I threw the question of what I should write about this week to a former manager of mine who was a forex dealer back in his younger years and now makes a living telling folks what’s happening in the markets. He tossed back a surprisingly good question:
How can technicals be relevant when central banks are trying to manipulate the market- BOJ with USD/JPY and SNB with EUR/CHF?
I’m sure this is something that others have pondered as well.
Here’s my view on it – speaking as someone who is very much a practicing technical analyst.
Currency intervention by a central bank or other monetary authority (in the US intervention is directed by the Treasury, though it’s executed by the NY Federal Reserve Bank) is just another news item or event that influences exchange rates. Those of us who’ve been around the markets for a while have seen a great many dramatic market reactions to all kinds of developments. Some of them have been triggered by data releases. Some have been driven by news events. Some have been caused by speakers. And some have been the result of intervention action. Heck, some of the moves have come just from the suggestion of intervention without it actually happening.
In other words, intervention is just one more thing that is reflected in the price action we see on the charts. Furthermore, it’s also something that is incorporated into the market’s expectation of the future as part of the price action we’re seeing now. The more market participants anticipate intervention, the more they will factor that into their trading and by extension the more it will influence the price action we see. It works in the same way that stock traders will price in anticipated share buybacks or weak earnings. All markets are discounting mechanisms in some fashion or another, and we can analyze the patterns that are developed in the price action through that process.
So, from my perspective, I don’t view technicals as any less useful in a market where intervention may happen. I use the same methods I would in any other case.
Now, having said that, intervention certainly presents the potential for a major volatility spike on the event (or even the hint of it). If your trading strategy or market analysis is ill-suited to that kind of thing, then while that risk is in the markets you may be best advised to either change the pair(s) you trade or to lengthen your trading time frame out to one where sharp intraday moves aren’t so much of a concern. Alternatively, you could adjust your risk so that you have less exposure for trades going against the likely direction of intervention (like when going short USD/JPY if you think the Bank of Japan is going to sell yen). The analysis doesn’t change, but how you then use it does.
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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.
Do you remember when the Swiss National Bank (SNB) came out with a declaration that it would no longer tolerate EUR/CHF trading below 1.20? That was back in September. That announcement saw the cross rate move up above 1.2400 by October after having been down near the parity level in August, as you can see in the chart below. It’s worth noting from a technical analysis perspective how the market stalled out near the early 2010 lows, but that’s a side discussion at this point.
What we’ve seen in the last few weeks is EUR/GBP dipping down below the range it has been in since the SNB made its intentions known. In other words, the cross is now getting to the point where the resolve of the central bank may be tested.
No doubt, some market participants had expected to see the 1.20 floor tested well before now. Challenging the SNB was a discussion point as soon as the floor was announced. That never really happened at the time, though, because the move was timed pretty well. It came when the market was already in rebound mode. The Japanese did the same sort of thing back when USD/JPY was making its first foray below 100 in the 1990s. They didn’t fight the move too hard on the way down, but really kicked it in the tail when the selling was seen to have abated and as a result really pushed the market back up.
The issue for the SNB, though, is the euro. No longer are we talking constantly about the franc being a safe haven currency attracting loads of attention as was the case earlier. Now it’s just a function of a weak EUR, which we can see in EUR/USD, EUR/GBP and EUR/JPY as well. In other words, it’s not the same kind of speculative froth as was the case in EUR/CHF back in the summer. That could make things a bit more challenging for the SNB in defending the floor.
In theory, the SNB has unlimited funds available to it. All the central bank need do to support the 1.20 floor for EUR/CHF is to print as many francs as required with to buy all the euros necessary to support the rate. At some point, however, inflationary concerns will start to become an issue. That would tend to put upward pressure on Swiss interest rates, which would only further support the franc, especially in a situation where the ECB is tilted toward an easing policy.
Now that we’re getting close to 1.20, I wouldn’t be surprised at all to see the market give that level a run just to see how aggressive the SNB really is going to be in defending it. My guess is the initial defense will be quite stout. It will be more a question of follow-through under sustained attack.
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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.
In the last post of the Ask the Expert series, Scott Boyd and Dean Popplewell began chiseling away at a question we received about spotting trend reversal. Today they will focus on another facet of trend reversal: using Bollinger Bands.
Traders have long understood the relationship between volatility and trends. Volatility – that is, the degree by which an exchange rate varies over time – tends to increase as a market trend gathers momentum. This is because traders are buying and selling in greater frequency as they attempt to get in on the trend. However, as the trend nears the end of its run and traders slow their activity, volatility naturally declines.
