Forex Strategies

Talking Points:
-What Do Triangles Mean?
-When Do Triangle Corrections Occur?
-How to Trade the Following Breakout

Have you ever felt like the market has no idea what it wants or where it wants to go? This is often seen on the chart as a trendless sideways move with a lot of overlap and no clear direction. However, if you step back, you begin to recognize a pattern that can provide clues as to the next possible move with a favorable risk reward ratio.

What Do Triangles Mean?

Triangles are a trendless or corrective pattern that allows bulls and bears to find equilibrium after a strong trend. Triangles can happen after uptrend or downtrend and they often mean there is one more punch in the direction of the trend. Another benefit to recognizing and trading the breakout after the triangle is that triangles provide very clear profit targets.

Triangles can be easily identified by drawing trendlines off of converging highs and lows until a breakout occurs. If the trendlines are not converging, then it’s best not to trade it as a triangle. If you have trouble identifying the important highs, you can use a tool like fractals. Fractals will identify the highest high or lowest low over a 5-bar period as seen on the XAUUSD chart below. One thing to ensure is that what you label as the end of the triangle or ‘e’ wave cannot surpass beyond the ‘c’ wave extreme or something else is at play.

Triangles Are Easy to Spot, Knowing How to Trade Them Is What’s Important




You’ll likely notice we’ll specifically discuss trading the breakout from the triangle as opposed to entering during the triangle hoping to catch the breakout because a lot of margin can be used up while waiting for a triangle to break and some triangles can take weeks, or months, or years to breakout.

Because of the drawn-out sideways price action, it’s best to label and identify key points of the triangle. For simplicity sake, let’s use Elliott Wave labeling which labels corrections with letters and triangles specifically with a-b-c-d-e for the key points.

USDMXN was a 5-year Triangle



When Do Triangle Corrections Occur?

Triangles often occur before the last move of a current trend and rarely in the early part of the trend. However, that doesn’t mean you should start selling into a triangle breakout thinking it will trade lower. It likely will for a short period of time but triangle could have been a fractal part of the overall trend meaning the overall trend will resume much higher. When a triangle breaks as identified by the points below, it’s best to follow and or trade with the overall trend

How to Trade the Following Breakout

Once the overall trend has been identified as higher or lower and the trendlines have been drawn, we can look to where we can place protective stops and respective profit target ranges. Once a breakout has been identified, an entry in the direction of the overall trend can be entered with a stop set to be trailed below the final higher low of a triangle, or lower high in a bearish environment with a profit target determined by the width of the triangle or a prior trend measurement.

The width of the triangle is the orthodox target when trading triangle breakouts. However, another method is to look at the distance traveled earlier in the trend and look for an equal move. For example, EURUSD has just broken out of a triangle to print multi-year lows and we can use either the width of the triangle for a target or the distance traveled on the first leg of the downtrend that begin in May to June and use that as our target.

Big Picture EURUSD – Downtrend Since May



EURUSD Recently Broke Lower After the Triangle Completed



The profit target range for the EURUSD breakdown from the triangle is from 1.2260-1.2020 but that’s not a point to start buying because an extension could be underway. Either way, the triangle helps us see that the trend is reaffirmed and we should wait for key price action pivots to break against the overall trend before adjusting our biases.

Happy Trading!

---Written by Tyler Yell, Trading Instructor


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Talking Points:

• ADX can pinpoint strong currency trends
• RSI can be used to enter with market momentum
• Risk Management can use previous market highs and lows

ADX 50 trend trading strategy.

EURUSD 4Hour with ADX



ADX and the Trend

Finding a strong directional move is the first priority of any trend trader. However, when having to select a currency pair to trade, it can be difficult to identify the best trends. For the “ADX 50“strategy we will be using the ADX (Average Directional Index) indicator for this process. First, add a 14 period ADX to the 4Hour chart, using Daily periods. This can be accomplished through the data source options found in the properties menu. Ultimately, this will show us a Daily ADX reading on the 4Hour graph as depicted above.

Remember, ADX is not identifying the direction of the trend, only its intensity. If a currency pair’s trend is weak or if the pair is consolidating, ADX will read significantly lower than a strong directional market. For the “ADX 50” strategy, we will only be looking for currency pairs with an ADX value of over 50! If Daily ADX reads over 50, you can then begin to move to the execution phase of the strategy.

EURUSD with ADX and RSI for Entries



Trending Entries with RSI

Once a strong trend is found, it is time to plan an entry into the market. The “ADX 50” trend trading strategy uses an RSI (Relative Strength Index) indicator signal for this task. For today’s entry signal we will be using an RSI with a 14 period setting on a 4Hour chart. In a downtrend, new sell positions should be entered only when ADX reads over 50 and RSI closes below 30 (oversold). Conversely buy positions will be initiates when ADX reads over 50 and RSI closes above 70.

