Chart of the Day - Page 5

Thomas Long · #61 (**permalink**) 10-21-2008, 01:53 PM

Another currency pair that is close to moving down through support is the CAD/JPY. With the Bank of Canada lowering interest rates today from 2.50% down to 2.25%, the CAD has seen some weakness in trading. The JPY on the other hand continues to be strong. So a selling opportunity in the CAD/JPY would be on the move down through support with a protective stop above resistance. Traders should identify that risk and look for twice that in profit potential. If that risk in 100 pips, look for 200 pips in profit for your 1:2 risk:reward ratio. A move up through resistance would negate any thoughts about selling this pair.

Thomas Long · #62 (**permalink**) 10-22-2008, 04:21 PM

Yesterday we looked at the CAD/JPY with the break down through support confirming CAD weakness. Today we look at a chart of the USD/CAD which is showing a strong parabolic move up. The combination of USD strength and CAD weakness is easy to see on this chart as the market continues to move up to new recent highs. This pair experienced tremendous weakness as the price of oil was rising in the last couple of years, so it makes sense that as the price of oil falls, this currency pair rallies. The US imports more oil from Canada than any other nation, so that activity has a great influence on the price of this pair. We should look for pullbacks off of the highs, down to a support level for a potential buying opportunity. Especially if the price of oil continues to weaken.

Thomas Long · #63 (**permalink**) 10-23-2008, 02:14 PM

Most of the trending currency pairs seem to be in an oversold or overbought condition on the 4-hour charts, so now might be a good time to move down to the hourly charts to find any potential trading opportunities. The hourly chart of the EUR/USD might offer such an opportunity. The trend is down on the daily chart and the 4-hour chart and seems poised to move down through support on the hourly chart. Traders could open a new sell position at that time and place their protective stop above resistance. Trades on the hourly chart do not offer the same quality setups as trades from the 4-hour chart, but by trading in the direction of the trend on the daily chart, we can increase our chance of success.

Thomas Long · #64 (**permalink**) 10-27-2008, 02:03 PM

Following up on my previous post concerning about the hourly chart of the EUR/USD, we can see that the market did trade down through support and has now found new support and is starting to move up. Since the daily and 4-hour charts still show a strong downtrend, this is not the time to buy but rather the time to once again look for a selling opportunity. Normally, I would look for a move up to resistance on the 4-hour chart to find my sell level and I will continue to do just that, but I would also sell on a move down through support on the hourly chart. However, it would take a move down through support to sell at this point since this market is very oversold and due for some sort of correction to the upside. But sometimes you can't stop a strong trend which is why we always want to trade in the direction of the trend on the daily chart.

#65 (**permalink**) 10-27-2008, 08:47 PM

Mr Long,

Why does it have to be selling @ resistance on the 4hr and through support on the 1hr? Why wouldnt it work to sell at resistance on 1hr and through support on the 4hr? I think I am missing something basic here.

Thanks

Thomas Long · #66 (**permalink**) 10-28-2008, 01:31 PM

Quote:

Originally Posted by xwowsersx

Mr Long,

Why does it have to be selling @ resistance on the 4hr and through support on the 1hr? Why wouldnt it work to sell at resistance on 1hr and through support on the 4hr? I think I am missing something basic here.

Thanks

You can use either approach on either chart. My concern here was that this market was extremely oversold and due for a corrective bounce to the upside. So I was looking for some sort of confirmation that the sellers were once again in charge of the EUR/USD before opening a new sell position. To me, that would be trading down to new lows. As it turns out, this pair seems to have moved into a trading range as the current 2-day US Federal Reserve meeting seems to be on traders' minds. Their interest rate decision is expected tomorrow (Wednesday) at about 215PM Eastern. I wouldn't expect any breakout until after that time unless unexpected news hits the wires before then. Thanks for asking.

