End of the month and quarter
The end of the month and the quarter today certainly provided the typical market volatility that often comes with such significant endings. Profit taking came in in a big way after lackluster ADP report and Chicago PMI data, giving strength to the dollar, especially once traders realized that the GDP data was a bit better than expected. Today I was lucky: I noticed that the GBPUSD pair had risen strongly in both the Asian and London sessions with no retracement, it is very rare to see one pair rise in all three sessions, so I figured this should be a nice short opportunity. But three equally compelling reasons supporting shorts were these: price on the hourly GBPUSD chart came to hesitate perfectly at the 200ema, which was also the weekly pivot point, which was also the 50% retracement of the recent down move from 1.6460 to 1.5750: all at 1.6120. Too perfect. I knew that there was quite a bit of econ news coming out in the next few minutes, but I made the decision to enter short at the close of the 8am hourly candle which closed as a doji. I decided to try for 100 pips initially. Sure enough, as ADP news came out, my short kicked into high gear. The GDP data being dollar positive also helped my trade, and the poorer than expected Chicago PMI is what was really got the overall markets into a selling mode. I figured that end of the quarter would be a take profit day most likely. It only took two hours before my +100 pips profit was hit. All in all, it was a good month of trading: +758 pips total, 77% winners, 2.6 profit factor. Again this month I only traded GBPJPY and GBPUSD. Time to check the monthly candles closing today to see how it looks going forward. Hmmmmm, red candles, and both pairs closed monthly below their 5emas. Down continuation is expected. Good trading!
All markets are connected
Today’s market action could be signaling a changing in the guard after the Federal Open Market Committee’s rate decision and accompanying statement. It is such a perfect example of how all markets are connected in some fashion: whether it is oil, gold, EURUSD, the Dow, or the Hang Seng. It is also a perfect example of why intraday traders need more than one screen to trade from, there’s so much going on to pay attention to. First I’d like to say, I never trade an FOMC statement. But it was spectacular to watch the reversal today after this bit of news, or non news, came out. Today’s price action in most markets were quietly awaiting the FOMC decision, minus crude oil prices. Oil had already dropped nearly $3 this morning when I turned on my computer. Consequently, the US dollar was showing signs of resilience against the euro, yen, and aussie, after reaching new highs in the euro and aussie during Asia last night. That spike last night certainly caught my eye, creating some serious negative divergences in those pairs today. Putting all this together I was starting to guess that the dollar was starting to reach some sort of bottom, if only temporary. So after the 2:15pm FOMC decision and price spike, (look how beautiful the double tops in EURUSD and AUDUSD!) it was not too surprising to watch the Dow also spike up, but all of these stalled after just 20-30 minutes and the US dollar came back strong to lead the EURUSD, AUDUSD, and the Dow down in a big way. The Dow made a 160 point swing to close -81 points down. Nice volatility, just like the old days. There has been quite alot of talk about the US dollar being the new carry trade, and that is probably why we have not seen “normal” market correlation with the dollar and the yen, and oil, in respect to the Dow. My good old trading strategy of Dow/yen correlation has not worked for many months now, but just selling the greenback against anything has been the trade of the year. Wouldn’t it be interesting now if we see more dollar strength, ushering in some risk aversion? Did the Dow get close enough to the magical 10,000 level (she hit 9906 today during the FOMC spike) for sellers to get in the game? Are the institutional traders back and in the swing of moving this market?? So many questions, so many pips. Good trading.
On to September, bring on the volume
Summer is ending. Boo hooooo…. But with autumn trading and autumn higher volumes, the good trading times are just around the corner. First, let’s revisit August trading: +821 pips, 19 winners, 8 losers. I only traded GBPJPY in August, intraday trades, cutting losers quickly. Now with the new monthly candle closed, it is time to check the big big big picture. Sometimes it is hard for intraday traders to care that much about the monthly candle, but I do think it important and take the time, each month, to see where things may be headed. Attached is the monthly chart for the GBPJPY. The bear candle closed today certainly could indicate more to follow. But it is also important to remember: when price gets so far away from the 50ema, it will soon react like a rubberband and retrace back to that equilibrium, if only for a moment to recoil. That said, I have placed two fibonacci retracements: one from the high reached last year at 215.00 to the low at 119.00. The second is the green fibo up from the low to the recent high at 163.00. The “perfect” scenario would be for price to now dip down to the 50%-61.8% retracement area around between 135.00 to 140.00, that being sufficient to build new steam to break upward toward the 50ema, now sitting between the orange 23% and 61.8% retracement at 187.50. Also of note is the up trendline which also comes in around this level, even more reason for price to head in that direction. But it is our job as traders to deduce the next move, and then trade it for profit. Easier said than done, at times. It is certainly possible that when the summering institutional traders return to the market this month, they will be eager for more risk. But the interesting thing with the yen pairs most of the summer is how they are NOT in synch with the Dow as usual, making the trading landscape harder to decipher with the yens. So, remaining open and flexible to trading the charts and not my big picture plan is imperative. But I like to keep this in the back of my head. If price does reach 135.00-140.00 zone this month and bounce, I will certainly be looking to long for an almost certain bounce up to that 50ema. Would take months to get there, the next carry trade would be in swing, if only for a few months.
