borrowing costs, thus avoiding an unsustainable rate of inflation and an overheating economy.

Impact on Currency

There are two main ways in which the RSM data can impact a country’s currency. By showing the economic growth and as an indicator for potential monetary and fiscal policies.

When the RSM has been steadily increasing, forex traders can anticipate that contractionary policies will be implemented to avoid unsustainable economic growth. One of such policies involves interest rate hikes, which make the currency appreciate relative to others. Conversely, expansionary monetary and fiscal policies can be anticipated in the event of a persistent drop in the RSM. Such policies include cutting interest rates, which depreciates the local currency.

The currency can be expected to be relatively stronger when the RSM is increasing. In this case, economic conditions are improving, unemployment levels are dropping, and a general improvement in households’ welfare. On the other hand, a dropping RSM is negative for the currency because it is seen as an indicator of a contracting economy and worsening labor conditions.

Sources of Data

In the UK, the RSM data is collated by the British Retail Consortium and KPMG. The data is published monthly by the British Retail Consortium.

How Retail Sales Monitor Data Release Affects Forex Price Charts

The recent publication of the retail sales monitor data was on October 12, 2020, at 11.00 PM GMT and accessed at Forex Factory.

The screengrab below from Forex Factory; as can be seen, a low impact on the GBP is expected when the RSM data is published.

In September 2020, the BRC increased by 6.1%. This change was greater than the 4.7% change recorded in August 2020 and higher than the analysts’ expectation of a 3.5% change. Theoretically, this positive RSM is expected to have a positive impact on the GBP.

Let’s see how this release impacted the GBP/USD forex charts.

EUR/USD: Before the Retail Sales Monitor Release on October 12, 2020, 
Just Before 11.00 PM GMT

Before the publication of the RSM data, the GBP/USD pair was trading in a neutral pattern. As shown by the 5-minute chart above, the 20-period MA had flattened with candles forming just around it.

EUR/USD: After the Retail Sales Monitor Release on October 12, 2020, 
at 11.00 PM GMT

The pair formed a 5-minute ‘Inverted Hammer’ candle after the RSM data publication. However, the release of the data did not have any noticeable impact on the pair. The GBP/USD pair continued trading in the previously observed neutral trend with the 20-period MA still flattened.

Bottom Line

Most forex traders tend to pay attention to the retail sales data, which is usually scheduled for ten days after the RSM publication. The retail sales data are considered to cover the entire economy hence the low-impact nature of the retail sales monitor as an indicator in the forex market.

Categories
Forex Elliott Wave Forex Market Analysis Forex Price Action Forex Technical Analysis

Is EURGBP Ready for a Fresh Rally?

In our latest EURGBP technical analysis, we commented on the cross moving in an incomplete sideways corrective formation of Minor degree, identified in green. Its internal structure suggested the completion of a double-three pattern of Minute degree.

Also, we saw the pierce and bounce of the September 03rd low at 0.8658, when EURGBP dropped to 0.88610, found fresh buyers there, and created an intraday impulsive move identified as the first wave of Minute degree, labeled in black.

As the next 4-hour chart shows, once the EURGBP cross completed its first wave, in black that belongs to wave C, in green, it reacted mostly bearish, developing a correction, extending the move below our forecasted area, and testing the lows of the previous bullish impulsive move.

The breakout of the short-term descending trendline confirmed the end of wave ((ii)) of Minute degree and the beginning of the third wave of the same degree, which remains in progress.

Likewise, in the last chart, we distinguish the advance of the third wave of Minuette degree identified in blue in its internal structure.

Short-term Technical Outlook

The short-term Elliott Wave view of the EURGBP cross, unveiled in the below 4-hour chart, reveals the breakout of the descending trendline that follows the wave ((ii)) identified in black, which suggests the beginning of a new rally.

