Forex Strategies

Talking Points

• Trading a breakout strategy affords many benefits when day trading.
• Order placement can be aided through the use of Camarilla Pivots.
• Learn to place stops and limits using support and resistance.

Trading intraday breakouts continues to be a favorite methodology for trading news events such as todays FOMC (Federal Open Market Committee) rate decision. While rate expectations are forecasted to remain the same, it can increase the possibility of a price breakout on pairs such as the EURUSD later this afternoon. Breakout traders will enjoy the advantages of having clear points of entry through the use of support and resistance, all while having the ability to trade the news with either market or entry orders.
Sound good? Today, we will cover a 3 step process to day trading the EURUSD using pivot points. Let’s get started!

Learn Forex: EURUSD 30Minute with Pivots



Apply Pivot Points

While this first step may seem like a no brainer, it is important to add pivots to the graph so we can trade them! Camarilla pivots used in the example above, are available to traders through FXCMs Marketscope 2.0 charts. Camarilla pivots are designed to show key levels of support and resistance which can be perfect for identifying a potential Forex breakout!
When using Camarilla pivots for a breakout, traders should keep an eye on the S4 (support) and R4 (resistance lines). These areas are identified as market extremes and in the event that momentum pushes price through either of these levels, traders will want a plan of action to trade their favorite pairs.

Place Your Entry Orders

Once key intraday levels of support and resistance are found, trading a breakout is a fairly straightforward process. Traders will look for a strong continuation to the upside in the event price moves through resistance, prompting new Buy positions. Conversely, if price cracks S4 support traders will look to sell continued downward price momentum.
It should be noted that traders can execute a breakout strategy using entry orders, or by placing a market order. Market order traders have the luxury of being in front of the computer. This allows traders to enter immediately, or wait for a candle close for confirmation if preferred. Entry orders allow traders to set orders and walk away from their computer. If either S4 or R4 is broken, they will be ready to enter into the market at the best prevailing price. If you choose to trade with entry orders, consider an OCO order. This way, an entry to buy can be placed above the R4 pivot, and an entry to sell below S4.

Manage Risk and TakeProfit

As you can see breakouts can be an easy and effective way to approach short term trading the Forex market. However, it is important to note that false breakouts can and will occur! Traders should always prepare for price moving against their entry through the use of a stop order. The use of Camarilla pivots can also make the process of risk management easier.
In the example below, we have set up a potential breakout on the EURUSD above R4 resistance. A stop has been placed at R3, for a 20 pip stop loss. From here, traders can extrapolate a positive risk reward ratio of their choosing. Looking to gain more profit in a winning trade, limits are to be set at least 40 pips away from the breakout entry. This would setup a preferred 1:2 Risk/Reward ratio.

Learn Forex: EURUSD Pivot Entries




Conclusion

Using a day trading methodology to trade breakouts can be made easier through the application of Camarilla Pivots. Remember that this strategy is broken down into 3 essential components and can be useful when the market approaches a potentially volatile economic event.
Following this 3 step strategy will allow for traders to identify and execute an easy to follow breakout strategy. The next part of the equation is to then determine your trade size. For more on that, follow this three step guide to determine your trade size.

---Written by Walker England, Trading Instructor

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Talking Points
- The 200-day simple moving average is one of the most widely watched technical indicators
- This moving average can be indentify a significant area of support in an uptrend
- The confluence of the 200-day simple moving average and a major price support zone provides a low risk trading opportunity to join an uptrend

Forex traders have an overwhelming selection of indicators to choose from to help them locate a trading opportunity. Some of these brand new indicators are costly and promise to be the “Holy Grail”. Others are free and not so new but have withstood the test of time. One such indicator is the 200-day simple moving average (SMA).

Since there are roughly 200 trading days in a year, a currency that is trading above its average 200 SMA is considered bullish. It can also be simply used to find major support so traders can enter an uptrend with an excellent risk to reward ratio.

Learn Forex: NZDUSD 200-Day Simple Moving Average Bounce



In the example above, we can see a strong uptrend in the daily NZDUSD chart. The trend started at the end of August at 0.7718 from below the 200-day simple moving average crossed above the 200-SMA on 9/16 and reached a high of 0.8434 on 9/19. Traders who missed the over 700 pip move had a second chance to join this powerful trend as NZDUSD retraced back and bounced from the blue 200-day simple moving average in the 0.8200 neighborhood.

