Thread: Chart of the Day

The previous three days we posted three different charts of three different currency pairs that are in the same situation. The AUD/CAD, NZD/JPY and the AUD/JPY all show a downtrend on the daily chart and have rallied up to a potential resistance level on the 4-hour chart. This is a classic selling opportunity as we want to always trade in the direction of the trend as seen on the daily chart. If one of these pairs starts to move down again, it is likely that all three will move down together. Even though they are different pairs, the moves in the FX markets are related. So instead of opening three different trades and increasing your risk, the better play is to open smaller positions on these pairs and treat all three trades as one trade. If you normally would risk $300 on a trade, then only risk $100 on each trade to keep your total risk at that $300 level. Selling all three pairs and opening big positions on each is not really diversifying, but rather just loading up on one move. This is just too risky as all three are likely to win or lose together. Some traders will just sell the weakest and if buying, buy the strongest. The weakest of the three appears to be the AUD/CAD and since that is also the pair with the lowest rollover amount to be paid, might be the best pair to trade of the three. The situation is unique with each opportunity, but taking a look at the big picture does bring some clarity into the equation.

A look at a couple of the pairs with European currencies shows that the CHF is much stronger than both the EUR and the GBP. The downtrend on the EUR/CHF and the GBP/CHF means that traders see that the financial situation may have less of an influence on the Swiss economy than the economies of other European nations. This is something we want to keep in mind when looking for trades. An example would be that if you think the USD will weaken, instead of buying the EUR/USD, one could sell the USD/CHF instead to take advantage of the stronger CHF. This guarantees nothing but is rather just an edge in our trading. But edges like this can make a big difference in one's results over a long period of consistent trading.

This is a daily chart of the USD Index. It is used to get an idea of the strength/weakness of the USD against a basket of currencies. A move off of the highs in the last couple of weeks seems to be over with another strong move up today. This may be the sign we are looking for as a hint that the USD will continue to rally. I have been avoiding trading the USD for a few weeks now based on the uncertainty of the US financial markets, but this chart shows me that it may be time to once again look for trading opportunities to take advantage of a stronger USD.

Here is an hourly chart of one of the pairs we have been following. You can see on the chart that the AUD/CAD has moved into a range after selling off strongly. There may be another opportunity to sell this pair as the trend remains down. Breakout traders might sell on a move down through support and place their stop above resistance. Aggressive traders might just sell now and also place their stop above resistance. A move up through resistance would not be an indication of a trend change, but it does offer some protection for protective stops.

With the USD continuing on it's bullish run as one of the strongest currencies right now, I like to look at the other currencies to find the weakest. This gives me the opportunity to be in on some big moves by buying the strongest and selling the weakest. My pick would be the AUD as currently the weakest currency, which means to look for selling opportunities on the AUD/USD. We can see that this pair just broke down through support and remains trading below that level. Our recommendation in the DailyFX Power Courses is to sell a move up to resistance in a downtrend or to buy a pullback down to support in an uptrend. This pair seems a good choice for traders to sell any strength in anticipation of a continuing downtrend.

An updated AUD/USD chart from last week shows how the AUD broke down through support and sold off dramatically. The AUD is still the weakest of the currencies with the USD showing continued strength. A quick look at the USD/JPY shows the the JPY is stronger than the USD which means that the AUD/JPY, which we looked at earlier in the week, appears to be even weaker than the AUD/USD. But the time to enter into a trade is not now after a big sell off. We have to keep our emotions in check and wait for the right moment. I like to wait for the market to rally up to a resistance level and then sell. That way my risk is smaller and I put myself in a position to be in on some of these big moves that these markets are known for. This is the main reason we recommend in the DailyFX Power Courses to trade with the daily trend and not against it. Catching one of these trades where you can actually profit by over 1000 pips in a couple of days sure makes up for a few losing trades. The two keys to trading are to always trade with the daily trend and to use good money management on the trade. It's been a good month for trend traders as we see breakouts in many pairs, all in the direction of the trend as seen on the daily chart.

A look at a 4-hour chart of the AUD/NZD confirms once again just how weak the AUD has become recently. All of these pairs are trending strongly and offered great trading opportunities in the last week or two. But this is the time when professionals use extreme patience and discipline in waiting for the next selling opportunity. Notice how the Slow Stochastics, using values of 15,5,5, have not yet come close to the overbought level, which is considered 80 or above. I have circled three occasions on the chart where the indicator did move up to above 80, which signaled a selling opportunity since the direction of the trend was down. We want to wait for the market to reach a point where the odds of a successful trade are better and this is where the use of technical indicators can be of great value.

A look at the daily chart of the EUR/GBP shows a range today of over 200 pips. It has been years since this pair has had this kind of a move in one day. It is showing EUR strength with GBP weakness since the pair rallied. This kind of a move is big enough to take notice and my interpretation is that there is a big shift in sentiment on these two currencies. While they had been in somewhat of a range since April, this week we saw a quick move down through the lows and then this big rally. This is a clue for traders to use the weakness of the GBP and the relative strength of the EUR to their advantage. Instead of selling the EUR/USD, one could sell the GBP/USD on the assumption that the GBP weakness will continue and could result in a better trade. These dynamics change frequently, but the relative strength of one currency with another is an edge that FX traders want to use every time they look for a trading opportunity.

