EUR/USD Week of March 26th
I stated a couple of days ago that I would try to analyze the market as if I was a Currency Strategist. I have no idea what it takes to be a Currency Strategist but I made an attempt today to analyze the EUR/USD for the upcoming week.
Introduction
The EUR/USD has had 7 straight weeks of alternating price action (down, up, down, up, down, up, and down.) The 3 weeks prior to last, we had higher highs and higher lows but last week, the EURO failed to push above the prior high of 1.2208. The price closed on Friday at 1.2037.
Candlestick
A dark cloud occurred (which indicates that prices moved up strongly on the previous bar, opened higher, but then closed significantly lower). This implies weakness as the momentum appears to be shifting from the bulls to the bears.
Moving Averages
We have support below from the 8 and 21 EMA’s at 1.2020. The 50 and 100 EMA’s at close above at 1.2144 and 1.2133 respectively. The 200 EMA provides longer term support at 1.1720.
Basic Indicators
MACD – Bullish
Stochastic – Bullish
RSI(7) – Neutral
RSI(14) – Neutral
DMI – Neutral and Trendless
Trendlines
Resistance: 1.2217, 1.2330
Support: 1.1785, 1.1868, 1.2000
TTM Squeeze
Squeeze in progress since 1/27/06. The last exit from a squeeze was 11/11/2005.
Commitment of Traders Report
As you can see from my graph, non-commercial positions are building on the long side.
Volatility Analysis
Bollinger Bands are 41.41% narrower than normal. eur is currently experiencing very low volatility as compared to its normal range. The probability of volatility increasing with a sharp price move is likely in the near future.
Prediction
EUR/USD may remain in the 1.2000 – 1.2200 range. If the psychological important 1.2000 is broken, look for furthur downside to 1.1868.
Steve Shenker’s Trading Corner
It's actually Sam Shenker's Trading Corner and it can be found here:
http://www.forexproject.com/Blog/Investing_and_Trading/Original_Traders_Corner/
Another tough week
I had a pretty good CAD trade before my 3rd lot closed out this morning but I missed the bigger move upward. No need to be greedy though. Other than that, I’ve had a pretty bad week.
I cannot say that there haven’t been traces of impulsiveness but generally I’ve been following my stop loss and limits. This is a good thing. 1 mistake that I have made was making 2 trades because of the advice of others. This is where I lost a majority of my money this week. There is no problem with taking the advice of another if you also did the research and study. But what I did was blindly go with what 1 other person recommended. I’ve been receiving John Carter’s newsletter this week during a 2 week trial and his latest recommendations didn’t work out. This isn’t a knock on him because you obviously have to expect losses. What hurts more to me is that I was not in control enough of myself to make my own decisions. The only decision I made was to read a newsletter and place a trade exactly as it was written. If I didn’t want to do any thinking, I shouldn’t have been trading.
What’s done is done. I always preach to myself to make my own decisions and live by them. You cannot expect to make money by listening to a newsletter here and a newsletter there. That’s a good way to lose your money and fast. If I subscribed to John Carter’s trading room or was an avid follower of his newsletter, I might expect better results.
One exciting thing this week has been the development of my 4th custom indicator. Just like every indicator, it is just a derivative of price but it is suited to my preferences. I can’t say much more because I don’t know if this indicator will work out yet. I’m still testing it but the results look promising so much so that it surprised me. I have a firm belief that there is no holy grail. I understand that. But there is a system that you can create that will work in certain market conditions that will consistently make money. With my programming experience, it is my thought that if I can create such an indicator, it can be totally automated. This doesn’t mean that I don’t want to study charts. Supplementing this with a steady money making system is like having another employee working next to you making trades and money for you. You have to give it direction but generally it works primarily on its own.
Do Interest Rate Differentials affect Currency Price?
