Brilliant market selling to end the week and month
The rollercoaster market that we forexers crave returned this week and the putrid whiff of fear is again wafting through both Wall Street and Main Street. The big news of the week was released yesterday with the US Gross Domestic Product release at 0830am, spawning a fresh load of buying and pushing the Dow up 199 points, the GDP data did slightly surprise to the upside to 3.5%. This after three days of a moderate slide in stocks, and continued dollar weakness. After yesterday, traders were excited that price action would likely continue up and up, at least for a time. Friday brought in the sellers. The important level to watch is 2712 on the Dow, which was September’s close. But with the -250ish point fall, the monthly Dow candle will be quite a nice wick and doji. Why all the selling today? Could be the consumer data today showing spending fell in September now that Cash for Clunkers in finished. This may be the beginning of truth coming out in the numbers as the economic stimulus wears, afterall jobless rate continues high and people here just cannot sustain the go-go-go spending that kept the US humming for so long. The jobless data next Friday will be big, either way. Question is, was today’s selling only end of month profit taking or the beginning of something much bigger? Meanwhile, I was happy to snag about 100 pips on the GBPJPY today, selling. Here is something to consider: The daily GBPJPY certainly points to further downside, but even with today’s action the weekly GBPJPY is still neutral to buy. Check it out: The 5ema has crossed the 8sma back down on the daily chart, indicating further selling. But the 5ema crossed the 8sma upward last week on the weekly chart and will close this week firmly in control. Lets see if we can get a drop to the 146 region to begin buying this pair again, near the 61% retracement, looking for a return to 155.00 and maybe even 162.00 level. Good luck.
Weekly GBPJPY chart
Stress free New York session: avoiding econ news trades
It is often said that patience is the hardest thing to master for traders, but it is truly your ace in the hole to wait for the right entry and then wait some more for your profit target to be reached. As I have mentioned, I am an intraday forex trader: I get up around 06:30am New York time to start my trading day. I am rarely in overnight trades. I decided early in my trading career that patience was hard for me, so the quicker intraday trades made more sense for my style. But the noise associated with the smaller time frames of intraday trading, especially around economic news releases can be stressful and easier to make mistakes. My favorite days to trade the New York session are when there is little or no economic news releases scheduled. When there is no news to move the market, then the market looks more to the overall technical bias for its direction. Mondays are typically non econ release days, and since it is the start of the week, it is a good bet that the previous week’s bias will continue on a Monday. On average there are two days during any given week that will not contain economic news during the New York session. I can usually pick off about 50 pips on each of those days on the GBPJPY trading the prevailing trend. If you can have the patience to not trade unless it is a non news day, averaging 100 pips per week ain’t bad. I went back and reviewed my non news day trades for the past 3 months and I have shown 94% profitable trades just on those. Remember, this thing of forex trading is not a sprint, but a marathon of patience and emotion-free execution of your strategy. Taking some stress out of the mix could certainly help to keep you on track and avoid the noise of the news. Good trading!
Trading naked
Ever hear about naked trading? It ain’t what it sounds like. “Naked” trading is the medthod of using candlestick price charts without all the indicators: no MACD, no or very few moving averages, no stochastics, just price — pure and simple. Price is king, and when you have the courage to take all the flim flam of indicators away you can actually see what is occurring to price much easier. Afterall, technical indicators are all lagging indicators, and while they can help the trader in different ways, if you can dumb down your charts to the bare minimums, life and trading can actually get easier, especially for beginners, because many tech indicators can confuse the situation. When I trade naked, eh hum, I still plot my trendlines. Trendlines are my most important thing to have on the charts, price is attracted and repelled by these lines, perfect for entries and exits. Trading naked really forces the trader to learn what the candlestick patterns are telling him, since there isn’t much else to look at. Attached is a 5minute USDJPY chart that I trading this evening during Asia open. USDJPY remains in a very strong down trend for months now, important to know the overall trend before drilling down to less than a 1 hour chart. As the Asia session got going, it is easy to see how price respected this minor supporting trendline for many candles, about an hour. I waited for a break of this line to enter a short trade on this pair. This was a very typical break, then retrace up, then break and break of the last low. Entry was at 89.40 and a stop placed above this line at 89.60. In just 30 minutes I was able to book 30 pips. I like to look for wicks to confirm hesitations in price. Here is a great site to hone your candlestick pattern skills at www.babypips.com. Good trading.