In Forex, numbers ending in “00” usually act as significant areas of support and resistance as well. The confluence of these two factors gave traders added confidence in a resumption of the trend. From the rebound on 10/2, NZDUSD did not disappoint as the bulls as price pushed up over 300 pips higher topping out at 0.8543 on 10/22.

However, nothing moves in a straight line forever including NZDUSD. But after a 300 pip decline, NZDUSD has just rebounded from its 200-day simple moving average (0.8177) and prior round number support at 0.8200. This setup could be a replay of the 10/2 rally and the 200-day simple moving average is about 80 pips away with the old 9/19 high at 0.8434 is 182 pips away.
In sum, the confluence of an uptrend line, round number support and our old friend, the 200-day simple moving average point give traders a good 1:2 risk to reward setup. Traits of Successful Traders research by FXCM of over 12 million real trades by clients worldwide in 2009 and 2010 revealed that the number one mistake that traders made was not using a minimum of a 1:2 risk/reward ratio.

Locating where price is in relation to the 200-day simple moving average can help Forex traders find entries that have a greater chance of making more money than the amount placed at risk.

--- Written by Gregory McLeod, Trading Instructor

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Talking Points:
-USDOLLAR was the largest gainer over the past week
-Shift in SSI readings suggests further gains are possible for USDOLLAR
-Buy USDOLLAR Currency Basket

The Federal Open Market Committee meeting this week provided the fuel to ignite the sleeping markets. Several currency pairs are trading near their 200 period Simple Moving Averages on the 4 hour chart. This suggests the markets are generally range bound and staying close to their averages.

However, there is one currency, the United Stated Dollar, which jolted awake and climbed up the Strong & Weak chart noted below. When comparing the price of the exchange rates relative to their 200 period Simple Moving Average, the Greenback changed trend the most and is now considered the strongest currency according to the Strong & Weak analysis.

Forex Strategy: Matching Strong versus Weak

Currency	Up Arrows	Down Arrows	Change From Last Report
USD	4		Higher 5 rankings
EUR	3		Down 1 ranking
AUD	2		No Change
CHF	3	1	Down 1 ranking
GBP	3	1	Higher 1 ranking
JPY	2	3	Down 2 rankings
NZD		6	Down 1 ranking
CAD		6	No Change

We have focused on the USDOLLAR quite a bit in our strong and weak analysis over the past several weeks. It all began September 22, 2013 when the Euro began thrusting higher.

As the USD was rebounding, the Euro wasn’t backing down. As a result the EURUSD pair finished the week on its highs. Also, when looking at the EURUSD weekly chart, there is a cluster of resistance in the 1.3750-1.3850 range. Therefore, this indicates to me that although the USD may perhaps find support, the EUR still has room to run higher against the USD.

Then, a couple weeks later, a very tight range developed as the US Debt ceiling painted the USDOLLAR in a corner. A trading plan was presented with “the easiest way to determine [direction] is wait for price to break above resistance or below support.”
Eventually, prices did break lower and the USDOLLAR sell trade was entered. Eventually, the EURUSD pushed into the 1.3750-1.3850 resistance zone and both trades were closed down. As noted last week’s piece:

“The lack of follow through has me concerned about broad based USDOLLAR weakness. The single currency has several reasons to weaken, yet it remains stubborn. Therefore, be careful that the oversold levels may revert back to the mean and the Buck might actually strengthen.”

As a result, the USDOLLAR appeared poised for strength.
Now, that the USD has proven itself, the landscape is changing that we can seek out USDOLLAR strength to buy.

Forex Education: USDOLLAR Sentiment Readings (BEFORE)

From

October 25, 2013 (above) --- October 31, 2013 below

Forex Education: USDOLLAR Sentiment Readings (AFTER)



We’ve shown these SSI readings for the past several reports. The important take away is how the sentiment towards the USDOLLAR has shifted. The USD bulls actually got it right during this past week and the USD strengthened.

Now that they are slightly into the profit, they are reducing their positions evidenced in the positioning changes above. For example, a change in the EURUSD SSI from -4.5 to -2.1 means the percentage of USD buyers reduced from 81% to 68%. This change in sentiment is part of the fuel behind a new bullish stance towards the Greenback.

Forex Education: USDOLLAR in a Trend Channel



As we can see above, the Greenback is stuck inside this red trend channel. The next level of resistance is near 10,575 so the dollar should have a clear road until then. Due to the confluence of resistance near 10,575, there should be a reaction at that level. If the value of the USD were to strengthen above the 10,575 strong resistance, then that would likely confirm a medium to longer term bull market is kicking off.

