Price Action and Patterns

Pre-Trend Chart Patterns Every Trader Should Know: Part I

Talking Points:

• Benefits of Pattern Recognition
• The First Pre-Trend Pattern: Zig-Zag
• Setting Stops & Profit Targets

“…markets are chaotic in nature, but within this chaos are non-random patterns that repeat and are predictable”
-Larry Pesavento,

Some traders love to look for common price action patterns before entering in the direction of the overall trend to improve the risk: reward ratio. Others however, prefer to steer clear from patterns and focus solely on price action. However, the two are not mutually exclusive and can be combined for a powerful trading combination whether you’re swing trading or day trading.

Benefits of Pattern Recognition

Let’s start off with the mental traps you can get into with pattern recognition. Of course, I’m a trader as well, and if you’re going to make progress and reach your goals, you must have the right mindset. The right mindset has us looking for a methodical edge that we can exploit with the full understanding that there is no guaranteed outcome on any trade, only risk with a favorable edge.

Learn Forex: Sometimes an Edge Works & Other Times they do not

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However, pattern recognition has allowed me to enter trades at incredible turns with excellent risk: reward. This article will be the first of a 4 part series on common patterns that you should be aware of that precede the resumption of a trend.

The First Pre-Trend Pattern: Zig-Zag

The patterns that we will cover will span through common Elliott Wave patterns. While there is price action combinations such as pin bars or indecision candles that have a shorter-term focus, such as only a few candles counter-trend, this 4-part series will span the corrections known in Elliott Wave.

In the nomenclature of Elliott Wave, it’s good practice to look for moves against the trend to develop in three-drives. These three wave patterns are what we’re going to focus on so that we can look to their exhaustion. When the counter-trend movement is exhausted, as we can see through price action and common patterns, we can look to enter back in the direction of the overall trend with limited risk in case we’re wrong about our entry and the trend isn’t ready to resume yet.

Learn FX: Idealized Sharp 3-wave Correction (Not Likely on Candle Charts)

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The zig-zag is unique to the future patterns to be discussed as it is a sharp correction. This three-wave move often develops early in the trend. The clear sign that a zig-zag is in play is if the second move, in the direction of the prior trend, is very weak. If it’s very weak and another move against the trend develops, we can look for the end of that move to help us enter the trend.

Setting Stops & Profit Targets

There are three ways we can identify a zig-zag and additionally, use that information to enter back in the direction of the prior trend.

• Look for the common sharp counter-trend three wave-moves
• Apply Fibonacci Retracements to see if the exhaustion is at a Fibonacci Collision
• Find price-action indecision at the end point that allows you to enter with a good risk: reward

Setting a stop is relatively easy, and so is setting a profit target. The stop can and should be placed below the prior swing low in an uptrend or prior swing high in a downtrend. You can choose one of two profit targets depending on your risk tolerance.

Learn Forex: Risk: Reward Is the Focus of Entries on Corrections

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The conservative profit target is the prior turning point or recent high in an uptrend. If the trend truly does continue, then you will likely get out early but that’s OK as you saw an edge and were able to take money out of the market because of it. This is also a good methodology in a range-bound market.

The other option is to trade with only a trailing stop so that if the trend really does take off, you can try and ride it as long as possible. In a low volatility market this isn’t as favorable as true breakouts are hard to be sustained. However, there are always the few moves, like USDCAD or GBPUSD that defy the common patterns and a trailing stop is just the ticket.

Closing Thoughts

Because the 3-wave sharp correction happens at the beginning of the trend, when you recognize a potential entry, you should have a great risk: reward on your trade. Because we’re putting our stop below the prior low, we’re likely to be involved in the resumption of the prior trend or be alerted, through being stopped out, that a major reversal could be underway.

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

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In this article, we’re going to focus on what many traders consider to be the most attractive of the three conditions: Trends.

Why Trends?

Of the three possible market conditions, trends are often considered to be the most desirable for a few different reasons. Future price movements are unpredictable. Price action merely gives traders a clear and concise view of the market so that they can look to implement strong risk-reward ratios in their strategies.

This is why trading in trending environments can be so attractive. If the trend is to continue, the trader can reap three, four, or five times the initial risk that was used to enter the position… and if the trend isn’t going to continue, the trader can look to cut their losses quickly.

Further – trading trends via price action is a way to decrease ‘guess-work’ with fundamental analysis.
If fundamentals are improving for an economy, then traders will generally look to buy in anticipation that those fundamentals may, eventually, bring on higher rates in that economy.