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.
GBPJPY is following my plan
GBPJPY has been playing right into my trading plan this week. I started piling on shorts after I saw the evening star confirm on the daily chart on Monday for 3 trades of +100 pips each. I was targeting 155.00 as stated in my previous post, and sure enough price hit 155.00 almost to the pip today in London trading. When I woke this morning to check my charts at 7am New York time, I saw a golden opportunity staring at me in the face! Since the target had been hit and price was consolidating near 155.50, the smaller time frames were oversold at that point, just prior to the 8:30am news release. I figured there could be more room for a movement to the upside at that point, especially since the news was jobless claims which has been moving the markets positively the past several weeks. Also pointing up: there was positive divergence on the CCI on the 1 hour chart. So, about 15minutes after the news released I entered a long trade at 156.10. I managed to hang on for +100 pips, it was a quick trade, about an hour and a half. So now it looks like the GBPJPY is following along my big picture trade plan: it appears to indeed be heading back up to possibly form the right shoulder of this head and shoulders pattern on the daily chart. If you fib from the high at 162.50 to the recent low at 155.00, the 61.8% retracement is 159.60, pretty darn close to the 160.00 area I was originally thinking. I will observe the price action at that level (if it gets there) and look to enter a short to ride this back down to the neckline again at 155.00. Of course, price may not have the strength to reach 160 area, or it could blow right through it. That is why I prefer to set an alert for my price targets to actually see how price behaves before making any decisions. Wish me luck, and good luck to you.
Yens shorting finally worked out
The head and shoulders pattern that I identified several days ago on the GBPJPY finally broke through its neckline on Friday and the selling continued through Monday to the target. From neckline break near 147.00 to the target at 142.00, a cool 500 pip trade. Since the break happened on Friday, I shorted at 146.90 but price just ranged down and up until the close of the day. I chose to close my trade prior to the close of the day and week, it is one of my rules not to hold trades over the weekend. So Sunday evening I re-entered the trade and took a quick +100 pips. The AUDJPY also had a beautiful head and shoulders pattern on the 4hour chart, so I sold that pair at the break of its neckline at 70.39, taking +100 pips profit. Another clue to the potential break of the AUDJPY was the inside daily candle on Friday, breaking the low of that candle Sunday I figured it was quite likely that price would continue south. Monday continued the selling, I again sold the GBPJPY at 143.54 for another +100 pips. The GBPJPY trade was tricky: the original head and shoulders pattern that was first identified about 10 days ago actually failed when price bounced up off the neckline and broke above the right shoulder, near 149.00. But just two days later a completely new head and shoulders pattern developed, and this is the one that finally broke and gave up all the pips. Sometimes you gotta be flexible and patient to cash in on these patterns, especially when they are on the bigger time frames: 4hour and daily. By the way, am I upset that I did not keep my original sell trade and get all 500 pips? Nope. +100, +100, +100 = +300. That is just fine. Good trading!
Candlestick patterns do work
Using candlestick patterns in technical analysis when trading the foreign exchange markets can certainly be a worthwhile strategy when looking for both entries and exits for your trades. It is definitely one of the tools in my trader toolbox. Different traders incorporate candlestick analysis in different ways with their entries and exits but here is a strategy that I like to use. When trading a currency pair that is in a strong trend on the daily chart, look for price to retrace against the trend and begin looking for an entry to trade with the trend, preferably also in conjunction with a fibonacci retracement level or major support or resistance level. A reversal pattern on a smaller time frame, like the 30minute chart, can make a good confirmation for your entry into the prevailing trend. There are 6 major reversal candlestick patterns that I use regularly: harami, engulfing, evening star, morning star, dark cloud cover, and piercing. You can go to www.babypips.com to view the specifics about these patterns and how to define them. I look for these patterns in all time frames, but I really like to find them on the 15minute, 30minute, or 60 minute for my intraday entries. It is important to wait for the candle to close before confirming the pattern. Then, once confirmation is given, it is safe to enter. Stop can then be placed on the other side of the pattern. A good example of using a candlestick pattern to confirm an entry is on the EURUSD pair. On the 1hour chart today during the New York session the EURUSD retraced from the highs near 1.3730 down to 1.3500. This level was important a few days ago, a resistance level. At 11am NYT a harami formed on the 1hour chart, an inside candle, closing back above the important 1.3500. At 12pm I saw the confirmed pattern and entered a BUY trade, in the same direction as the trend on the daily chart. The stop was placed at 1.3469, below the low of that pattern. In about 2 hours the trade completed +100 pips and I exited. Nice trade with the short term trend. Good trading!