Once the price found fresh buyers at 0.88998, the cross began to advance mostly bullish in an impulsive sequence of Minuette degree, identified in blue, that remains in progress. This upward move corresponds to the internal structural series of wave ((iii)) of Minute degree that belongs to wave C of Minor degree, in green.

Furthermore, considering the reduced period it took for the first stage of wave (iii) to complete, It is plausible that the third wave in progress will be the extended wave, as the Elliott Wave theory states that only one extended wave would occur in an impulsive structure. 

In this context, the current upward move could advance to the next supply zone between 0.90446 until 0.90686. But, if the cross maintains its bullish momentum, it could strike the next potential target zone between 0.91260 and 0.91464.

Finally, the current bullish scenario’s invalidation level is 0.88610, which corresponds to the origin of the wave C in green.

 

Categories
Forex Fundamental Analysis

Analysing The Impact Of ‘Wholesale Trade Sales’ On The Forex Market

Introduction

When it comes to households’ consumption, the retail sales data is usually considered the best leading indicator. Most people rarely have wholesale trade sales in mind. However, the importance of wholesale trade sales data should not be underestimated. Whenever retailers face an increase in demand by consumers, their next stop is to the wholesalers. Furthermore, when retailers anticipate increased demand, they stock up directly from wholesalers. Thus, wholesale trade sales data can be used as a leading indicator of retail sales and the overall demand in the economy.

Understanding  Wholesale Trade Sales

A wholesaler is a business whose core operations strictly involve selling to institutions, governments, or other businesses. A wholesaler rarely deals with the end consumer. Wholesalers usually conduct their businesses from warehouses and do not market their services to households. Their place in the supply chain is to provide retailers and vendors with goods.

As an economic indicator, the wholesale trade sales measures the monetary value of the inventories and sales made by registered wholesalers over a particular period.

How are the Wholesale Trade Sales Measured?

In the US, the Census Bureau conducts a sample survey to determine the national wholesale trade sales and publishes its findings in the ‘Monthly Wholesale Trade: Sales And Inventories’ report. This report contains end-of-month inventories, monthly sales, and inventories-to-sales ratios. These aspects of the reports are segmented by the type f business that the wholesale operates. Some of the wholesalers covered by the report include; jobbers or wholesale merchants, exporters and importers, and distributors of industrial goods. The report excludes agents who market products for mining firms, refineries, and manufacturers.

The samples contained in the monthly report are selected through the strata design, which is defined by the type of business sampled and the annual sales for the businesses. In this report, wholesalers of all sizes are included. It is updated quarterly to capture the changes in the sector.

Since the sampling method is used to create the final monthly report, the estimates on the inventories and sales are arrived at by the summation of the collected, weighted data. These estimates are then seasonally adjusted and benchmarked to the annual surveys. Note that the report is susceptible to sampling and non-sampling errors.

Using Wholesale Trade Sales for Analysis

The wholesale trade sales data can be used as a leading indicator of retail sales and consumer spending, estimated to drive up to 70% of the GDP.

Source: St. Louis FRED

The wholesale sector is an integral intermediary in the distribution of goods to the final consumer. Therefore, an increase in sales can be seen as an increase in demand by households. As an economic indicator, this increase could signal that the welfare of households is improving and they have more disposable income hence the increase in demand. The increased disposable income could result from increased employment levels in the economy or higher wages received by households. In either scenario, more money is circulating in the economy. It shows that the economy is expanding.

On the other hand, if the wholesale sales are continually decreasing, it could be considered a sign of depressed demand in the economy. The decrease in demand might be resulting from the lower circulation of money in the economy. An increase in unemployment levels or a decrease in household wages can be attributed to the depressed demand. In this instance, it shows that the economy is contracting.

Suppliers and manufacturers can also use wholesale sales data to determine their level of output to match the demand, hence avoid distorting the equilibrium prices. When wholesale trade sales are increasing, the manufacturers and producers will increase their output to match the level of demand in the economy. When the sales are increasing more than the inventories, producers, and manufacturers will have to scale up their production. Increasing production entails hiring more labor hence a decrease in the unemployment levels. This instance shows that the overall economy is expanding.

