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Trending Days in Currency Trading

Over the past two days I’ve been explaining “trading days” in the foreign currency exchange. Today I’m going to explain the procedure for attempting currency trading on “trending days.”

Trending days, in contrast, are characterized by the following external events and conditions:

1. A fundamental announcement is released during the session.
2. Price movement is aggressive (fast).
3. Market movement (volatility) during the session creates large trading ranges of 120 to 300 pips.
4. Prices don’t close near the session’s opening price.
5. Price movement during the session creates an uptrend or a downtrend.

Currency Trading on a Trending Day

If you plan to day trade currencies on the trending day, cancel and replace on a 30-minute forex chart. There are two currency trading strategies on a trending day: the first is to trade the straddle (when the session’s fundamental announcement is preceded by consolidation).

The second is to trade a convergence (when the session’s fundamental announcement is not preceded by consolidation). Refer to our earlier discussion of trading the straddle for the why’s and how’s of that type of trade.

Trading a convergence on a trending day is similar to trading a convergence on a trading day (except that you will not see the formation of a bell curve on a trending day).

Begin at the anticipated release of the fundamental announcement – that’s where you will expect that market to break into a downtrend or an uptrend. Look for consolidation to make sure that you should not be trading a straddle – if there is no consolidation, you’ll trade the convergence. Draw your inner, outer, and long-term outer trendlines.

Next set your Fibonacci lines based on the latest price swing. Based on your trendlines and your Fibonacci numbers, do you see a possible convergence? If equity management allows, trade the convergence in the direction of the trend.

If the fundamental announcement reverses the current trend, your losses will be confined to the distance between your entry and  stop loss order. In addition to using the trendline and Fibonacci numbers to set up your trade, you can also use your technical indicators (MA crossover, MACD, etc.) to help you anticipate the market’s movement.

Rules for Currency Trading on a Trending Day

The general rules for currency trading a convergence on a trending day are:

1. Locate the point at which the fundamental announcement will be released. Plan to create your market order 15 minutes prior to the fundamental announcement.
2. If there is a fundamental announcement planned for the trading session, but the market is not in consolidation prior to that announcement, you’ll trade a convergence (if the market is in consolidation prior to the announcement, you’ll trade a straddle, described earlier).
3. Find and draw all your trendlines (inner, outer, and long-term outer). This will help you determine if the market is trending up or down, or if a trendline has been broken.
4. Locate the price at which you anticipate the market will bounce (at the trendline and/or one of the Fibonacci numbers). If the anticipated trendline bounce and Fibonacci bounce are located at the same price, you will trade a convergence. 15 minutes before the fundamental announcement is released, place an order to buy or sell the convergence in the direction of the trend.
5. Find the last level of support or resistance to determine where to place your stop loss order.
6. Practice sound equity management. If you can’t afford the potential loss (the loss you would incur should the market reach your stop loss order), don’t make the trade.
7. Create a trading plan. Trade the plan.

By understanding the market’s likely movement on a currency trading day and on a trending day, you can prepare yourself to make more solid, predictable trades.

The principles you use to make your trades are largely the same no matter what kind of session you’re in (e.g. trading a trendline bounce, Fibonacci bounce, a convergence, a candle formation, or technical indicator) but having an idea of whether the market is going to move slowly, closing near the open or move aggressively downward or upward can help you immensely in making consistently profitable trades.

Posted in Fundamental Announcements

Valuable Forex Information | Fundamental Announcements

Fundamental announcements are important pieces of forex information because they affect forex prices significantly (often preceded by a tight sideways consolidation in forex charts as forex traders wait for the fundamental announcement).

To monitor forex fundamental announcements, I use the free forex economic calendar at fx360.

A fundamental announcement is a report released by a country to announce its recent economic performance. This is important forex information for trading. There are about 14 different reports that the major Forex players release to describe the economic situation in their countries.

Fundamental announcements reveal the relative strengths of a country’s performance in a variety of areas and can shift the value of that country’s currency.