As traders move prices higher with increasing demand, price action will show the up-trend with higher-highs and higher-lows; and if those rate expectations are to continue to increase and if the fundamental news is going to continue to improve, the rational expectation is that the trend will also continue to move higher.

Threading the Needle with Multiple Time Frame Analysis

Traders can use multiple time frame analysis to get two different vantage points of a market; with the primary goal being to enter trades and trigger positions in terms of the ‘bigger picture’ trend.

Rather than basing the entirety of a trader’s decisions on a single time frame, traders can look to a longer-term chart to determine the ‘general condition’ and trend of that market. In the 4-hour chart below, we’re looking at GBPUSD making continual higher-highs and higher-lows over the past year:

Up-trend in GBPUSD over the past year

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As you can see in the above chart, GBPUSD has been on a tear since July of 2013, putting in a +2200 pip up-trend; and this is shown via price action with the continual higher-highs and higher-lows.

When a situation like this presents itself, the trader should look for opportunities to go long so that if this +2200 pip trend can continue, they can look to take part in the move.

The only question is whether or not a new ‘higher-low’ has actually been made on this longer-term chart, and the answer to that will never be known until it’s too late. But this is the advantage of price action; the premise of whether or not this is going to be a ‘higher-low’ can allow the trader to look for a risk-efficient entry.

Executing the Entry

As we said above, you’ll never know whether a higher-low has been set until after price action has proven that the trend will continue: But the hypothesis that a higher-low ‘may’ have been set is enough for traders to assimilate risk management of a potential position.

In the below chart, we’ve moved down to the hourly time frame so that we can more accurately plan an entry in the same market we had looked at above.

The hourly chart presents greater granularity for plotting and planning the entry

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Traders can watch the shorter-term chart to begin planning their entries; and in the event of an up-trend, as was seen above, traders want to wait for support to be set (the higher low) so that they can look to buy with a stop just below that ‘higher-low.’
What allows this to Work – and why are Trends so desirable?

As we’ve said a few different times in this article, future price movements are unpredictable; and the goal of price action analysis isn’t to get a 100% accurate forecast of what will happen because nothing in this world can offer that.

Rather, this is simply a way for traders to look to get the probabilities of success on their side, if even just a little bit by getting the most clear and concise view of a market.

Make no mistake about it; retracements can last for a prolonged period of time. Case-in-point, check out the down-trending channels in the same GBPUSD chart we looked at just a moment ago:

Traders can wait for higher highs and lows to show on entry chart before triggering position

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What allows trend trading via price action to work so effectively for some traders is the fact that if and when they’re on the right side of the trade, they can reap far more than they had to risk to get into the position.
This could be a risk-reward ratio of 1-to-2, 1-to-3, or 1-to-4. Traders can look to ‘scale-out’ of positions as trades move further in their favor; even adding a break-even stop to ensure against taking a loss in the position should prices happen to turn around.

If a trader is able to average out of their positions with a 1-to-2 risk-to-reward ratio, they need to be right approximately 33% of the time to break-even; spreads or commissions not included. If a trader wins $2 when they’re right, but loses only $1 when they’re wrong – well if they win 40% of the time, they stand a legitimate chance at making a profit: These traders don’t need to win 60 or 70% just to get a chance to break-even on their strategy.

--- Written by James Stanley

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Talking Points:

• Recap of the Zig-Zag & The Study of Corrections
• The Second Pre-Trend Pattern: Triangles
• Setting Stops & Profit Targets

“All patterns fail, but the key is to know when to trade them and when to avoid them.”
-Suri Dudella

Trading patterns can be seen as a short-cut to in-depth technical analysis. You were recently introduced to the first type of corrective trading pattern known as a 3-wave correction or zig-zag, which commonly plays out before a trend. A Zig-zag is a sharp counter-trend moves that has the effect of flushing out the optimism of the prior trend before resuming again.

Learn Forex: Example of a clean Zig-Zag

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Some traders will do in-depth Intermarket analysis or other types of lengthy analysis, which can be helpful. However, you only need three things to use this type of analysis successfully.

• A well-defined trend with higher highs & higher lows (or reverse for down move)
• Knowledge of the common pre-trend patterns (our objective with this series)
• Knowledge of levels that validate trend resumption

A firm knowledge of the prior three aspects will help you be ready to pounce when a new trend is born with a tight level of risk.

The Second Pre-Trend Pattern: Triangles

Of the corrective patterns, triangles are the easiest to recognize, but there are a few key points to keep in mind. First, a triangle habitually will involve 5-points against the prior trend composed of 3-wave movements. The triangle will often show a decline in volatility as price looks to be pressing against each other with break outs failing to develop.