Conversely, when inventories are increasing more than the wholesale sales, it indicates that demand is falling. The producers and manufacturers will be forced to scale down their operations to avoid having excess supply than demand, which will distort the market prices. As a result, jobs will be lost in the economy making households worse off. Furthermore, corporate profits will b expected to take a hit.

Impact on Currency

Economic growth and the rate of inflation are the two ways wholesale trade sales data can impact the forex market.

An increase in wholesale sales shows that there is an increase in aggregate demand. In this case, the economy is poised to perform well in the coming months, with discretionary sectors flourishing. The increased demand drives the economic growth towards expansion, which might be accompanied by increased demand-driven inflation. Therefore, in the forex market, a sustained increase in wholesale trade sales can be seen as a potential trigger of contractionary monetary and fiscal policies. These policies are implemented to ensure that economic growth is within sustainable levels and the rate of inflation stays below the target rate. As a result, the currency appreciates relative to others.

Conversely, a continuous decline of the wholesale trade sales will lead to the depreciation of the currency. In the forex market, falling wholesale trade sales show a decline in the aggregate demand, which might result in deflation and, eventually, a stagnating economy. To prevent this from happening, governments and central banks might adopt expansionary fiscal and monetary policies. Although these policies are meant to stimulate the economy, they result in the depreciation of the currency.

Sources of Wholesale Trade Sales Data

The US Census Bureau publishes the monthly ‘Wholesale Trade: Sales And Inventories’ report. St. Louis FRED publishes a comprehensive historical coverage of wholesale trade sales in the US.

Source: St. Louis FRED

How Wholesale Trade Sales Data Release Affects The Forex Price Charts?

The US Census Bureau published the latest monthly ‘Wholesale Trade: Sales And Inventories’ report on October 9, 2020, at 10.00 AM EST. This released can be accessed at Investing.com. As shown by the screengrab below, low volatility is expected upon releasing the wholesale trade sales data.

In August 2020, wholesale trade sales grew by 1.4%. This growth was lower than the 4.8% growth recorded in July 2020 and lower than analysts’ expectation of a 2.0% growth.

Theoretically, this lower-than-expected growth should be negative for the USD.

Let’s see how this release impacted the EUR/USD forex charts.

EUR/USD: Before the Wholesale Trade Sales Data Release on October 9, 2020, 
Just Before 10.00 AM ET

The pair can be seen to be trading in a steady uptrend before the news release. The 20-period MA is steeply rising with candles forming above it.

EUR/USD: After the Wholesale Trade Sales Data Release on October 9, 2020, 
at 10.00 AM ET

After the news release, the EUR/USD pair formed a 15-minute bullish candle, as expected. This candle showed that the USD weakened against the EUR immediately, the worse than expected wholesale trade sales data was released. Subsequently, the pair continued trading in a renewed uptrend.

Bottom Line

Although the wholesale trade sales data is regarded as a low-impact economic indicator, it is significant in the current economy. The data can be used to show the rate of economic recovery after the coronavirus induced recession.

Categories
Forex Elliott Wave Forex Market Analysis

EURJPY Advances from Demand Zone Forecasted

In mid-November, we commented about the technical market context of the EURJPY cross, as its big picture displayed in its weekly chart revealed a technical formation identified as a triangle pattern, which continues progressing since mid-2014.

Moreover, our previous mid-term Elliott wave analysis in its 12-hour chart revealed the advance of an incomplete corrective structure of Minor degree, which currently advances in wave B in green.

In this regard, our main outlook anticipated the progress in its wave ((b)) of Minute degree identified in black. The internal structure also suggested a limited decline toward the demand zone between 122.951 and 122.317. Once reached, the price could have completed the internal wave (b) of Minuette degree labeled in blue. 