I wanted to do a study on my own between the EUR/USD and interest rate differentials so I gathered all historical interest rate data from 1/1/1999 to present. What I found was that there was no correlation between the actual differential and the price of the currency pair. What I did find was the following:
We are in the third cycle of price changes. What I mean by this is that there was an extended period where the USD gained versus the EURO (Cycle #1) and then an extended period where the EURO gained versus the USD (Cycle #2). Currently there has been another extended period where the USD has gained versus the EURO (Cycle #3)
Here are my estimates of cycle length:
Cycle #1 – 01/1999 – 05/2001 BULLISH USD (29 months)
Cycle #2 – 05/2001 – 12/2004 BEARISH USD (43 months)
Cycle #3 – 12/2004 – present BULLISH USD (16 months +)
I found that the most defining point regarding the change of cycle was that it happened right after the interest rate differential between the EURO and USD hit 0%.
Here are the periods of time when the differential hit 0.00%:
5/11/2001
11/10/2004
As you can see, there is a correlation between the differential being 0% and the change of cycle. Unfortunately we have limited data since the EURO has only been in existence for the last 7 years or so.
If I was to use this information to predict the future direction of this currency pair, I would have to predict that the USD will remain BULLISH for quite some time to come. Seeing that the interest rate differential currently is 2.50% and the fact that the Fed may increase rates 2 more times, I cannot foresee this differential decreasing anytime soon.
I don’t know if this study is B.S. or not. There are many other economic factors that can affect currency prices and I didn’t take any of these into consideration such as the US Account Deficit or the Eurozone’s slower GDP growth. In addition, with Iran switching to EURO’s for payment of oil, there are other things in play that make it more difficult to predict the future.
EUR/USD Interest Rate Diff- Excel (20.50 KB 06.03.2006 11:32)
Busy Trading Week
I’ve been keeping a close eye on the charts this week. I have never quite felt out of the market whether I’m studying the charts or thinking about what might happen next. While this can be mentally draining, I feel like it is necessary for my training.
I’ve kept the indicators on my chart quite busy this week as they must constantly dodge each other on the screen. Yes, I still have too many indicators yet I don’t feel like any of them should be taken away at this point in time. I am using the following indicators this week:
1. Ichimoku – I love this indicator. I’m still learning to use it. Ichimoku actually means "one glance cloud chart." I’ve found it very useful for support/resistance confirmation. In addition, the current trend can be determined in a glance.
2. Trend Lines – Where would any of us be without these
3. EMA’s – 21 EMA Wave, 8 EMA, and 50 EMA
4. Bandwidth – Similar to the squeeze. This indicator is used to indicate volatility or lack thereof
5. RMOM – An indicator that I developed that uses MACD histogram values to compute whether the existing MACD value is greater than or less than the last up or down segment
6. RSI (7) – Relative Strength Index (7 period)
7. Directional Movement Index
8. MACD(12,26,4)
9. Pivot Point Oscillator – An indicator that I developed that I find quite useful now that I made modifications to it last night. I now paint the pivot point values directly on the indicator. This saves having to plot pivot lines on the price chart. Using the 15 minute charts can indicate trend nicely. See the indicator below:
Waiting for a Yen pullback?
I’m waiting on a Yen pullback. The price has been hanging around the S2 pivot point all day. Depending on where the pair is during the Asian open, I may be shorting this pair if it pulls back a little more. Remember that this pair is trending on the 240-minute and momentum indicators aren’t worth a bit. Right now I’m watching the Directional Movement Index, pivot points, and trendlines. The pair will have to pull back quite a bit for my continued interest, at least to the high 116′s.
The chart below shows the S2 pivot point at 116.08, .09 below the price (bottom red dotted line). The pivot point for today was 116.807 (thin solid black line)
Yen Swing Trade Analysis
TRADE
Date: Friday, February 24th
Entry: Short USD/JPY at 117.05
Reason for trade/setup: With a downward trend in motion, I was looking for a swing trade to short the USD/JPY. I was waiting for price to retrace back up where a minor Asian session breakdown occurred several hours prior at 117.10. The DMI indicator was used as confirmation that the existing trend was still in place.
Initial Stop: 117.19; the high of previous bar
Initial Target: 116.40
RESULT
Exit: 116.76
Reason for Exit: End of day
Profit/loss: +29 pips/ +$745.10 (3 lots)
Trade executed according to plan? yes
Outcome: This trade entry went exactly according to plan so much so that it surprised me. The price didn’t reach my limit and that didn’t surprise me.
Thoughts: The market doesn’t generate trades like this everyday and this setup would only apply to trending markets.