Executing the Trade

Since we don’t know which currencies the USDOLLAR is likely to outperform against, so we will take a diversified approach and buy the USDOLLAR against a basket of currencies.
We recommend risking less than 5% on all open trades. As a result, risk less than 1-2% on this basket so you have additional capacity to take on other trades.

Good luck with your trading!
---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education

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Talking Points:

• The Nucleus of the Forex Market is Trade and Capital Flows
• This article shows why Trade and Capital Flows can be so important
• Currency Wars are based on Trade and Capital Flows; we explain how and why

Only six months ago, you couldn’t turn on the news without hearing the term ‘Currency Wars.’ And if you didn’t know any better, and only paid attention to the headlines - you might think that whole theme had already played itself out.
Well, it hasn’t. It’s still there. There have just been more ‘headline-worthy’ matters that newspapers and cable television channels have focused on because it’s allowed them to attach a countdown ticker to an event to scare people into watching and/or reading their content (such as the taper-tantrum, or the US Government Shutdown).

But to remind us that currency wars are not out of the realms of possibility, in a sharply worded statement this week, The United States Treasury Department pointed a very accusatory finger towards Germany propagating a ‘beggar thy neighbor’ strategy; in growing their economy through an export-led recovery at the behest of their neighbors in Europe. The statement goes on to say that without Germany making concessions, the Euro Zone was unlikely to recover.

This is about having a weak currency. Since globalization has set hold of the global economy, the most powerful nations in the world have realized that the easiest way to find growth is to sell to people outside of their own country (exports). By doing this, you bring foreign capital into your economy, and then your economy can use that capital to hire more workers, pay higher rates on deposits, and eventually, see inflation.

Let’s take Japan as an example, as they were the target of accusations of currency manipulation not more than a year ago when Shinzo Abe kicked off the ‘three arrow’ approach to revive the Japanese economy.

The backstory is that Japan was mired in a decade’s long down-trend. The Nikkei approached 40,000 in the latter 1980’s, and during the Financial Crisis, came back down to 7,000.

A strong currency can ravage an economy




This led to considerable political turmoil in the country. And that political turmoil spread through Japan in a number of ways.
But this all came to an interesting pivot last year, when one of the characters at the center of that previous Japanese political turmoil came back in the spotlight: Mr. Shinzo Abe. Abe had been Prime Minister of Japan before; and he resigned in shame upon accusations of wrong-doing within his cabinet.

But, Abe got an idea that would allow him to take back control of the country promulgated on an economic policy that would FINALLY pull the Japanese economy out of the doldrums.
A primary point of emphasis was to weaken the Yen, and this is why that is important: Japan is an export-based economy. For export-based economies, exchange rates are extremely important.

The USDJPY exchange rate is simply an expression for the value of one dollar quoted in Japanese Yen. So, let’s look at an example together:
Let’s say that a Japanese auto-maker designed a car in 1998; and calculated that it cost them roughly ¥2,800,000 to produce it ($20,000). But, no problem at all - they were going to sell the car for $30,000 - which would allow a very handsome profit of $10,000 on every car sold.
The USDJPY exchange rate in 1995 was roughly ¥140.00. So, we can look at the overall cost and sale of one of these cars below:

So, remember - the value of 1 dollar in 1998 was around ¥140.00 - so it cost ¥2,800,000 to build the car. But, that’s ok - because they were selling it for $30,000, or ¥4,200,000. That left the auto-manufacturer with a nice profit of ¥1,400,000, or $10,000.
If things could stay like this forever, our auto-manufacturer would surely be happy with a 50% profit margin on each car sold.

But things didn’t stay that way. The world has changed massively since 1998.
Only 10 years later, that exchange rate on USDJPY had moved below 80.




Let’s look at how our auto-manufacturer would fare in that environment.


It still costs ¥2,800,000 to build the car, because they are paying workers in Japan, and buying goods in Japan. So the change in the exchange rate doesn’t necessarily do anything to their cost structure, although because each yen is worth so much more; the cost structure in dollar terms is considerably higher.

It does, however, have a massive impact on their sales revenue. Remember how they were selling it at $30,000 in the US. Well, now they are only getting back ¥2,400,000 ($30,000 X ¥80.00 = 2,400,000).