Below we see a sample EURUSD chart, which has been filtered for ADX. As ADX rises above50, traders can begin executing sell signals as RSI closes below 30. So far, during the highlighted period, RSI has signaled 3 sample entries for the graph. As ADX is now below 50, no new trading signals should be considered.

Stop and Limit Placement

Traders should always have a plan for managing their position. Eventually trends will come to an end and any existing trades should be exited. When initiating a buy order, stop orders should be placed at a 14 period low on the 4Hour chart. That way if a new low is created, all existing buy trades will be closed. Conversely if a trader is selling in a downtrend, stops can be placed at a 14 period high again using the 4Hour chart.

When it comes to profit targets, the “ADX 50” trend trading strategy will use a standard 1-2 Risk:Reward ratio. This means that your limit placement should look for twice the amount of pips relative to your stop. For example, if a sample trade has a 100 pip stop loss, a minimum 200 pip profit target is suggested.

---Written by Walker England, Trading Instructor


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Talking Points

• The USDJPY opens in a 39 pip range
• Price bounced from the S3 pivot at 118.85
• A break above 119.39 would signal a bullish reversal

USDJPY 30 Minute Chart


The USDJPY has opened Tuesday’s trading range bound, traveling between its R3 and S3 Camarilla pivots. So far, price has traversed its 39 pip trading range once, and has recently bounced from its S3 pivot in early morning trading. Currently, range support is found at the S3 pivot found at 118.85. In the event that price remains range bound, traders will watch for an advance in price back towards values of resistance starting with the R3 Camarilla pivot found at 119.24.

In the event of a price breakout, it would signal a significant shift from the present range bound market conditions.A move below the S4 pivot at 118.67, opens the possibility for the USDJPY to challenge April’s current monthly low which stands at 118.53. Likewise, a breakout above the R4 pivot would leave traders to look for a reversal back to higher highs above 119.39



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---Written by Walker England, Trading Instructor

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As for me, I prefer scalping most of all. Fresh offers ECN-acconts, which have the quickest order execution time. Spread is from 0 and there are almost no re-quotes. It's quite the thing for scalping.

Talking Points:

• The FX Focus is Currently on Greece
• USDJPY direction is Important for Global Risk Sentiment
• JPY is Strengthening Already

Forex trader’s eyes have been on the EURUSD over the last few months and for good reason. First, you had many traders and analyst confident that EURUSD would trade down to parity, a Forex term for 1.0000. Second, in mid-March, we had a bounce off the 1.0460 level that gave way to a selloff in the German Bund that took EURUSD up to 1.1460, a 1000 that move. Lastly, we are currently dealing with a potential ‘Grexit’ whereas Greece would leave the euro zone and many believe what continue the march to parity that we saw the beginning of the year.

EURUSD Has Grabbed Attention While Being Directionless



While currency traders will always be focused on EURUSD, a developing story that deserves much attention is the direction of the Japanese Yen or JPY. Historically, JPY weakness has correlated to an overall environment of speculation, which often leads to times of higher equity markets and high-yielding currencies like the AUD, NZD, & other Emerging Market FX Pairs. This relationship has a lot to do with the fact that Japan has kept historically low interest rates for decades causing one of the world’s largest economies to send money offshore seeking yield via the carry trade.

The carry trade is a favorite among institutions and includes borrowing or selling a low yielding currency in order to buy a high-yielding currency and earning the difference. Japan is famous for the strategy however, the unwinding of the carry trade is often first seen in Japanese Yen strength which can ripple throughout financial markets in a negative manner. The popularity of this trade and it's propensity to unwind quickly make the JPY a key story that few seem to be watching.
What Could Happen If JPY Strengthens?




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Talking Points
-3 different wave counts suggest a bounce of at least 150 pips
-A break below 1.0800 likely accelerates to below 1.05
-Look for short opportunities below 1.0800 or bounces to 1.1050-1.1300
Earlier today, the Fed released their statement regarding their monetary policy outlook and it created a knee jerk reaction in forex towards buying US Dollars. The subsequent move in the EUR/USD stopped at an important inflection point which could open the door to a counter trend rally higher. Though EUR/USD liquidity is typically thinner through the US afternoon session, we will get a better sense of any potential follow through Thursday morning when London arrives.

In this article, we will look at the EURUSD technical picture through the lens of Elliott Wave. In a moment, we’ll share a preferred wave count and a couple of alternatives. We never know for sure what the wave count is until the waves are finished. Therefore, we need to bring a probabilistic approach in what is likely to happen based on the patterns.