; "Forex swing trade")
12 Weeks Trading Forex
With 12 weeks of trading forex in the books, I currently have a balance of $17,346.74. I started with exactly $10,000 12 weeks ago with the goal of quitting my job to trade full-time by October 1st of this year. That would leave me with 218 days left. After about 3 months of trading, I cannot make a determination if this is a realistic date or just plain crazy. As I’ve stated before, I live in the New York city area where the cost of living is higher than most cities in the United States. I realistically need to make at least $100,000 a year to support my lifestyle. This includes food, a roof over my head, transportation, and a retirement plan not to mention student loans. In 12 weeks, I’ve profited $7,346.74 which averages to $31835.87 for a year. That is not going to cut it nor is it guaranteed that I will consistently make money each month. If I look at my performance in 4 week increments, things tend to look a bit better.
Weeks 1-4 +1101
Weeks 5-8 +1779
Weeks 9-12 +4467
This week I started out down similar to last week. I rallyed back to end the week down only $300. This is the second straight week where I had to bite and scratch to get closer to the black. I made some stupid impulsive trades but generally had a decent week sticking to my plan.
I’ve come to the conclusion that I’m a lot more effective when I place an order that doesn’t fill at the current market price. Instead of going to the price, I let the price come to me. Last night, I placed an order to sell the USD/JPY at 117.05 when the price was trading at 116.70. Eventually my order was filled and I ended the week making about $800 on this trade. When you let price come to you, trading becomes a lot less impulsive. There is no question that I’ve made a lot more money in my sleep than when I’m awake. You can’t overtrade, change your strategy, or act impulsively when your fast asleep in the middle of the night.
I haven’t had time to put all of my Trade Analysis down on "paper" yet but I will get to it this weekend. Don’t forget that there are 2 Raghee Horner webinars this weekend. They are free and I’m sure space is still available. I went to her last 2 webinars and found them motivational and beneficial. I hope to hear some of you there tomorrow.
USD/CHF 2006-02-21
TRADE
Date: Tuesday, February 21st
Entry: Short USD/CHF at 1.3082
Reason for trade/setup: Using the 240-minute chart, there was the presence of a downward trend line above. In addition, a momentum indicator that I created and am currently testing indicated a short opportunity. Furthur confirmation was obtained from the 3-period, 5-period Price oscillator using EMA and the continued downward movement of the 8-period, 21-period Price oscillator. Stochastic crossover and a decreasing rate of change since early February provided double-secret confirmation.
Initial Stop: 1.3121, the high of the entry day.
Initial Target: 1.3050 then 1.2950 which are horizontal support lines.
RESULT
Exit: 1.3121
Reason for Exit: Stop Loss triggered
Profit/loss: -38 pips
Trade executed according to plan? yes
Outcome: After trade entry, the pair had remained close with the downward trend line. Volatility was non-existent during Asian session. The USD was bullish going into the European session and the pair went as high as 1.3153 stopping me out of the position between 3 am and 7 am. This trade never moved in my favor by more than a couple of pips.
Thoughts: All the indicators in the world can’t predict the future. I seemed to have multiple confirmation, felt great about the trade, yet it didn’t turn out well. I feel good about executing the trade though because I didn’t go against my plan. I saw a possible setup and pulled the trigger. If I could do it all over again I would make the trade again but may have waited for an increase in volatility. In addition, I probably set my profit targets too high considering the lack of price action this week.
Understanding Market Structure
There is another decent article in Stock & Commodities magazine regarding market structures.
Sometimes I neglect to identify the underlying market structure before entering a trade. I’m hoping this post will help you and I.
This article identifies 4 market states:
1. High directionality – low volatility : prices moving steadily up/down with no or little reaction or correction. Trend following systems work fine in this scenario and oscillators will continuously give false signals.
2. High directionality – high volatility : trend is well-defined and corrections are deep and volatile. This scenario favors swing traders and counter-trend traders.
3. Low directionality – low volatility : no or little direction and moderate volatility. This is a very difficult environment to trade in and traders should wait for a new trend to ultimately emerge.
4. Low directionality – high volatility : no or little direction but deep swings. This market state favors swing, counter-trend, and short-term traders.
Click Read More to Continue reading.