They aren’t even covering their cost any more! A 50% profit margin has just went ‘POOF’ into thin air, and this is ONLY because the ¥ has gotten stronger.
Our auto-manufacturer is now losing 400,000 yen on each and every car sold. How long do you think this will go on for? Not many businesses can continue to stay in business if they are losing money.

So, what will our auto-manufacturer do? Well, they’ll respond and none of their options are very good. They can raise the price in the US... but now they won’t be selling nearly as many cars. Customers will notice that our Japanese auto-manufacturer had raised the price more so than German, American, or Chinese auto-manufacturers; so this isn’t really a readily available option.

Often times they’ll respond by cutting costs. This means laying off workers, or at the very least hiring fewer of them. They’ll begin focusing on ‘efficiency’ of the business, and trying to find each and every way of pinching pennies so that they can at least cover their costs. All of the actions taken by our auto-manufacturer to try to cut costs are going to be negative for the overall economy: Fewer people employed (higher unemployment), smaller or non-existent increases in pay (lower inflation), and a general sense of panic about future economic certainty given that our auto-manufacturer didn’t even necessarily do anything wrong... they just got blind-sided by a much stronger currency.

This is precisely why Japan was mired in a decades-long recession, and saw deflationary pressures throughout their economies.

The Response:
So, what does Japan do, in response? They work to cheapen their own currency; because if they can succeed, they can get the opposite effect working for them.

So, lets say our auto-manufacturer has found a way to continue to exist in this expensive yen environment; and they’ve cut costs to 2,300,000 yen per car.
Surely, this isn’t a desirable scenario, because they have minimal profit margins (only 100,000 yen per car). But - they’ve found a way to survive.

But - when the Bank of Japan finally gets the yen weaker, our auto-manufacturer is in a position to massively benefit.

Let’s say that the Bank of Japan does something similar to the end of 2012, and pushed the yen lower (and USDJPY higher) to 100.00.

Well, our auto-manufacturer is lean from the hard times, and is still producing the car at 2,300,000 yen. But now that USDJPY is 100.00, they’re getting back 3,000,000 for every car sold... a profit of 700,000.

This means quite a bit... because now that profit can be re-invested in the company in equipment. Those equipment purchases are going to provide profits for manufacturers in Japan, who will then need to hire more workers. Our auto-manufacturer can now become more competitive with pricing, considering they now have a profit margin with some cushion to reduce selling prices, and they can even try to outsell their German or American counterparts by offering a lower price.

Eventually, our auto-manufacturer will need to hire more workers, and because the demand for workers has increased (since equipment and auto-manufacturers are both looking to hire), wages have to increase.

This starts that whole synergistic impact of economic growth within an economy, and all that really happened was a change in the exchange rate.

Weaker currency prices make exporting more attractive; and for export-based economies, cheaper currencies can bring considerable growth into the economy.

Why Does this Matter Today?

It matters because the largest economies in the world are all actively embarking on campaigns to weaken their currency.

The United States is in its 4th round of QE, adding $85 billion per month into the economy (which functions as dilution in the US Dollar, or ‘artificial weakness’). China uses a ‘fixed-floating-rate’ regime, where an US Dollar weakness seen will also show up in China because they base the price of the Yuan on the value of the Dollar. So, as the US goes, China goes along with it.

That same report mentioned at the beginning of this article had previously made those same accusations of employing a ‘beggar thy neighbor’ strategy towards China with their fixed-floating-rate regime.

Japan now has a 220:1 Debt-to-GDP ratio after firing off the ‘three-arrows’ approach towards the end of 2012. As we saw in our previous example, continued Yen weakness is something the Bank of Japan is actively seeking, albeit cautiously to avoid further accusations of starting a Currency War (particularly with their next-door neighbor of China).

And Europe, well Europe is a mess right now, and will probably continue to be so until a true banking union is formed. Nobody is really even sure what type of wherewithal the ECB has to embark on a dilution-based currency policy; but recent talks of ‘negative rates’ have served to scare many investors from storing currency in one of the few areas in which we might not see an active dilution-based policy.

This is the nucleus of the forex market: Trade and Capital flows. And this will be at the center of the next bout of the Currency Wars.

-- Written by James Stanley

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Talking Points

• Forex trading is similar to buying milk or orange juice

• 2 type of market conditions are trend and range

• Match the strategy to the market condition

What if you went to the local store to buy milk only later to find out they don’t have any milk – they sell orange juice. What would you do?