Once the cross completed its wave (b), in blue, the cross should begin its wave (c), in blue, with a potential target in the supply zone between 125.285 and 126.123.

Technical Outlook

Currently, the EURJPY cross in its 12-hour chart reveals the bounce from the previous demand zone forecasted, where the price began to advance in its wave (c) in blue.

In the previous chart, we distinguish wave (c)‘s upward progress, which should evolve in a five-wave sequence according to the Elliott Wave theory. The figure also shows the potential target zone between 125.285 and the psychological barrier of 126.

This price landscape brings us three potential scenarios for the current upward movement:

  • First scenario: The EURJPY cross reaches the supply zone between 125.285 and 126.123, completing its wave ((b)) in black, and the price starts to decline in an internal five-wave sequence corresponding to wave ((c)).
  • Second scenario: The cross’ short-term rally fails to surpass the end of wave (a), in blue, and begins to decline. This scenario should be indicative of strong bearish pressure.
  • Third scenario: EURJY price action surpasses the invalidation level located on 127.075. In this case, the cross could be creating a bullish breakout of the long-term triangle, suggesting the continuation of the long-term bullish trend.

Nevertheless, before placing any position on the bearish side or continue on the bullish side, the price action must confirm the end of wave ((b)) in black.

Categories
Forex Fundamental Analysis

Everything About ‘Business Investment’ Fundamental Forex Driver

Introduction

The economy is intricately woven. Although consumption accounts for about 70% of the GDP, this consumption wouldn’t be met if the supply was cut short. The point here is – all aspects of the economy are intertwined. Therefore, a change in one aspect of the economy is bound to influence the others significantly. In this article, we will see how investments by businesses influence the economy and how it impacts the forex market.

Understanding Business Investment

In the most basic sense, business investment is defined as spending money to acquire assets, start a business, or expand a business with the anticipation of making profits.

As an economic indicator, Business Investment’ represents the change in capital expenditure in the private sector. This expenditure is an inflation-adjusted value.

Source: Ernst & Young UK

In the UK, for example, business investment data is published quarterly. The data in this report is usually segregated depending on the asset type. These categories include; private sector business investment, investment in transport equipment, investment in ICT equipment and machinery, investment in buildings and structure, and investment in intellectual property products. Cultivated biological resources and the manufacture of weapons are included in the calculation. Note that the following are excluded from the calculation of the data in this report: expenditure on residential dwellings, expenditure on land and existing building, and the cost of ownership or transfer of non-produced assets.

In the calculation of the Business Investment’ in the UK, the data from the Annual Business Survey (ABS) is used to establish a benchmark on investment for various industries.

Using Business Investment in Analysis

As we mentioned earlier, business investment is part of the GDP and is also correlated with other economic aspects. The fact business investment data measures the value of the inflation-adjusted value of capital expenditure gives us a dependable ‘real’ figure of the economic activities over a specific period.

The primary effect of business investment will be on the labor market. When business investment increases, it could mean that new business ventures are being set up or the existing ones are being scaled up and expanded. In both instances, it means that more labor will be required. Remember that business investment encompasses investments made in any profit-making venture; it could be in agriculture, in the financial markets, or the informal sector. As a result, increased business investment lowers the rate of unemployment in the economy.

Furthermore, the increased production leads to the growth of output hence higher levels of GDP.

Source: Ernst & Young UK

Conversely, when business investment decreases, it could imply that economic activities are being scaled down. Scaling down operation implies that less labor will be needed. The result is an increase in unemployment levels. More so, scaling down operations implies low economic outputs hence lower levels of GDP.

Business investment goes hand in hand with the level of demand in the economy. Business investment can be said to be responding to levels of demand. Therefore, when business investment increases, it means that there is a higher demand in the economy. By itself, the increased demand means that other aspects of the economy, such as the labor market, are performing well. On the other hand, decreasing business investment means that demand is falling. Demand Reduction is synonymous to a contracting economy.