AUDUSD, USDCAD fake out break; GBPJPY was the money maker
Following up to my last post, the trade idea for GBPJPY shorts paid off nicely by Thursday but much patience was needed to stay in that trade. Price flirted and bounced and stalled several times with the monthly pivot at 135.57 Tuesday and Wednesday before finally giving a nice down move in Asia and London on Thursday. I was able to milk about 300 pips on shorts on GBPJPY. Meanwhile AUDUSD appeared to break and show a daily candle close below the supporting trendline, only to then reverse and continue upward all week. Equally with USDCAD: a nice punch through the meaningful 1.3000 level but continued buying ceased and USD weakness gave sellers more confidence to keep this pair falling. I did take minor losses on both pairs but did not have the fortitude to jump on the reversal trades like many of my compadres did. Luckily, they are taking me to dinner this weekend, to even out the pips. He He hee !!
What is on tap for next week? With the Dow’s rally this week and close above 7200, I am searching the charts for clues to how to plan the week’s trades. Most obvious patterns exist on GBPUSD daily, the trendline down from the 1.6660 high is still in control. I could foresee price retouching it again near 1.4100 next week, then will be looking for a new decision candle. Also important is the new down channel on the USDJPY 4hour chart. I am expecting this channel to hold next week, but a break above the upper line could signal for more upside in the yens. Good luck and good trading.
Nice end to the week and month for my trading, GBPJPY rules
Today was spectacular trading for me, little sleep, but it was worth it! The clue to big profit: the inside daily candle on the GBPJPY at Thursday’s close, plus that beautiful double top at 141.70 that formed late on Thursday. Nice! I usually check the daily charts around 6pm NYT to look for inside daily candles or other chart patterns for the following trading day. I entered the short GBPJPY position at 140.71, and decided to target 100 pips. Price pretty quickly went to my target with little hesitations. I decided to wake up around 2am to check for further short opportunities, I very rarely trade the London open session, but I was a bit behind on my weekly pip count, so I sucked it up. 2:30am I entered a short on GBPJPY at 139.42. Now, I did use a fibonacci retracement on the down move that started during the asia session and so was looking for the 50% retracement at 139.96 or so to enter the short. But then I noticed that 139.87 was a resistance level earlier on Thursday and that level again was important. I again targeted 100 pips. And again, in about 1 hour my target was hit, which was good because I was tired! After a few hours of sleep I managed to get myself up at my normal 6:45am to check the 7am trade. COFFEE.. Again I fibbed that recent run down and the 50% retracement came to 138.82. As soon as I got my charts up and running GBPJPY touched the 138.82 level to the pip and began decending again, so again I entered a short, at 139.50. Down she fell and I took another 100 pips. I was figuring that the 4hour 50ema would hold shorts, and since the lower bolinger band on the 4hour chart was also around this level I was happy to take profit even though price did run down an extra 70 pips or so. But immediately I thought: the 4hour 50ema, would be a GOOD BUY. Since this pair was running up and up all week and the 4hour 50ema was slanted up pretty strongly, I decided that if price did touch it I would try to buy there. Sure enough soon after the 8:30am news, price touched the 50ema and my entry was filled at 137.00. I decided to target the 4hour 21ema which is pretty much half way between the lower and upper bolinger bands, near 139.50. I placed a stop loss 50 pips below my entry. Within 2 hours my target at 139.50 was hit, another 250 pips. Incredible day!! +550 pips today to add to my meager +210 pips for the week. Nine trades this week total with only 1 loss, trading the GBPUSD and GBPJPY. Now, off to nap..
Important levels in Dow and S&P have broken, Gold up, USD ________ ?
The important levels in Dow, at 7900, and the S&P, at 800, have broken down and we have seen daily closes in both below their respective supports. This could be the beginning of a further break down continuation that many have been expecting and waiting for. Since August 2008 when the markets excelerated their falling momentums, recall that the USD began gaining strength, a flight to the US currency for safety while other commodities and markets and currencies crashed down. Recently the price of gold has been moving back toward $1000/ounce, its all time high. Traders are speculating that the price of gold could break higher as more investors look for safe places to put their cash, since few markets are showing any signs of bottoming for a good place to start buying stocks. Since fall 2008, buying USD vs most any currency continues to be the play of the day, week, and month. The trend, my friend. Indeed EURUSD has broken out of its daily range as identified in my last post, between 1.3050 and 1.2725. We are likely to see 1.2400 soon, then the 1.2300 area which was last seen in Bloody October. I suspect price will have difficulty breaching this level, but be ready for anything.
Today I was forced to trade GBPJPY since price gave me a lovely inside daily candle to play. So my typical set up was play the break of the support or resistance, in this case the resistance broke at 132.15 this morning and ran up about 150 pips today. I especially liked this trade since this resistance level of 132.15 was also the weekly pivot point, so I knew a break above would be good for longs. Of course, with markets down and the Dow falling today, I was concerned with buying yen crosses, usually the yen likes to follow the markets. But today the yen was not following, interestingly. To me that means this was purely a technical move for the yens, they are needing to retrace to get out of very oversold conditions. I will likely be looking to sell this pair or even USDJPY soon, since I do see some double tops forming on many yen pairs. We may see USDJPY at 94.60, the recent high, a lovely place to short this pair. Remember the four P’s: Patience Pays Pretty Pips.
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.
Stay Updated with the most effictive Forex strategies and secrets with Jed & Kirk Norwood.