Would you beg and plead with them to provide you milk?

There are a few similarities to trading forex and our milk analogy above. This piece is the 2nd of a 5 part series on becoming a more disciplined forex trader.

Let’s unpack the analogy above, determine what our choices are, then relate it to forex trading.
The way I see it, there are 3 choices in the situation above:

• Buy milk from another store
• Do nothing
• Buy orange juice from store

The choice we ultimately make will depend on why we want the milk. If we want milk because of the specific nutrients it provides, then we are likely to choose #1 or #2 above. However, if we want milk because we simply are thirsty, then option #3 would likely be the easiest choice to make as the orange juice would easily quench our thirst.



Well, forex trading has similar choices and part of the reason many traders lose is because they expect to buy milk from an orange juice store. Let me explain.

As we learned last week, trading is methodical. That means we have a plan and a strategy of when we buy or sell. Part of that plan should also include what market specific condition a strategy performs well in.

It is unrealistic to expect a strategy to do well in all market environments. Each strategy is built with a specific market condition in mind. When that condition doesn’t exist, the strategy experiences losses. When that market condition appears, the strategy tends to perform better. The strategies that outperformed during the 2008-2009 credit crisis tended to underperform in the subsequent ‘thawing’ of 2010.

The two main market conditions are trending and range.
Trending strategies are the most widely followed and popular. Trends are easy to identify. Trends are also fairly simple to trade. Additionally, so long as you can identify a strong trend, many times, the trend can bail you out of an imperfect entry which is why many new and experienced traders follow trends. (see 3 Ways to Trade a Strong Forex Trend)

The other main market condition is a range or trend less market. Ranges can also be easy to identify as well. Additionally, newer traders typically trade ranges once they have learned how to identify support and resistance levels. This is because you have a fairly well defined level of support and resistance which oscillators tend to thrive in.

Range trading basics is a great place to start and you typically see currencies that are close geographically develop ranges with one another. This is because the trade relationship between the two neighbors is fairly tight and they feed off each other. So both economies are typically strong at the same time or weak at the same time.

As you can see above, both types of markets are fairly simple to identify. However, many traders lose because they apply the wrong strategy to the wrong market environment.
Therefore, once you can distinguish between the two market types, then you simply need to identify which condition your strategy is expected to perform well in. After that, seek out those markets the exhibit that condition.

Using the analogy above, you would be similar to buying milk because you need milk and its specific nutrients. If you can’t find the market that sells milk, or the market that is offering you ranges, then do nothing until you find the market that produces ranges.

On the other hand, many traders have several strategies that they trade. Those traders will identify a market like the EURUSD, then decide which condition it is providing and apply the appropriate strategy to the EURUSD. This would be like buying the orange juice because you are more interested in a liquid to quench your thirst rather than a specific liquid. Said another way, you are more interested in trading the EURUSD (quenching your thirst) rather than trading a specific strategy (the liquid used to quench your thirst).

By the way, these concepts apply to robotic trading as well.

---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education

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Talking Points

• Forex traders prepare for an active economic event calendar this week.
• Key Benchmark Rates are expected to remain at .5%.
• Absent of any changes, the EURUSD is expected to continue trending.

This week is sizing up to be another big week for Forex news traders. With events such as the European central bank (ECB) rate decision on the economic calendar, it is important for traders to have an idea of the markets expectations and how it can affect price.
To get prepared for the event let’s take a closer look at the ECB rate decision!

Learn Forex: ECB Benchmark Rate


Interest Rates

The ECB rate decision is set to be released on Thursday the 7th, at 12:45 GMT. Controlling interest rates is one of the key monetary tools the ECB has at its disposal to influence the Euro Zone economy. Over the past two years, you can see these key interest rates steadily declining as the ECB has worked to spur the economy. The goal has been to free up capital by making borrowing more accessible to businesses. It is worth noting that rates have been at a record low.5% now for 7 months, as seen in the graph above.

Analysts believe that interest rates are to remain the same, holding at .5%. So with rates potentially set to remain unchanged, let’s look at what can traders expect from price.



Trade the Trend

Outstanding any fundamental changes from this week’s news events, traders will reasonably to expect the current EURUSD trend to continue. Price has been defined by a rising price channel supported by the standing July and August lows. As long as price remains supported, traders will look for opportunities to buy the EURUSD up towards channel resistance near 1.3900.

An alternative scenario would occur in the event that price breaks below the supported price channel. If the price of the EURUSD moves under 1.3440, traders may then look to sell the pair towards lower lows.

