This is a Guest Post by Tom Cleveland from ForexCharts.net
Financial Markets are Tense, But the Fate of the Euro Hangs in the Balance
Financial markets are presently in a “stuck place”. Nearly every index from stocks to commodities and even to currencies has been hovering in a tight trading range for the past several weeks. Traders have been frustrated, as volatility has also remained low. There is opportunity in chaos, but not when prices are jerked back and forth in “whip-saw” like movements. Treading in these waters often results in being sliced to ribbons in a heartbeat.
Ranging markets, however, eventually morph into meaningful trends. The timing is the only issue to resolve, and, in circumstances like these, the best approach tends to be to take a longer-term outlook and try to draw insights from this broader perspective. This type of analysis combines basic fundamentals with technical data to form a basis for projecting near-term prospects. The “EUR USD” currency pair has become the current focal point for the trading community. Its fate will dictate the direction for stocks, instead of the other way around, but it presently floats at levels that seem to defy gravity.
The following diagram of the Euro versus the Greenback paints the recent “picture” for our analysis:
The hourly pricing behavior of the “EUR/USD” is presented for the past ten months, together with several indicators and other technical information. The “Ichimoku Kinko Hyo” indicator system is often helpful at longer timeframes where “noise” levels are lower and pricing patterns are more predictable. The “Kumo Cloud”, represented by the Aqua/Blue shaded regions on the chart, is the most distinctive aspect of this system.
Here are a few technical insights from the above diagram:
The Euro has been trending downward for months within a defined channel, depicted by the parallel red lines;
The Euro, to the consternation of all, has rebounded from the lower trend channel line on two occasions during this period. The explanation for this source of strength has been threefold. Foreign exchange reserve managers around the world have shifted their portfolio allocation back to Euros after the crisis was reduced. Central banks have also stepped in to ensure adequate liquidity in the region. Lastly, banks and corporations have repatriated foreign earnings to prepare for the oncoming recession in the region;
A pronounced “Head-and-Shoulders” pattern has recently formed, but the “neckline” has been tested on several occasions to no avail. Traders would expect an abrupt fall down to the $1.24 level based on this pattern alone;
The “Ichimoku” indicator speaks to two issues. The “Kumo Cloud” has mirrored the upper trend channel line, and the Euro has had difficulty each time it has attempted to penetrate the cloud. Secondly, all moving averages and current prices have converged within the cloud, uncertain as to their next move.
Basic software trading platforms provided by currency brokers can be used to create this same analytical picture. From a fundamental perspective, Europe is headed for another business downturn. Bond yields for weaker member states are rising. Iran is adding uncertainty to the oil market. China is ratcheting back its growth in response to less demand from the West. Lastly, the U.S. recovery appears to be losing steam and bringing back memories of last year’s failed recovery rally, but the possibility of a “QE3” program from the Fed has bolstered the strength of all currencies versus the Dollar.
All signs point south for the Euro. Currency experts have forecasted its fall for months, some down as far as parity. Its gravity-defying act will have to conclude at some point. The question is not “if?” but “when?” Only time will tell.
Pivot Points are an incredibly useful online forex trading technique. A recent trade of mine yielded a 126 pip profit in only 50 hours, which grew my entire trading account by 10.04%, which is exceptional for 20-30 minutes worth of work!
Why Forex Pivot Points?
Pivot Points are one of the most commonly used methods of online forex trading. The pivot point takes the High, Low, & Closeprices from yesterday and generates Support & Resistance target prices.
Forex Pivot Points are uncannily accurate when combined with the right directional entry strategy. In the example below you’ll notice the predictive nature of forex pivot points for online forex trading success.
While the trade below could have been an excellent Sail, it also would have required a stop of several hundred pips, which would have violated the money management system followed by the LIVE Forex Training class.
For this reason, I used pivot points to capture a shorter term profit of 126 pips in 2 days. Here’s how the trade unfolded.
EUR/USD Daily Trend Moves Down
From Forex Sailing we had a forex umbrella handle form after breaking a longer uptrend on the daily chart for the EUR/USD. I’ve labeled the fibonacci wave with the key points of I, II, II on the daily chart below:
In the chart shot above notice how there is good separation of the EMAs and how the MACD is increasingly negative as prices make new lows. This is a strong signal that prices will continue moving down for several days. We also moved past II, which means we should move to a lower low to reach IV.
To confirm this direction I also looked at smaller timeframes, which lined up nicely as well to indicate downward movement. As indicated on this 4 hour chart below:
In this chart we also had nice EMA separation, and an increasingly negative MACD. While there was a fair amount of divergence, the trend direction was still downward. But a large enough stop was needed to make sure the divergence didn’t retrace too much before the trend continued.
The 15 min chart below also indicated a downward moving trend:
As newer lows were made we maintained a widening of the EMA, we also maintained strong negative MACD divergence as new lows were made.
Downtrend Confirmed -> Let’s Trade
With a downtrend confirmed on these timeframes, it was time to look at our pivot points for good stop/limit prices. For the entry price I used a price close to the pivot and found a EMA/MACD divergence on a 5 min chart.
Initially I set the following trade parameters:
Entry: 1.3397 short
This gave us a good reward/risk ratio of 82%. We were below the pivot price of 1.3453, so the stop was less likely to be hit than our limit. This initial trade would have netted 123 pips profit.
24 Hour Adjustment
The next day the pivot points were recalculated because the trade was still in progress.
Entry: 1.3397 short
This reduced our risk to only 14 pips, and increased our profit 3 pips from 123 to 126 pips. The next day the trade was exited for a profit. Here’s the picture of what happened during the life of this trade on the hourly chart:
You can see the entry price of 1.3397 (red line). You can see the price at which the limit was hit 50 hours later at 1.3271 (blue line). The stop isn’t included on this chart because that price was never approached
As you can see the price consolidated a bit, but moved downward overall. We managed to get in near the top of this price movement and captured a 126 pip profit in only 50 hours.
There’s stuff that forex charts will teach you that I simply can’t. So I have a simple challenge for you this week…
Watch 3 Currency Pairs This Week
I’ve selected three currency pairs for you to watch. The exercise is very simple.
Step One: Fire up a Forex Chart. If you’d like a great free chart, use the free netdania chart from dailyfx.com. This chart is great because it has all the basic tools and you can just go there with your browser. No account needed.
Step Two: Open up a window for each of these three currency pairs: EUR/USD, GBP/JPY and AUD/CHF. I chose these three currency pairs because they contain 6 different currencies. This way you’re guaranteed to see three different, completely unrelated chart patterns.
Step Three: Draw trendlines on Daily, 4-hr and 1-hr charts.
Step Four: Watch what happens. 2-5+ times a day look at these charts. Keep the same trendlines that you originally draw. In your head form a guess as to what might happen. To think like a trader, you’ll want to guess several different “what if” scenarios.
Don’t Skip This Because It’s Simple
I know you’re thinking that this is a little too simple.But hear me out...
Depending on your level of experience, you may be trying “too hard” to be right!
A beginner doesn’t know what to do. Before even trying to make trading decisions, JUST WATCH THE CHARTS!
Watch the live charts to see what happens. Just be curious as if you were watching an ongoing sports game. You don’t have to be right or wrong, just be curious.
You’re never going to be a successful forex trader online unless you get used to looking at forex charts often. Why not take your time and just get a good feel for the charts?
This is also a great time to look for the patterns you’ve been learning about.
Forex Chart Exercise Video
Watch the video below to see how to go through your forex charts and “what you should do” to set them up