Learn Forex: Idealized Triangle (Not This Clean of Candle Charts)

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The reason that triangles are important to take note of are two-fold. First, they often chew-up the clock. In other words, they are sideways patterns that take time to develop and are best avoided for swing-traders. Second, they are of great use for finding great range-trading environment for range traders.

When looking for the resumption of the prior trend, there are a few key points that should hold your focus. First, trendlines against the corrective extreme are helpful to see when a legitimate breakout occurs. Second, price action around Points C & D after they have been marked. Failure to break below the point marked, ‘C’, yet break above ‘E’, helps you to see a breakout has occurred.

However, an important note about triangles is that they often occur prior to the terminal thrust or move within the trend. Therefore, you want to have a specific and conservative target along with a firm stop, to be in place so that you’re not holding onto a trade that starts profitable but ends with a drop in your account equity. While there is more to be said on triangles, please note they occur on multiple time-frames. Here’s a triangle on a EURUSD hourly chart and a USDJPY Weekly Chart

Learn Forex: Hourly EURUSD Triangle

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You can see that the move out of the triangle was sharp and fast. Secondly, you‘ll notice that once that move / thrust was finished, a reversal developed. This is a helpful recognition that has put me in many trades at excellent levels.

Learn Forex: Weekly USDJPY Triangle

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Setting Stops & Profit Targets

The uniqueness of the triangle formation is that you can use the triangle itself as a target for the thrust. You do this by taking the height of the trend lines and apply the height in pips from the termination point of the triangle, known as point E. You can see from the chart of USDJPY that the target hit within a 5 pip range

The stop on the triangle thrust trade can and should be below E, the last leg of the triangle. If you’re wanting to assume the end of the triangle, before it takes place, you can focus on a stop below ‘C’.

Learn Forex: Triangle Target & Stops on XAUUSD

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If Gold is working out the first move out of the triangle, then we’d need to see a few levels give way. The first is a close below 1,304 (100-dma), which would place a stop above the level now marked, ‘E’ around 1,345.10. Because this is happening as oscillators are diverging negatively, we can turn our focus to the point marked ‘D’ near 1,240. A close below there would have us confidently looking for a thrust lower to resume while managing our trade carefully because this would likely be the terminal move to the downside.

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

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Talking Points:

• Recap of thePrior Pre-Trend Patterns Discussed
• The 3rd Pre-Trend Pattern: Flat Corrections / Double or Triple Bottoms
• Setting Stops & Profit Targets

If you can get a clean understanding of the typical patterns that develop before the trend resumes, you can find yourself entering at incredibly favorable entries with an excellent risk: reward ratio. This series of articles takes a look at common patterns that are known as trend corrections and can be applied to any time frame you trade.

Recap of the Prior Pre-Trend Patterns Discussed

The two patterns we’ve looked at so far are sharp zig-zags, which are 3-wave patterns against a prior trend that doesn’t make a new low and will often move into a Fibonacci retracement, and Triangles. Triangles are a congestion pattern that take up a decent amount of time but usually end with an aggressive thrust out of a triangle. A key note about triangles that we discussed was that the move out of the triangle can be the last move of the trend so you should be cautious of trend termination after the thrust out of the triangle is completed.

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Triangles are clean and easy to read, however being caught with an open trade during a triangle while anticipating a breakout can be frustrating. For that reason, the article discussed key technical levels that can help you seen what a triangle is likely over and the trend has resumed.

The 3rd Pre-Trend Pattern: Flat Corrections / Double Bottom

The name may not be exciting, but the flat correction is a clean pattern that can help traders clearly define and take advantage of risk. Also, the flat correction can take the form of an intra-trend double-bottom, which makes it easy to spot and trade. This type of move often happens after a strong or extended move but once broken, a stop can be put under the correctionary low or you can trail your stop with each new swing low.
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What’s important to see is that after a strong move higher or lower, the market goes into a period of consolidation or range environment. Cable or GBPUSD has had a handful of very clean flat corrections within the overall trend. You’ll notice that price makes no major moves higher or lower and looks to trace out the flag pattern, which is a traditional technical analysis pattern before resuming the trend.

Clean Flat Correction Traces Out Before Trend Resumes

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When you’ve identified the making of a flat correction, you can look for three things to help you see that a flat correction is playing out and when the correction is over so that you can look to take a well-managed trade in the direction of the trend.