In normal market conditions, I would usually move down to the hourly chart if none of the 4-hour charts were showing any solid trading opportunities. But with the uncertainty of the markets and the increased volatility, I think that sticking to the 4-hour chart is the better play. The longer-term time frame charts are not as influenced by the increased volatility as the shorter-term time frame charts are. That just leads to better trading opportunities on the 4-hour chart. The problem is that there are not as many trades on a 4-hour chart as there is on an hourly chart. So the decision becomes whether you want be more active and take the higher percentage of losing trades by moving down to the hourly chart or to just be patient on the 4-hour chart. If you are in the markets for the excitement, then the hourly chart is for you, but if you are in the markets to make money, then sticking to the better trading opportunities on the 4-hour chart is the better play. Here was can see that the Slow Stochastics are moving up into the overbought area which is 80 or above with this indicator. The better traders were taken after the crossover back to the downside as noted by the circles on the chart. We have to wait for the best trades to show themselves and any attempt to quicken the pace usually leads to losing trades.

Another look at the AUD/CAD 4-hour chart shows how this market is acting similar to the last high about three weeks ago. Many pairs are in a similar position where the MACD has not yet crossed over. The crossover could be a sell signal for traders who use this indicator in their trading approach, while other traders will use their own approach. The USD/JPY, EUR/CHF, EUR/JPY, AUD/JPY, NZD/JPY and the GBP/AUD are just a few that may be ready to move back in the direction of the trend. Once again the idea is to check the Rollover on each pair and to look at the charts of all of these pairs in an attempt to determine which one may be the strongest trading opportunity. One other point to check is the spread of each pair as we want this trade to cost as little as possible to the trader to maximize the profit potential. Upon entering into the trade, we would also want to make sure we place our protective stop above the current highs, as we will be wrong on a trend change. But trends do not change that often in the FX markets so we want to trade with the trend on every trade.

Of the currency pairs that I listed yesterday as possibly setting up for another trade, it appears that the JPY strength is a common theme in many of them. Of all the currencies that are paired with the JPY, I see the AUD/JPY as perhaps offering the best chance of success. Many traders have most likely already established a sell position and placed their protective buy stop above the high just below the .7500 level, while others may still be waiting for their indicator of choice to offer the signal to enter. That may be quite a bit of risk to take on, so traders are best advised to open smaller than normal positions in an attempt to keep their risk to less than 5% of their account balance. Experienced traders identify their risk before getting into the trade and then look for more in profit potential. That is why we recommend using a 1:2 risk:reward ratio that is key to long-term success. If you risk 300 pips, you look for 600 pips in profit. But staying in the trade long enough to get the 600 pips is the hard part about trading. New traders typically get out too early in an attempt to make sure they get some profit on the trade, but that is exactly what you don't want to do. Staying in a trade long enough to let the market hit your profit target is what allows a trader to be profitable in the long run. Taking quick profits but letting your losing trades run to completion is how new traders can get themselves into trouble. There is that patience and discipline thing again. It is very difficult to teach, but necessary for long-term success in the markets.

I discovered that most of your News/Datas are between 200 - 2006. Can't we have survey of October, 2008? Please I need it. Thanks

Originally Posted by Patomacameo

I discovered that most of your News/Datas are between 200 - 2006. Can't we have survey of October, 2008? Please I need it. Thanks

I'm afraid that I don't know what you mean...can you clarify?

After a strong sell off yesterday, the AUD/JPY is bouncing up off of the lows. This can be a good time to move down to the hourly chart to find another trading opportunity. The hourly chart does not offer the same quality trading opportunities that the 4-hour chart offers, but they can be quite profitable in the long run just the same. Again, two different approaches are to wait for the MACD crossover before selling (one can use any favorite indicator for this) or to just wait to sell on a move down through support, which was the low from yesterday. The difference is that selling with the indicator might offer a better entry price, but the win percentage would most likely be higher by waiting to sell on the move down through support. It is really a matter of personal preference on which approach to use as both can be used quite effectively. In either approach, the protective buy stop could be placed up above resistance.

With the volatility in the FX markets declining, it may be getting close to once again adjust our thinking when looking for currency pairs to trade. After big moves like what we have seen, it is not unusual for a market to slow down to take in all that has happened. That is what we may be seeing now. I would still look for breakouts, but I suspect that we may not see as many as we saw in the last month. The EUR/USD is close to support and a move down through that area would be a solid selling opportunity. Protective stops would be placed above resistance which will be the risk on the trade. Limit orders to take profits should be placed to assure getting two pips in profit for every pip risked on the trade. If the risk is 150 pips, then look for 300 pips in profit. This is the 1:2 risk:reward ratio that we teach in the Power Courses. However, the longer this market stays above support, the more likely we will soon be looking for range bound markets and the trades that can be found in that type of market environment.