Because volatility provides immediate feedback on the level of market activity, it is an important technical indicator. One of the most common methods of measuring forex volatility is through the use of Bollinger Bands placed over a price chart as demonstrated below:
Bollinger Bands show changes in market volatility through the width of the two bands formed by the three lines, and the more volatile the currency pair price, the wider the bands grow. In the example above, you can see the bands widening as the price decreases until it reaches a point where the bands suddenly narrow. This indicates that volatility has quickly tailed off which means that market activity has reduced.
Coming as it does following a price decline, this is a strong indication that the rate is likely to increase as market participants consider the new market price. If the price finds support and buyers come in at the current price, the bands will widen in response to the increased activity.
Next time we’ll continue discussion of spotting trend reversal by looking at different price patterns. Okogba Papa Woyin-Emi (who sent in this question via Facebook), you have been keeping our expert panel busy answering this one! Have questions for Scott and Dean? Send them to us viaFacebookandTwitter. We are excited to see what you come up with.
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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.
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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.
Welcome back to our Ask the Expert series with Oanda’s Scott Boyd and Dean Popplewell. This week’s question comes from our Facebook page:
Okogba Papa Woyin-Emi asked “What are the best ways to spot trend reversal?”
Great question, and not one that can be answered fully in a single post. So we’re going to tackle this important topic in multiple phases, starting with… spotting trend reversal using Relative Strength Index:
Regardless of individual trading strategies, all traders share a common goal – identifying as early as possible, potential trend reversal points. The earlier you can get in on a reversal, the greater the potential for profit. Unfortunately, it is also true that the earlier you act, the greater the chance that what you thought was a trend reversal is really just a fluctuation and once the tend resumes, you may suddenly find yourself on the wrong side of the trend!
To help avoid this scenario, there are several approaches you can take to improve your analysis of the current market trend. Generally speaking, analysis falls into one of two types – fundamental analysis and technical analysis. Fundamental analysis consists of news events such as central bank actions or the latest unemployment figures. The rule of thumb is that when news is seen as a positive sign for a country’s economy, the currency tends to perform better. While the correlation between economic performance and exchange rates is helpful when defining an overall trading strategy, this approach offers little insight into potential reversal points.
This is where technical analysis comes in. Technical analysis involves the use of charts and historical prices in an attempt to determine future prices and over the years, a whole host of technical indicators have been developed. We don’t have room to discuss them all here, but we’ll cover a few our favorite indicators and show you how they can be incorporated into your own studies.
Relative Strength Index
The Relative Strength Index (RSI) calculates the total average losses and gains for a currency pair and uses this information to determine the strength of the latest price in relation to the previous price. A numerical value is determined as part of the RSI calculation and this number is plotted on a chart segmented from 0 to 100 and placed at the bottom of a price chart as illustrated below:
If the RSI value falls in the 30 or under range in the chart, it is considered undersold suggesting that the market could soon start buying the currency pair thereby pushing the rate higher. A reading of 70 or higher on the RSI scale is considered overbought and identifies a potential opportunity to short the currency pair ahead of a falling exchange rate.
In addition to the undersold and overbought designations, traders also look for what are known as centerline cross-overs. When the RSI crosses over and above the center line (50 on the scale), the buyers are winning and upwards momentum is gaining. When the RSI crosses under and below the centerline, the sellers are gaining and the downwards trend is gaining momentum.
We’ll have more on this topic soon, including how to spot trend reversal using Bollinger Bands and different price chart patterns. Have questions for Scott and Dean? Send them to us viaFacebookandTwitter. We are excited to see what you come up with.
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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.
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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.
Here’s a scenario I’ve been thinking about the last week or so:
First, take a look at the monthly USD Index chart below. Notice how the market stalled out below the early 2009 peak. Notice also how wide the Bollinger Bands are. This could be the set up for the market to turn down at least into the middle part of the recent broad range.
Now look at the S&P 500 chart. Here too we’ve seen a recent upside failure. One could point to resistance near 1200 from a low put in during the big decent as well as another from back in 2006 during the rally. The Bollingers are flat to narrowing. If the index cannot hold above about 1040, the odds will be very good for some kind of move back toward 900, or lower.
Then there’s the 10 year Treasury Note yield chart. Here too we’re looking at a recent rejection of higher levels and the risk of a breakdown, if it hasn’t already begun. It’s not hard to imagine the rate dropping below 3% once more in the months to come.
Now the question that comes to my mind is what would be negative for the dollar, negative for stocks, and negative for US interest rates? Those three markets have not moved in tandem of late. It’s generally been stocks going one way and the USD Index and Treasury yields going the other thanks to the risk-on/risk-off nature of the market psychology. If yields are falling, it suggests economic weakness and/or expectations of holding or lower rates by the Fed. If stocks are falling it’s generally about weakness in the economy and/or corporate profits.