Thomas Long · #67 (**permalink**) 10-28-2008, 01:51 PM

The recent strength of the JPY, noted here by the weak EUR/JPY, is cause for concern for exporters in Japan. The Japanese economy is dependent on strong exports, so the Bank of Japan likes to maintain a relatively weak JPY to keep their exports competitively priced in the world's markets. Recent talk has been about the Bank of Japan saying that they were prepared to intervene in the currency markets to make sure the JPY does not continue to strengthen. Today, we see the result of that talk as the EUR/JPY has bounced off of the lows and started to move up. However, the reality is that not even a central bank can change the trend of a currency pair. Their influence is limited to how long they intend to intervene in the markets. They can only buy or sell for so long and when that ends, often the move against the trend also ends. So for the next fews days, we should keep an eye on this pair to see how far it can rally before finding resistance. I still see a downtrend and am looking for a selling opportunity to set up, but I first want to make sure I know what the Bank of Japan's intentions are. They may not be able to change the trend, but their intervention sure can turn a winning trade into a losing trade and that is more important to me.

Thomas Long · #68 (**permalink**) 10-30-2008, 12:15 PM

The markets have once again turned as the USD gains strength. The 4-hour chart of the EUR/USD is a good example of this as the market moved up to resistance and has now started to move down. Selling a rally up to resistance when the market is in a downtrend is a classic trading opportunity. Aggressive traders may have already opened a sell position while more conservative traders using technical indicators like the MACD shown below, will wait for the crossover before opening a sell. In either case, protective buy stops should be placed above the high and the target to take profits should be placed below the entry and represent twice the risk. If you risk 200 pips, look for at least 400 pips in profit for a 1:2 risk:reward ratio.

Thomas Long · #69 (**permalink**) 11-04-2008, 01:02 PM

After trading down to as low as 1.2525, the EUR/USD is now moving up strongly. Such a change against the trend is usually caused by uncertainty in the markets. National elections are being held today in the US and it seems as though traders are not sure of the outcome. Add to that the release of the Nonfarm Payrolls this Friday morning at 830AM Eastern, and you have perhaps too much uncertainty for many traders, who appear to be leaving the market to stand on the sidelines. Professional traders prefer to be out of the market when they don't have a good idea of their risk. While the markets seemed to be taking the election in stride, that no longer seems to be the case and many traders are getting out to watch instead of risking more than they are comfortable with. I would think that many might just sit out the week until they have a better understanding of the real mood of the market. One can only know that after the election results are set and the Nonfarm Payrolls have been released.

Thomas Long · #70 (**permalink**) 11-05-2008, 12:50 PM

Continuing our look at the EUR/USD 4-hour chart shows the strength of trendlines. The first two points identify the trendline while the third point offers the selling opportunity. Traders who use trendlines like the fact that they can keep their risk low on this type of trading opportunity. Selling at the trendline does take some blind faith, but in situations like this one can see why their risk is low as the market moved up to test the trendline and almost immediately reversed. With this type of an entry, an experienced trader can find a way to squeeze out a profit on the reversal. Of course, sometimes the market does not reverse and the trader finds that they are in a losing trade quite quickly. However, when your potential profit can be three or four times your risk, that same trader can be profitable in the long run with a consistent approach.

Thomas Long · #71 (**permalink**) 11-06-2008, 01:05 PM

Let's shift gears a little as this Friday, November 7th at about 830AM Eastern, the US Department of Labor will release the most anticipated news report of the month, the US Nonfarm Payrolls. This report can result in increased volatility and a chance to profit handsomely in a short period of time.

However, more often than not, new traders are not the one’s profiting but rather losing. The main reason is slippage, which is when your order is filled away from the price you wanted. The reason for slippage is simple, big traders stay away from these events and new traders all try to do the same thing at the same time. If the release is bullish for the EUR/USD, everybody wants to buy at the same time. However, most find that there is nobody willing to sell to them at their price. But eventually your order is filled, but at the seller’s price. Soon you find the market moving against you and you exit to keep your losses from getting too big. But what about those who were selling to you? As the market continues to fall, you start to wonder about these traders who sold to you and the fact that they are now making money. What did they do differently?