Volatility is back
This week has seens some spectacular moves in most currency pairs, with important levels being broken left and right. Awesome trading if you are in on the right side of the trade. The GBPJPY, for example, finally hit my long term down side target at 148.50, 261% extension of the high at 162.50 to recent low at 155.00. It also worked out to be target of the head and shoulders pattern on the daily chart, it is so sweet when everything works. Now with today’s huge move to the final target, I have entered a long trade at 147.13, expecting a decent retracement. Technically, this pair has moved down about 1000 pips without much retracement, so it is likely to get one. I especially like to see price action on the daily chart with the entire candle outside of the Bollinger band, and this candle never had a chance to touch the daily 5ema. This pair is itching for a retracement. This type of contra trade (against the trend) can be extremely risky, but the odds are in my favor. This same set up is evident on the GBPUSD. Attached is the daily chart for the GBPUSD. A major up trendline is just below price here at 1.5800. It is certainly likely that price will eventually come down to touch this trendline, but I am betting that it will need to retrace first, to about 1.6150, before heading down there. To be safer, wait for price to reach this area then short it. Good luck.
End of the month and quarter: confidence reigns
It is hard to believe that 2009 is half over today! For those of us who have been “the glass is half empty” because of the recession/depression/economy gone bad, maybe the second half will be better. But for intraday forex traders, this market has actually been quite nice for making consistent pips, especially this second quarter. Typically I pull in about +200 pips per week, but my average has actually increased to almost +250 per week in the past few weeks. The thing with forex trading, as soon as you start to celebrate your wins, you may get knocked down a few notches with some losses, but so far so good. In June my average weekly winning percentage actually decreased from 82% to 79% winning trades, but my losses have been lower, therefore my overall pip intakes has increased. Pretty cool. I guess I am quite a geek for being so interested in the statistics of forex trading, but truly it is just as important to track all of that each and every week, as it is to actually do the trading. The reason: it will improve your confidence immensely in order to properly act at each trade opportunity rather than second guess yourself. I “feel” better about entering a trade when I have my trade entry confirmation when I know that they past 4 weeks I have seen 80% of these exact trades do win. It makes me sweat less. Along with the confidence of consistent trading, tracking the stats week in and week out will help you determine best days of the week to trade, best times of the month and year to trade. These markets are so cyclical. I have mentioned before in another post that during different times of the year the New York session is good and easy trading, while other times the Asia and/or London are much better and smoother. One way to track your weekly/monthly/yearly trading performance is to track your profit factor. Profit factor is your Gross Profit divided by your Gross Losses. For example: if you make 10 trades in June and 7 are profitable for $15,500, and 3 are losers for $4,100, your profit factor is $15,500/$4,100 or 3.78. The goal is to keep your profit factor consistently about the same, and definitely above a 1.0 profit factor, which is break even. It will make you feel pretty good when you master your trading strategy each month with a consistent profit factor, and the cash you made will make you feel pretty good too. July here we come!
Summer trading volume means $$$
It is summertime. Stock traders often say “sell in May and go away”, betting on the light trading volume that summer brings to slowly grind stock indices down over the slow summer months. But not so for day trading currency traders, who can be raking in the big pips and big bucks if they play their cards right. Here’s some tips for light summer volume forex trading to keep the summer blahs away:
1. Range trading is king. With light volume often comes less ability for market makers to move currency pairs much outside their current ranges. But this is not 100%, if there are less players in the market, then it will also take less players to move the market. Moves can be sharp, so you have to be quick on the draw. Typically currency pairs will move in beautiful wide swings, perfect for day traders or swing traders.
2. Use your fibonacci tool. For some reason the fib tool extensions seem to work even more precisely during the summer, maybe because the big money institutional traders are out of the market (they are all at the Hamptons), so us little traders can push a pair exactly to where we want it to go. I enjoy fibbing the most recent 2 or 3 hour range ending at 7 am EST and then taking the trade to the 261% fib extension.
3. It is summer, take your profit then go to the beach. For intraday trading, my trade target is usually hit within 2-3 hours. If I can be in the money by the time London closes at 11am EST, then I take the profit and shut it down. Why waist more time waiting for the next trade set up when you can outside enjoying summer? Take the money and run. Tomorrow is another day.
Summertime is perfect for intraday and swing traders to rake in the big pips, due to the typical large swings that currency pairs are making. Just be sure to be on the right side of the market’s current move and you can easily make +100 pips per day. Rake it in now during the easy months before the big money traders come back into this market and mess everything up! Good trading.