The business investment data can also be used to analyze the business cycles and, as a result, help in forecasting recessions and recoveries in the economy. Using historical data on business investment, we can establish a pattern. This pattern will show us periods when business investments were slowing down, when they were stagnating, and when they were rapidly increasing. Naturally, periods when business investments are increasing can be regarded as the expansion stage. The recession stage is characterized by a continuous fall in business investments. When business investments have stagnated, this period could be considered the peak of the business cycle.

In predicting recessions and recoveries, let’s use the example of the coronavirus pandemic. Towards the end of the first quarter of 2020, business investments dropped continuously. The continuous drop in business investment was because investors anticipated the demand in the economy to be severely depressed, especially in the consumer discretion industry. While other sectors of the economy saw some increased investments, most sectors experienced a drastic reduction in business investments. The primary goal when making any investment is to earn profits. In this instance, due to the social distancing rules, massive losses were forecasted across the economy. As a result, business investment reduced as investors looked to reduce their exposure to a contracting economy.

At the beginning of the third quarter of 2020, business investment started increasing. This period signified the beginning of economic recovery from the coronavirus-induced recession. The recovery was prompted by a host of expansionary monetary and fiscal policies implemented by governments and central banks. These policies included lowering interest rates and offering economic stimulus packages of trillions of dollars. These policies signified the revival of the economy to the private sector, hence the increase in business investment.

Impact of Business Investment on Currency

In the forex market, the level of business investment can be used to foretell the policy actions of governments and central banks.

In any economy, the private sector is the single largest employer. Therefore, when the business investment is continuously falling, it can be anticipated that the labor market conditions will worsen, and demand in the economy will be severely depressed. This scenario may trigger expansionary fiscal and monetary policies to stimulate the economy and avoid a recession. Such policies make the domestic currency depreciate relative to others.

Conversely, the currency will appreciate when business investment increases. This increase can sign that the economy is performing well with an increase in the money supply. Contractionary monetary and fiscal policies may be implemented to avoid runaway inflation and prevent the economy from overheating. These policies make the domestic currency appreciate.

Sources of Data

In the UK, the Office for National Statistics publishes the quarterly business investment data. Trading Economics has in-depth and historical data on the UK business investment. It also publishes data on global business investment.

How Business Investment Data Release Affects The Forex Price Charts?

The most recent publication of the UK’s business investment data was on September 30, 2020, at 6.00 AM GMT. The release can be accessed from Investing.com. Moderate volatility is to be expected on the GBP when the data is released.

In the second quarter of 2020, business investment in the UK decreased by 26.5%, which was better than the -31.4% expected by analysts.

Let’s see how this release impacted the EUR/GBP pair.

EUR/GBP: Before the Business Investment Data Release on September 30, 2020, 
just before 6.00 AM GMT

The EUR/GBP pair was trading in a weak uptrend before the publication of the UK business investment data. As shown in the above 15-minute chart, candles are forming just above the 20-period MA.

EUR/GBP: After the Business Investment Data Release on September 30, 2020,
at 6.00 AM GMT

The pair formed a 15-minuted bearish ‘Doji’ candle after the news release. Subsequently, the pair adopted a bearish trend.

Bottom Line

While business investment is a significant indicator in the forex market, we may not entirely know the extent of its impact on the GBP. This is because its publication is scheduled at the same time as the GDP – which is a high-impact economic indicator.

Categories
Forex Elliott Wave Forex Market Analysis Forex Technical Analysis

AUDNZD: Potential Bounce among Overall Weakness

This analysis discusses AUDUSD’s overall Elliott Structure, the likelihood of a short bounce in the AUDUSD, and its potential continuation.

Technical Overview

In our last AUDNZD technical analysis, the Oceanic cross was moving in an incomplete complex corrective sequence corresponding to wave (c) of Minuette degree labeled in blue, which belongs to wave ((y)) of Minute degree identified in black. 