Fundamental announcements, therefore, are the main reasons for large price swings and breakouts in the currency market.

Each country has a wide variety of forex information it releases in its fundamental announcements.

Some examples of the most widely released forex information are:

1. GDP (Gross Domestic Product): The total amount (expressed in dollars) of the goods and services produced in the country. GDP includes goods and services produced by private industry as well as goods and services produced by public industry. GDP is usually expressed in real terms (that is, prices are indexed relative to some year in the past such that GDP does not also include inflation).
2. CPI (Consumer Price Index): The CPI reflects the relative price of certain consumer items like food, clothing, housing, transportation, and energy. It is indexed to provide a measure of today’s prices compared to prices at some other time (e.g. 1983 or 2000).
3. PPI (Producer Price Index): The PPI reflects the relative price of certain items used by producers in the production process. The PPI includes such items as raw materials and energy. Like the CPI, the PPI is indexed to provide a measure of today’s prices compared to prices at some other time (e.g. 1983 or 2000).
4. Unemployment rate: The unemployment rate is calculated by dividing the total number of persons seeking employment by the total number of persons who are employed. The unemployment rate reflects the percentage of people who want jobs (and are actively seeking jobs) but are jobless.
5. Personal income: The amount of money that all of the persons of the country made in income. Per capita personal income, another measure, is the total amount of income received divided by the number of persons in the country. Like GDP, personal income is usually expressed in real terms (that is, dollars are indexed relative to some year in the past such that personal income does not also include inflation).
6. Consumer spending: The amount of money that all of the persons of the country spent (the amount of income that was spent on consumer goods such as food, clothing, housing, luxury items, etc.). Like GDP and personal income, consumer spending is usually expressed in real terms (that is, dollars are indexed relative to some year in the past such that consumer spending does not also include inflation).

Other forex information released in a fundamental announcement includes industrial production, capacity utilization, retail sales, money supply, current account balance (the balance in a country’s international trade account), and government deficits.

Not all fundamental announcements, however, move forex prices. If the fundamental announcement does not reveal any new forex information about the country’s economic performance, then the value of that country’s currency will likely not change. In this case prices would not break out of the consolidation, but rather would slowly return to the previous trend.

When a fundamental announcement from a previous trading session moved the market to a new price and the new fundamental announcement is only repeating that price move, then the market will likely not respond to the fundamental announcement with a break out. In either case, prices would likely continue to move in the direction of the trend that existed prior to the consolidation.

Posted in Fundamental Announcements

Consolidation in Forex Charts

It’s important to notice when prices are moving sideways in forex price charts. When this happens, you’ll want to use different rules for trading forex.

The market is always moving relative to time on forex charts.

It can move in three directions: upward, downward, and sideways.  If the market is moving upward or downward it is trending and if it is moving sideways it may be in consolidation.

Consolidation (also referred to as accumulation, bracketing, or sideways movement) occurs when prices establish a tight trading range create somewhat equal levels of support and resistance (that is, the support and resistance lines are roughly flat and parallel to each other).

To qualify as consolidation prices must be moving horizontally in a tight trading range (20-60 pips between the high and the low of the given trading period) for 6 hours or more.  Each forex chart has its own overall trading range, while consolidation ranges can exist within that forex chart.

Forex Price Consolidation

Consolidation usually (but not always) occurs right before a major breakout.  There are two key reasons why the market would be in consolidation: first, forex prices on the charts have reached the value that traders are willing to pay (not more, not less).

In this case the game between the bulls and the bears is tied up.  As in any game, however, one team will pull out ahead again eventually.  The second reason why the market would be in consolidation is that traders are not trading, because they’re waiting for a fundamental announcement.

In my next blog post, I’ll describe the basics of forex fundamental announcements. Understanding what to look for and what to avoid in forex fundamental announcements is a valuable skill to have when looking at forex charts and trading the forex market online!

Posted in Forex Basics