Riding the 5ema
I like to use the 5ema on the daily chart to determine my bias at the beginning of my trading day. Since lately I have been using the GBPJPY for my intraday trading, I have included my daily chart with the 5ema in red. It is a fair assumption that if the daily candle closes above the 5ema, it is likely to continue moving up for the next day. Conversely, a close of the daily candle below the 5ema would signal the likelihood that the next day’s price action would also move down. This very simple method of determining direction is not 100%, but in my experience it does work about 80% of the time. Last week was a spectacular week on this pair for intraday trading. The white arrow shows Monday’s price action, crossing from bottom to top over the 5ema. My bias on this pair was DOWN on Monday, since Friday’s close was below the 5ema. So on Monday morning I looked for a good entry for a short and entered, but quickly price ran against me and I closed my trade for -52 pips. But with Monday’s candle closing above the 5ema, my bias then turned to upside. In fact all of my trades on this pair remained with a buy bias, and I made about +100 pips on each trade, 4 days in a row. Not too shabby. The key to this method of finding trade direction bias is to just look at the daily close in relation to the 5ema. Do not let the wicking price action during the day trick you into a contrary trade. This happened several times last week where price fell back down, reaching below the daily 5ema but only to actually end the day back above the 5ema level, signaling a continuation in the upside bias. Taking profit on this type of trading is up to you. For me, a cool 50-100 pips per trade is perfectly good. I like to look for entries at the hourly 20sma or the bottom bollinger band if I am upward biased. This way my stop loss can be placed just 40 pips below that, a good risk/reward trade. Good trading!
USDJPY: brilliant week
After pointing out the two head & shoulders patterns last Friday, the USDJPY tested the neckline of the smaller inverse pattern after NFP last Friday and never hesitated, falling all week this week to break the larger head & shoulders pattern neckline near 96.50. Attached is the daily chart of this pair, with the obvious pattern in view, neckline is in blue. The nearly 400 pip move this week is surely a precursor of what is to come in the coming weeks. Since the neckline of this larger head & shoulders pattern broke, I am expecting further downside, potentially all the way to 89.60 area. The new dotted white lines outline a new down trend channel that has also emerged. Any price pop ups should be good for selling into, as long as this new down channel upper line holds. In fact, with large patterns like this one, and such a large move this week, I would not be surprised if this pair continues its fall without much retracement at all. Target for the pattern points to 89.60 area. Only price above the newly formed down channel would make me reconsider shorts.
The dollar/yen technical dilemma
There are several forces that are pulling and pushing on the USDJPY as is evidenced by the daily chart attached. A large head and shoulders pattern, in pink, has been slowly developing since the breakout of the up channel, in white, some weeks ago. But in the past 10 days a smaller inverse head and shoulders pattern is now evident, in blue. It is important to note that the neckline of the inverse H&S, in orange, is also a trendline slanting down from a previous resistance, obviously still remaining very important and respected. So how does one trade all of this? Thursday and Friday there is important economic data expected: the EUR and GBP interest rate decisions on Thursday and then the NFP unemployment data on Friday. Everyone is waiting for this news before making any big moves. This is evident in this sort of price action: making chart patterns within chart patterns, creating a technical dilemma. So I for one will wait for price to tell me the direction and then pounce on it, because this sort of ranging and pattern making always preceeds a big move. In case this pair heads higher after the news, 99.50 is the level to watch. Price breaking 99.50 and then retesting it for a buy entry, confirms the inverse head and shoulder and also fails the larger pink head and shoulders at the same time, since a move above the right shoulder is a pattern failure. Target for longs is then 103.50 area. If, however, price decides to head downward after the news, 95.60 is the neckline to break for continued fall. A break, retest, and subsequent fall would then target 89.70 region. The important thing about trading these types of chart patterns is to wait until the break happens then look for a retest to confirm the move. Fakeouts are likely. Good trading, and be careful, use your stops.
EWI ponders the question: are successful forex traders just lucky?
Elliott Wave International (EWI) yesterday in their newsletter revisited a question that many have asked since the dawn of time: Are successful forex traders just really lucky? In their article they recount the Alan Greenspan comment made at an economic forum back in 2004 in which he stated
Jennifer Shotts
Casey Stubbs has been trading for 14 years. He started trading in the stock market and moved to Forex. 
Richard draws from his extensive experience trading to write insightful trading articles for both fundamental and technical analysis.
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