---Written by Walker England, Trading Instructor

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Talking Points
- Rising Forex trend channels show clear entry and exits
- In a rising trend channel, a buy signal happens when price rebounds at or near support
- The current AUD/CAD daily chart illustrates a rising trend channel buy setup

Forex currency traders like trading horizontal ranges because they are easy to trade. One only needs to buy at support and sell at resistance. If the range is long enough, several repeatable trades can be made. However, when price breaks out of these ranges, traders can be disoriented as price makes a new high and breaks out. In some cases, range traders can be caught on the wrong side of the trade.

However, this initial spiking phase starts to mellow with time and the angle of assent eases. Price action settles into a different kind of upwardly sloping range called a rising trend channel. By connecting two consecutive rising swing lows, the support or base of the channel can be constructed. Similarly, by connecting to consecutive higher swing highs with a trend line, the resistance or top of the channel is created.

Learn Forex: AUD/CAD Long Entry Near Channel Support




How to Trade

Projecting these lines into the future, traders will look for price to come down and test the support line and bounce higher. Waiting for the close of a bullish candle that is formed after the bounce would be the entry signal. Traders would then place a protective stop just below the last swing low and the trend line support. Next, they would place a take profit limit at or near the top of the channel.

AUD/CAD has been in an uptrend starting from the low at 0.9167 on 8/1/2013 peaking at 1.0046 on 10/28/2013. The pair has rebounded from near the bottom of the channel at 0.9828 on 10/31. As long as channel support holds near 0.9800, AUD/CAD should be able to reach the top of the channel at 1.0113. A possible entry is at 0.9928. However, a better on a pullback toward trendline support at 0.9814 would reduce the amount of risk on the trade. A daily candle close below the 0.9800 figure would invalidate this trade setup because the channel would have been broken.

In sum, channels do not need fancy indicators, just two parallel trend lines. The top of the channel is formed by connecting two consecutive higher highs to form the top of the channel. The bottom is formed by connecting two consecutive higher lows. Projecting these lines into the future can identify a trade setup with a predefined risk and profit target. So exchange your TV channel surfing habit for a Forex channel; you’ll be glad you did!

Knowing how to read candlestick patterns can help you become a better Forex Channel Surfer! Watch a free 15-minute course on the topic of Price Action Candlesticks. You'll first be asked to sign the guestbook, which is completely free;and then you will be me with the video-based lesson via Brainshark

--- Written by Gregory McLeod, Trading Instructor To contact Gregory McLeod, email

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Talking Points

• Preparing For A Central Bank Rate Decision
• The 2 Main Questions To Ask Yourself
• Placing a Trade off the Print

2013 has been a year where Forex market pivots have been on the heels of Central Bank meetings. Nothing else can so abruptly change the direction a market is heading like a Central Bank. For example, last week the Federal Reserve simply implied that they’re not asnegative on the economy as many believed and that provided the USDOLLAR with its largest rally in months. This article will serve as a primer to walk you through approaching a Central Bank announcement as well as how to trade or adjust your position after the announcement has hit the wire.

Preparing For a Central Bank Rate Decision

Central banks are the key driver of the Forex market as they control the monetary policy that affects interest rates and sometimes open market operations to assist the economy. A simple understanding of a Central Bank’s chief tools and objectives will be instrumental in helping you gauge how to prepare and trade an upcoming Central Bank announcement. Once you have a clear understanding you can create a framework for trading an upcoming rate decision.



Two Questions to Ask Yourself When Approaching a Bank Rate Decision

The two questions that should help you to place a trade once a rate decision statement has been released are:

• Where is the Central Bank Wanting the Economy to Go?
• How Will They Use The Currency To Deliver That Result?

The first question will help you get your mind in line with the Central Bank’s objectives. This is key because you want to see if the statement is more or less aggressive in allowing them to reach their goals for the economy. You can take a simple example like the US Dollar whose Central Bank, the Fed, is working to expand employment as well as reach an inflation target of 2% to show as proof that the economy is recovering.

The second question is what most traders around the world are focused on for placing a trade on a currency pair. The answer to this question drives most Quantitative Easing efforts or other open market operations. Naturally, if a central bank feels that the economy is in such poor health that they must flood the market with the home currency to get the wheels of the economy greased and moving again so that the Nexus of the Forex market can steadily move, that can weaken a currency.