So what would cause the dollar to drop at the same time as stocks and Treasury rates?
The number one reason that jumps out at me is a shift away from the flight-to-quality mentality which has bid-up the dollar and a return to more normal trading. That is the type of trading which sees the dollar lower on declining Treasury rates. In other words, the risk I’m seeing in the potential price action is an economic downturn in the US.
For this scenario to develop, however, the dollar needs to continue its retracement off recent highs and stocks and yields both need to carry through with their potential bearish set-ups. It might be a while yet before we see confirmation, if it’s to come, and if any other market goes higher rather than lower it changes things all together.
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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.
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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.
The pips of Currensee Towers are excited to welcome back Lara Iriarte of ForexInfoUSA for another Elliott Wave webinar on Thursday, May 27 at 8:00am New York time. It’s free to attend with the code “blog” (that’s creative, isn’t it?) We hope you’ll join us. This webinar is for your if you’re curious about how to apply Elliott Wave analysis to your Forex trading setups, even if you don’t know (yet) what Elliott Wave is all about.
Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.
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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.
Here at Currensee towers we love a good educational forex webinar. As you know, trading forex alone in your basement can be lonely, so it’s great to get out there – even if only virtually – and meet some more experienced traders and learn from them. We’re working on a whole passel of webinars (and would love to hear from you if you have ideas) but I’ll just point out two:
In this practical and results-oriented session for traders of all levels, Casey will discuss setting realistic trading goals and suitable risk and profit targets and will show you:
How to set up the moving averages on your charts
How to find support and resistance levels with moving averages
How to use moving averages to find good trade entry points
This session is $10, but Currensee members and readers of this blog can get in for 8 bucks via the Currensee Marketplace or this EventBrite link.
Currensee and SpotEuro have partnered up to provide real-time analysis and commentary during the release of this very important economic indicator. Don’t miss out on a great opportunity to learn how to trade this economic report and ask questions while the market is moving!
EUR/USD will be emphasized
Learn how to trade during news events.
See how technical analysis is applied to live market charts.
Support and Resistance levels will be determined before the release
Ask questions while the market is moving.
This session is free to attend although space is limited, and registrants will get a special offer from SpotEuro.
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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.
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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.
Last week it was noted that the Eurodollar currency was trapped, but it was required to stay above 1.4515 to confirm that a new higher trend could develop. It managed to do this for almost the entire week, (although without any much needed acceleration), before the overnight session on Friday saw the original break out point at 1.4440 give way. On waking up Friday morning it was clear that only this currency had shown any real weakness, so it was necessary to look for clues as to what it was. After scouring the wires the conclusion was that a rumour that Angela Merkel would resign was the reason. However, a government spokesman said: ‘Rumours about Angela Merkel’s resignation are just pulled out of thin air.’ The origin of the rumours was unclear. The break actually occurred at 1 a.m. U.K. time when the market is at one of its thinnest moments, when a critical support point was breached.
By the time the main market woke up, the lack of any real reason for the break (for those who don’t believe in Technical’s), led to a somewhat spurious excuse that feeds on itself to explain the move. This type of justification after the price move is a classic example. Another common one is that one major block of players such as funds are coming into a market. Again, in a world far removed from past decades when FX was traded on the phone and by human market makers, and therefore there was a degree of visibility, in the current trading environment, large players go to great lengths to hide there activity via sophisticated automatic trade engines. This has led to such terms as “Dark Pools”, which is a term for hidden liquidity. The question for traders, who are not in the professional market, is whether they are at a disadvantage. This is where Currensee’s social indicators and views of the communities positioning can provide some visibility that is relevant and up to date. It is easy, if discipline is not strict, to feel that the market is conspiring against you and can cause great damage to the ability to trade. Your position is wrong; the reason why seems nonsensical, and hope can easily enter your trading plan. This is nearly always ruinous.
So what is the solution? It may seem obvious, but there are two basic rules. The first is simply to day trade in your time zone, so there is no overnight event risk. Tomorrow is always a new day and opportunity. The second is the placement of stops. Whilst it is true that volume is thin in Asia compared to the other time zones, the FX market remains the area of deepest liquidity among all the asset classes. It is far better to have been taken out of a trade, in order to be able to reassess your analysis when not actively involved. One of my key mental tasks, if a current position is causing me uncertainty, is to go back to my days as a market maker, when often you were forced to have positions you didn’t want.
My question is. If I didn’t have a position, would I get long or short? Again, it seems somewhat simplistic, but in cold analysis, it is often easy to eliminate one side of the market, as it is obvious that it does not coincide with your trading plan and template. If it doesn’t do this, then the answer is that you shouldn’t have a position at all.
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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.
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