The patterns we’re looking at suggests a higher likelihood that the EURUSD finds support in the 1.0850-1.0900 price zone. That may lead to a rally of at least 150 pips.

The preferred Elliott Wave count we are considering is that today’s low is the end of the 1st wave of a medium term sell off. We can see this October 15 to October 28 sell off subdivide into 5 waves. Once we anticipate the end of wave 4 (which occurred this morning), we can estimate the termination point of the 5th and final wave of that sequence.

Circle wave 5 = circle wave 1 = 1.0910
Circle wave 5 = .382 * circle wave 1 through 3 = 1.0907
As you can see, this created a tight cluster around 1.0900.

Additionally, one alternate count that we’re watching (not shown) is that today’s low is actually circle wave 3. Alternating waves typically have a Fibonacci or equality relationship. In this case, circle wave 3 would be equal to 2.618 * circle wave 1 near 1.0903.
Lastly, secondary alternate count is that this October 15 to October 28 sell off would be the alternative wave to the August 24 to September 3 sell off (not shown). Alternating waves often times have an equality measurement which means the second sell off (October) would equal the first (August – September) in distance near 1.0867.

Conclusion

Bottom line, between 1.08-1.09, there is a high likelihood of a bounce forming in the EUR-USD that could spring higher to 1.1050-1.1300. A break below 1.0800 would alleviate pressure on this bounce and likely continue to below 1.05.
Though a bounce may develop, the trend is still down so we will use the bounce to short at higher price levels.

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"Gold prices dropped from $1227 on Friday to $1202 per ounce on Monday which was slightly above the top end of the $1190 price zone. Could it be possible Monday’s price action was the secondary reaction we were looking for? Possibly, but be mindful that it may still be coming. Therefore, the door is still open for a rejection between current levels and $1291 which may lead to a sell off towards $1167-$1190 per ounce."

"The bottom line is that the better risk to reward ratio opportunity for bulls is at lower levels and if price begins to take off higher, the secondary wave count suggests an eventual revisit back to near current levels. Therefore, chasing prices higher is the trade that produces a worse reward based on the risk and that we need to stay away from such chasing. It is preferred to buy the dip near $1167-$1190 per ounce."


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EUR/USD 30 Minute

The EUR/USD has started Mondays trading, moving inside of a 44 pip trading range. In early morning, trading prices have initially bounced off support, which is found at today’s S3 camarilla pivot point at a price of 1.1244. If prices remain range bound, it opens up the EUR/USD to test values of resistance, including the R3 pivot point, which is found at a price of 1.1288.

Traders monitoring the EUR/USD for a breakout should continue to watch today’s R4 and S4 pivot points. Bullish breakouts for the day begin over the R4 pivot point, which is found at 1.1311. Conversely, bearish breakouts begin beneath the S4 pivot, which is found at a price of 1.1221. In the event that the EUR/USD trades to either of these values, it suggests that the pair may be attempting to breakout of a larger inside bar pattern. In this scenario, traders may look for a continued directional move above last Thursdays high at 1.1341 or under the low at 1.1203.

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-Dow Jones Industrial Average (DJIA) trades lower on a more hawkish Fed
-DJIA current corrective pattern likely to eat up more time on sideways to lower trading
-Dow Jones Sentiment suggest continued drifting lower

DJIA is trading lower over the past 24 hours but in general there seems to be a ‘calm’ about the sell off. This is despite the more hawkish tone released in the Fed minutes Wednesday afternoon. Fed futures are pricing for a June rate hike have increased from 4% earlier in the week to 30%. Though up dramatically, if you take a step back, there is still a 70% chance of rates staying the same. As a result, DJIA is holding up fairly well at the moment.

The correction lower has retraced minimally in price, but is shallow in time. Said another way, prices may continue to move lower, but it appears to be more of a drift than a waterfall.
The next zone of technical support appears near 16,900-17,144. We will look for prices to grind lower and see how prices react in this support zone.

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WTI Crude Oil prices are currently set to close higher for the third consecutive trading session. This bounce in price occurred immediately after Crude Oil traded to a new monthly low last week at a price of $45.81. If this rally is set to continue, traders will look for Crude Oil to move on short-term values of resistance, before challenging the June 2016 high at $51.64.

Key value of resistance sits at $49.41. This price level is represented in the graph above as a 61.8% Fibonacci retracement, which is found between the Junes high and low mentioned previously. If prices remain under resistance, it suggests that the measured move mentioned in last week’s article may still be valid. Alternatively, if prices break above this short-term point of resistance, it opens up Crude Oil to continue its 2016 uptrend. At which point traders may look for Crude Oil prices to challenge fresh yearly highs.

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