Conversely, if the economy is heating up and signs of improvement are developing then Central Bank may slow down their operations. Also, in the world of trading, a central bank noting that conditions are improving at such a pace that they may begin to adjust their open market operations can swing markets as well. This is what we saw in late October when the Federal Reserve of the US released a statement which omitted a key line about the financial conditions worsening.

Learn Forex: Market Sentiments Can Shift When the Market Misjudges a Central Bank




Placing a Trade off the Central Bank Decision Print

Later this week, we’ll have both the European Central Bank or ECB and the Bank of England or BoE with their rate decision. By looking at the two questions above, we can see that the latest news releases to have crossed wires affect the ECB’s goals the most. In short, the ECB is focused solely on inflation so the poor CPI reading last week shows that the ECB will likely need to address the threat of deflation which can act as a silver bullet to a recovering economy.

Given the ECB being outspoken about their focus on inflation, the recent CPI data makes Thursday’s ECB meeting one that will have the attention of many traders around the world as EURUSD drops from 2013 highs. As a trader yourself, when the statement is released, it is helpful to look for any guidance or surprise on the next step of action out of the ECB. Simply put, you should look for any indication that the ECB will act on worsening data or pave the road for December rate cuts or Quantitative Easing to weaken the Euro to assist the Eurozone in the face of deflation.

Once you know what to look for, it’s helpful to know what currencies you should look to trade the central bank’s currency against when approaching a central bank meeting. Given the strong or bullish price action of the GBP or USD, they would be a favorable counter currency to sell the Euro against if you get an indication from Thursday’s ECB announcement of further weakness.

Learn Forex: EURUSD Set-up into ECB



Happy Trading!
---Written by Tyler Yell, Trading Instructor

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Sometimes, support and resistance levels can be subjective, especially if one considers different time frames. Thanks for all the explanations.

Talking Points

• Candlestick analysis can be worked into any active Forex trading strategy.
• The bullish engulfing candle can spot potential reversals in price.
• Traders can look for candles to signal a resumption of the EURUSD bull trend.

Spotting price reversals and continuations through the interpretation of price action is an important skill for Forex traders to master. Candlestick analysis can help make this process easier. Candle pattern interpretation does not only make navigating the market easier, but it can also be a useful trading tool. With this idea in mind we will focus on recognizing and trading one of the markets most clear cut price action signals, the bullish engulfing candle pattern.


What is a bullish engulfing pattern?

A bullish engulfing pattern is a candlestick pattern normally foundafter a period of downward market pressure. Pictured above we can see that the bullish engulfing candle pattern is actuallycomprised of two completed candles! The first candle will normally depict the end of the currency pairs established weakness. This first candle can come in a variety of shapes and sizes and will vary from chart to chart.While it is notdirectly related to the next engulfing pattern, this candle should denote the end of the markets current decline. Small candles such as dojis are considered preferable in this position though, as they can reflect market indecision in the current trend.

The second candle in the pattern is arguably the most important. As seen above, this candle is expected to stick out from price action and close as a long blue candle. This large move in price signals a return to a bullish market bias with newupward price momentum surging towards higher highs. To be considered a complete bullish engulfing candle pattern, the high of this blue candle should close well above the high of the previous candle. The higher this blue candle advances, the stronger our signal is considered. A new push of upward movement in this position on the chart, reflects new buyers overtaking the previous strength of the sellers.This action can be used in conjuncture with an established uptrend,with buyers looking to enter the market on refreshed strength.

Let’s look at a current example!

Learn Forex – EURJPY with Engulfing Patterns




Charting the EURUSD

Once you are familiarized with identifying the bullish engulfing candle pattern it can then readily be applied to your trading. Above is an excellent example of the pattern in action on a daily EURUSD chart. The EURUSD is currently in a standing uptrend, beginning with a strong bullish engulfing candle completed on July 10th. Along the way there have been price retracements against this now mature trend, but we can see many of these declines have ended in a fresh bullish engulfing candle. These surges in price have confirmed the resumption of the broader trend, while creating new buying opportunities.

Currently, this scenario may be playing out yet again. Highlighted in green, there is another potential bullish engulfing pattern forming on the EURUSD Daily chart. Traders will be watching this candle for a confirmation to signal the resumption of the bull trend after last week’s decline. If the price of the EURUSD does remain supported, traders should take this as a bullish market signal and look for the pair to move towards higher highs.

---Written by Walker England, Trading Instructor

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