These traders were playing the reversal and taking advantage of the fact that the first move after a release is often based on emotions and wrong. Here is a 5-minute chart and an example of a reversal after the release of the Nonfarm Payrolls. We can see that just before the release, the EUR/USD was trading at 1.4892. After the release, the market started to rally up to near the 1.4940 level. The market then started to reverse and traders who were playing the reverse sold at the price the market was trading just before the release. The assumption here is that all traders who bought after the release are now in a losing trade and are selling to get out. So these new traders sell at 1.4892 to get in and use a 50 pip stop with a 100 pip limit order to take profit, which is what we recommend in our DailyFX Power Courses. This is our 1:2 risk:reward ratio and allows us to be profitable if only winning 40% of these setups. The market soon moved down 100 pips from the 1.4892 entry and rewarded those who were patient and reacted to the market environment rather than the emotional first response to the release. These reversal traders will also use the EUR/USD as much as possible in these situations because of the increased volume and better fills. But you don’t have to be first to get into the trade to be right, you just have to be patient and react to the market and not the news release. The EUR/USD doesn’t act like this on every release, but it does frequently enough to make this a valuable strategy.

Thomas Long · #72 (**permalink**) 11-12-2008, 01:24 PM

The EUR/USD 4-hour chart confirms the downtrend that is seen on the daily chart. While this means we should be looking for selling opportunities based on the direction of the daily trend, we should also attempt to time our entry to increase the chance of success on the trade. Some traders who like to trade breakouts could be waiting for a move down through support which is the previous low of 1.2328. A move down through that level would again confirm the downtrend and potentially offer a solid trading opportunity as many sell stop orders are typically placed below support. Protective buy stops could be placed above the previous high of 1.2631 with profit targets set at twice the risk to maintain a 1:2 risk:reward ratio.

KP FX Trader · #73 (**permalink**) 11-12-2008, 04:31 PM

Hello Tom,

As always the input is appreciated. I came to the same conclusion this morning and have my trade placed with a stop above the 1.2631 level just as you mentioned. I hope we are right. I have been studying Gann a bit today. Can you recommend any good books or webinars by FXCM? Who would you say has influenced your trading style the most?

Thomas Long · #74 (**permalink**) 11-13-2008, 01:00 PM

Quote:

Originally Posted by KP FX Trader

Hello Tom,

As always the input is appreciated. I came to the same conclusion this morning and have my trade placed with a stop above the 1.2631 level just as you mentioned. I hope we are right. I have been studying Gann a bit today. Can you recommend any good books or webinars by FXCM? Who would you say has influenced your trading style the most?

You are quite welcome. Good luck with your trade. As far as books, I buy just about every trading book I can and have a decent size collection at this time. Just about all of them have offered a piece of advice that I have found helpful. But the following are some that have offered more than the others:

Reminiscences of a Stock Operator by Edwin Lefevre

A true classic that was written many decades ago. However, the advice on trading in this book may be more true now that when it was originally written. This is basically the story of Jesse Livermore a famous trader in the early 1900's.

Market Wizards: Interviews with Top Traders by Jack D. Schwager

Another true classic that will withstand the test of time. This is a chance to get a feel for how the biggest traders of our time react to the markets in order to take advantage of their moves.

Sentiment in the Forex Market: Indicators and Strategies To Profit from Crowd Behavior and Market Extremes by Jamie Saettele

I am a big fan of using sentiment in one's trading approach and DailyFX analyst Jamie Saettele has done an excellent job of looking at sentiment in the FX markets.

As far as videos/webinars, Matt Russell offers daily videos on how to identify trading opportunities using the information provided on the DailyFX website. I think this work one of the best chances to look over the shoulder of an experienced trader to see what they see and how they use that to find trades.

I don't think any one person or book has had a great deal of influence on my approach to trading. I would consider myself a sponge on the subject of trading as I read and use everything that makes sense to me. But I still read Reminiscences of a Stock Operator at least once a year to keep me from wandering too far off of the path. Certainly I have been a fan of WD Gann, but one does have to be committed to understanding what it is he is talking about. That is not always easy with Gann.

Thomas Long · #75 (**permalink**) 11-13-2008, 01:03 PM

It does appear that the GBP may be one of the weaker currencies at the moment. Matching that up with the one of the strongest leads to checking out the GBP/JPY. Here is the hourly chart which shows that this pair may be moving down through support. The daily trend is down and the 4-hour chart also shows a downtrend. Traders could sell on the move down through support and place their protective buy stop above resistance. Target should be twice the risk on the trade to maintain the 1:2 risk:reward ratio.