• Draw a Channel from the Trend Top & ‘b’ Wave & Draw a Parallel to the ‘a’ point
• Look For Fibonacci Relationships to Catch The Exhaustion of the Pattern
• Look for the breaking of ‘b’ on a daily closes bases

All three of these instances took place on this chart and a variation of these three will happen more often than one would think as you look for these flat corrections to take place on the chart before the trend resumes.

Setting Stops & Profit Targets

There are clear benefits and a few drawbacks to trading the easily recognizable flat pattern. The benefit is that it is easy to recognize in bull and bear markets and the risk is very clear when you believe a correction has ended. The drawback is that if you’re entering on a break of ‘b’, you might have a hard time finding a trade with a good risk: reward ratio if you’re putting your stop below the recent pivot. For that reason, I like to look for the corrective move within the leg of the trade you’re about to enter.

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You’ll notice above that you have two options for placing a stop when you recognize an entry. The path you choose will likely depend on your risk tolerance. If you’re looking to risk less, you’re likely going to choose the corrective high labeled as the “conservative stop”. The conservative name is due to taking on less risk to see if the trade works out in your favor.

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

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Talking Points:

• Price is considered range bound when it is not trending up or down.
• We can connect swing highs and lows together to create support and resistance levels.
• Entering a trade with a positive Risk:Reward ratio can tip the odds in our favor.

Forex market conditions have been changing over the last couple years. Trend based strategies that worked well in the past are showing mixed results and frustrating many FX traders, myself included. However, recently I’ve been branching out into different strategies that embrace this low volatility environment. Today, we are going to talk about how a range strategy can make sideways markets tradable.

Identifying a Sideways Market

Our first step in range trading is to identify currency pairs that are moving sideways. We want to avoid currency pairs with prices that are sloping up or are sloping down. We can target whatever time frame and currency pair that we like, as long as recent price action has been more or less sideways.

The image below is of 3 different currency pairs and their recent price moves. The 1st chart is a classic uptrend, the 2nd chart is a classic downtrend, and the 3rd chart is an example of a range. We want to find charts that don’t have a clear direction and are mostly moving sideways like chart #3.

Uptrend, Downtrend, and Range Charts

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After we have found a few an examples of a potential ranging pair, it is then time to turn to technical analysis to help us find support and resistance.

Locating Support & Resistance

The terms “support” and “resistance” are trading jargon used to describe price levels where prices have bounced off of in the past. So anytime we see price bounce off a low or bounce off a high, that low and high price can be considered support or resistance.

Identifying these highs and lows is very easy in my opinion. I prefer using a yellow ellipse on my Marketscope 2.0 charts to highlight the times where price has “bounced” from either a high or a low.

Highlighting Highs and Lows

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The chart above shows a USDJPY daily chart with highlighted swing highs and lows. It looks like a mess at this point, but once we connect some of the ellipses together using the line tool, potential trading opportunities can be discovered.

There are differing opinions on how lines should be drawn. I draw lines using a two-step process:
The first step is to identify the highest high price and the lowest low price, and draw a horizontal line extending from each. The highest and lowest prices can act as strong support or resistance.

The second step is to identify price levels that touch more than one ellipse; the more ellipses the better. So in this example, we can see there were a two main clusters of ellipses that were right around the same two price levels. We want to draw a horizontal line through both of those clusters.
The results of these horizontal lines can be seen below.

Connecting Highs and Lows to Create Support and Resistance Levels

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Trading With a Strong Risk:Reward Ratio

Once our lines are in place, we are now ready to place a trade. Since these lines caused price to bounce off them in the past, they may cause price to bounce again in the future. So we want to look to buy when price is approaching a line from above and look to sell when price is approaching a line from below.

It turns out that the USDJPY is right at one of the lower lines that we drew, giving us the possibility of buying at its current level.

Our stop loss should be set beyond the line we are buying at or beyond the lowest low if it is not too far away. Because the lowest low is so close, I’ve opted to set my stop beyond that.

Buy Trade Setup – Buying at Support With Positive Risk:Reward

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We want our exit strategy to have a positive risk:reward ratio, meaning we want our profit target (limit) to be further than where we set our stop. This is a key part of money management that can tip the odds in our favor.

Keeping that in mind, we also want to try to place our profit target below the next closest line. This allows price to freely move to our profit target without being hindered by prior support or resistance levels.

Revising Strategy for Ranges

Traders that are fortunate enough to create a winning strategy must never get complacent. Changing market conditions can change your strategies effectiveness, so we need to be able to adapt. Low volatility usually leads to more market ranges, so it is good to know how to trade these types of scenarios.