As illustrated in the following 8-hour chart corresponding to our previous mid-November analysis, we commented on the broadening corrective formation the cross develops, which implies an acceleration of the downward sequence. Also, the move that pierced below the wave (a) in blue suggested further declines in the following trading sessions.

Likewise, we observed the potential bearish reaction areas for the decline until two potential demand zones. The first one located between 1.05186 and 1.04870, and the second one bounded between 1.03511 and 1.02864.

On the other hand, according to the Elliott wave theory, a complex corrective formation as a double-three pattern follows an internal sequence subdivided into 3-3-3, where each “three” corresponds to a single complete corrective wave.

Once completed, the current corrective structural series of wave 2 or B of Minor degree, the AUDNZD cross should give way to the start wave 3 or C, in green.

Technical Outlook

The AUDNZD cross in the next 8-hour chart exposes the price action advancing in its wave iii of Subminuette degree labeled in green, which belongs to the incomplete wave (c) of Minuette degree identified in blue. 

Considering the acceleration present in wave (c), the cross could develop an internal upward corrective movement corresponding to wave iv, in green. This move could find resistance in the adjacent supply zone between 1.0457 and 1.05603, where the cross could resume its downward movement, leading it to complete the wave ((y)) of Minute degree and, in consequence, wave 2 or B, in green. 

Once the current downward sequence finishes, the Oceanic cross will be ready for a new long-term rally corresponding to wave 3 or C, in green, which according to the Elliott wave theory, should be the largest wave of the impulsive sequence.

Finally, the invalidation level for the short-term bearish scenario is found at 1.07029, above the end of wave ii in green.

 

Categories
Forex Elliott Wave Forex Market Analysis

Beware of these Supply and Demand Zones on the GBPJPY

The short-term overview for the GBPJPY pair reveals the sideways movement in a trading range bounded by its 90-day high and low range between levels of 133.040 and 142.714. The cross recently developed a rally that found resistance in the bullish sentiment zone resistance located on 140.296, where the GBPJPY presents a set of scenarios.

Technical Overview

The following 12-hour chart illustrates the short-term market participants’ sentiment bounded by the 90-day high and low range. The figure presents a bullish bias that remains active since the GBPJPY found fresh buyers on 133.040.

After the cross found resistance at 140.296, the price action retraced it until a neutral zone located on 137.877, forming an intraday sideways channel that suggests a pause in the short-term bullish cycle.

On the other hand, the following figure unveils that the retail traders’ market sentiment is positioned on the bearish side. As the chart shows, 75% of retail traders hold their positioning on the sell-side, which is contrarian.

(source: myfxbook.com)

In this context, we can see that numerous retail traders are expecting a downward movement, while the price action remains moving in the bullish sentiment without exposing a reversal pattern. Thus, it is plausible the GBPJPY pair could develop a new upward movement.

Short-term Technical Outlook

The short-term Elliott Wave view shows a movement inside an incomplete corrective wave of Minor degree, labeled in green, which could be in its wave C

The following chart shows the price action developing an upward corrective rally, which could correspond to a wave (ii) or (b) of Minute degree identified in green. In this context, the following movement should correspond to wave (iii) or (c).

Under this scenario, if the supply zone between 139.831 and 140.315 confirms the end of the current second segment, in blue, GBPJPY should begin a decline to the first demand zone between 137.594 and 137.196. Moreover, the market action could extend its down move toward the next demand zone between 134.997 and 134.404.

An alternative scenario considers the possibility of the price extending its advance beyond the 140.315 level. In this case, the GBPJPY could find fresh sellers in the next supply zone between 141.759 and 142.714. The pair could complete its wave B in green and start to weaken, developing the wave C subdivided into a five-wave sequence with a potential target in the demand zones identified in green.

Finally, the invalidation level of the bearish scenario is set above the origin of wave A in green at 142.714