Prologue:
The foreign exchange market (forex, FX, or currency market) is a global decentralized market for the trading of currencies. The main participants in this market are the larger international banks. Financial centres around the world function as anchors of trading between a wide range of multiple types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies
The foreign exchange market assists international trade and investments by enabling currency conversion. For example, it permits a business in the United States to import goods from the European Union member states, especially Euro zone members, and pay Euros, even though its income is in United States dollars. It also supports direct speculation and evaluation relative to the value of currencies, and the carry trade, speculation based on the interest rate differential between two currencies.
Given the socio, economic and political nature of the factors that determine the price of one currency versus another, confusion may set in for the professional traders much-less a layman attempting to profit from these price fluctuations. Everything from economic numbers such as interest rates, political climes, natural disasters, social fads, inventions, GDP, discoveries, crude oil prices, and gold prices among other things affects the direction of the currency markets. The study of such catalysts is called FUNDAMENTAL ANALYSIS.
Despite the seemingly clear correlations, interest rates down currency strength up for example, market price fluctuations need more than ‘sniffing’ the news to be deciphered. In comes TECHNICAL ANALYSIS. This is the study of price charts to identify potential investment opportunities on financial instruments such as foreign exchange, indices like the London FTSE, Crude oil and commodities such as Gold, silver or even Wheat.
A rather ineffective and mostly confusing universe of technical indicators has been created by traders and Enterprise Architecture Programmers (EA) over time. These mathematical indicators are designed to predict or give clues as to the direction of market movements. Many traders, some successful ones and many failed ones (even though some would argue that a traders success cannot be holistically judges till he dies since it is possible to have running trades posthumously given the nature of trading platform features such as pending orders, take profits and stop losses) use indicators actively in the trading however some use them as supplementary indicators with low levels of success. Why?
The lag factor hampers these indicators. An indicator is said to be a lagging indicator when its trigger is always two steps behind price like a mediocre gunslinger with a slower draw against the best shot in the county. Slow lacking, unfortunately the underdog and obviously the one dead in the dust 9 times out of 10.
After exhausting well over 9 lives on technical indicators, rent way past due, tuition debt heavy on my shoulders, ignoring every professional warning about not trading recklessly I decided to focus on what I figured out a long time ago but chose to ignore. Price action: The tell-tale tracks in the sands of time left by the battle of the Bears and Bulls of the world’s socio, economic and political universe.
Armed with the knowledge that the market is driven by supply, demand, support, resistance, fear, greed, uncertainty, ambivalence, market manipulation by institutional players and the ever present impossibility of 100% certainty, I graduated to studying the language of price in form of Japanese candlestick charts to decipher the only true leading indicator: PRICE ACTION
EURUSD
EURUSD Monthly Chart
One Monthly bar = Four Weekly bars
One Weekly bar = Five Daily bars
One Daily bar = Six 4 Hour bars
One 4 Hour bar = Four 1 Hour bars
One 1 Hour bar = Two 30 Minute bars
One 30 Minute bar = Two 15 Minute bars
One 15 Minute bar – Three 5 Minute bars
One 5 Minute bar = Five 1 Minute bars
Technical
The fulfilment or failure of the pattern above (marked in the green square) is the ONLY thing that CAN technically happen as regards the balance of power between the economies of Europe and the U.S.
An inverted Head and Shoulder formation has formed spanning a time period from 2011 to 2014. This pair has spent the last 8 months at the springboard area of support within this formation hence my overall bullish sentiment. My trading technique stipulates that I buy false moves down at this point taking profit from area of resistance to resistance hence support and these trades are being taken on lower timeframes to better our entries. Points of take profit are the potential reversal points marked with red checks in the chart above. I invest only 2% of my overall equity on each trade as this ensures that I do not over leverage and my risk-reward ratio is taken into consideration too.
The success of a Head and Shoulder pattern is usually the beginning of a change in trend, a move to the next point of resistance or support. A pullback and break above or below is a trend indicator most times.
Fundamental
US Non-Farm Employment Change released every first Friday of the month by the US Department of Labour, measures the change in the number of newly employed people in the US, excluding workers in the farming industry. A reading which is higher than the market forecast is bullish for the dollar and vice versa for the inverse bearish scenario. This is considered by many to be the most volatile economic news event in the world of financial speculation. Given the current technical position of price, as explained earlier, the release for the month of May will prove crucial to the events on the EURUSD over the next few years as pullback and break above or below the inevitable spike caused by the news release will move this currency pair strongly.
Job creation is one of the most important leading indicators of overall economic activity. The release of US Non-Farm Employment Change is thus one of the most highly-anticipated releases, and an unexpected reading can quickly affect the direction of EUR/USD.
Nonfarm Payrolls has shown steady improvement in 2014 and climbed to 192 thousand in March. However, this was well short of the estimate of 199 thousand. The markets are expecting better news from the April release, with the estimate standing at 216 thousand. Will the indicator meet or beat this rosy prediction?
The Euro-zone continues to struggle with low inflation levels, and the ECB seems reluctant to step in, although ECB head Mario Draghi has said that negative deposit rates or QE are on the table. If April inflation numbers fall further, deflation concerns could hurt the euro. The exchange rate of the euro remains high and Draghi may again step in if the euro approaches the “line in the sand” level of 1.40. In the US, we finally get top tier indicators for a “clean” month. Given some positive early indications for April, the numbers could certainly be strong. The QE taper didn’t help the dollar, but continuing tapers from the Fed is a sign of confidence on its part in the US economy. So, the overall sentiment is bearish on EUR/USD towards this release.
Conclusion:
There is a divergence between the technical indicators, which suggest an upward break, and fundamental indicators which predict a downward thrust. We will sit on hands and trade the patterns as they come on the lower time frames while keeping the Technical stand made by the bulls on the Monthly chart in mind.
Real-time Update Section
EURUSD 1 Hour Chart(4th of May 2014)
The chart above shows the price action caused by the release of the NFP on Friday. A few hours before the report a Head and Shoulder had formed. The report which shows that the US economy produced 70, 000 jobs more than the forecasted 216, 000 and the employment rate held at 6.3% as opposed to the forecasted 6.6% was the cause of the downward spike shown in the chart above. However price reversed and took back all the gains made by the bears via that report in just ONE bar. Price closed the week with a pull back above the left shoulder of this H&S signifying either a likely breach of the head for a pullback, break and bull trend continuation or a double top and a highly unlikely return to the bottom of the spike down for a nervy downward push in an uptrend.
EURUSD Birds Eye View (Zoomed out) 09/05/2014
As at market close on Friday the Birdseye view zoomed out chart above was the stand: The market broke above new highs (1.39935) and made a sharp pullback below support spanning 13th of April to 5th resulting in this stalemate at monthly support and 4 hourly resistances.
As evidence piles up, probability now sits firmly in the court of the bulls with an almost inevitable touch of 1.3887 on the horizon. A pull back and break above this level would push prices up quite a few pips to the 1.50760 area. Subsequently pullbacks and breaks above points D, Y and X could be the wings to give the red hot Euro bulls the wings they need to fly.
WARNING: In as much as probability sides with the bulls at this point, the possibility of a drop in price still persists and solid resistance exists at 1.36540.
-The Anonymous Chart Technician-
@ChartTechnician