Good trading!
---Written by Rob Pasche

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Talking Points

• EURCAD starts week trading at R3 Resistance
• Range targets sit at 1.4485, S3 pivot support
• A move above 1.4555, R4 would signal a breakout on a higher high

EURCAD 30min Chart
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The EURCAD has begun the week, trading near short term R3 resistance. With price failing to break out in early morning trading, range traders will look to take advantage of prices continuing to reverse back into the defined trading range pictured above. Currently range resistance is holding at 1.4532 as marked by the R3 pivot point. With price below this value, range traders can consider new sell entries in the event of an early morning price reversal. Range support currently stands at the S3 camarilla pivot which can act as potential range targets near 1.4485.

Range traders should be cautioned of a breakout above the R4 camarilla pivot point. A move beyond R4 resistance at 1.4555 would signal a short term move towards higher highs, and denote an increase in volatility as well as a change in market conditions. At this point, range trading should be concluded and traders can consider entries with the markets new influenced direction. Likewise, a break below S4 support at 1.4464 would signal a creation of a new daily low and signal potential further declines.
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---Written by Walker England, Trading Instructor


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Talking Points

• EURUSD opens US trading below S4 pivot
• A bias towards lower lows remains under 1.3502
• A move above 1.3512 would signal a potential false breakout

EURUSD 30min Chart
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The EURUSD has begun the US trading session beneath daily S4 camarilla pivot. Price began this drop by first falling below range support at 1.3512. As price continues to move towards lower lows, breakout and trend traders will look to take advantage of the currency pairs continued downside momentum. Currently price has surpassed a 1x extension of the camarilla pivot trading range, but as long as price remains under the previously mentioned line of support day traders and market scalpers can continue looking to initiate new sell based positions on the EURUSD.
Breakout traders should always be aware of the potential for a false breakout. A move back above the S3 line of support would signal another price reversal for the day and an end to current market conditions. At this point, breakout and momentum trading should be concluded and traders can consider entries with the markets new influenced direction.

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---Written by Walker England, Trading Instructor

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As I’ve traveled and given FX strategy presentations around the world, one question that frequently comes up from the audience is an inquiry about the strategy’s win and loss ratio. In essence, the listener is attempting to judge the quality of the strategy by its win ratio.
(The win ratio is simply the number of winning trades divided by the total number of trades. For example, a trader who won on 15 of 20 trades would have a 75% win ratio.)

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When confronted with the question about a strategy’s win ratio, I’ll provide the audience of my opinion and then follow up with another question.

“Do you think that a 45% win ratio is a good win percentage?”

I can tell by the gazed looks of most attendees that they are not sure how to respond.

On the one hand, if the win percentage is not good enough, why would the DailyFX EDU team teach the strategy?

IF that previous statement was true, then where is the line drawn between a good strategy’s win ratio and the poor strategy’s win ratio?
I then follow up with another question, “I have a strategy that wins on 90% of its trades. Are you interested in seeing the strategy’s buy and sell rules?” Inevitably, I will get several interested parties who raise their hand.

I’ve seen too many traders drawn to higher win ratios thinking they are better strategies when in fact the ratio is not giving insight about the strategy profitability. The point here is that judging a strategy solely based on its win ratio is like judging a book solely based on its cover. You don’t get the whole story and a win ratio in isolation could be misleading.

How can a strategy that wins on 90% of its trades be a losing strategy?

How can a strategy that wins on 45% of its trades be a winning strategy?

The answer lies in analyzing the strategy’s win ratio alongside the risk-to-reward ratio. The result of the analysis provides us with an expectancy of the strategy.

For example, the reason the 90% win ratio loses money is because it wins a lot of small trades, and then loses big.

You can do the math yourself to see if a strategy is expected to produce positive results over time. Simply take the average number of winning trades multiplied by the average size of the winner in pips. Then, subtract the average number of losing trades multiplied by the average size of loser in pips. The result is your expectancy.

Let’s compare two hypothetical examples of Strategy ‘A’ that wins 90% of the time and strategy ‘B’ that wins only 45% of the time.
Forex Education: Strategy ‘A’ wins 90% of Trades

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Notice how even though strategy won on 90% of the trades, it still lost over the long haul as the 10 losers lost more ground than the 90 winners made.

Now, let’s look at Strategy ‘B’.

Forex Education: Strategy ‘B’ wins 45% of Trades

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On the other hand, this strategy with a 45% win ratio and 1-to-2 risk-to-reward ratio has a positive expectancy. Over the long run, this type of strategy is expected to show net profits. (A 1-to-2 risk-to-reward ratio means that for every pip of risk, there are at least 2 pips of potential reward.)

In the first example above (Strategy A), clearly the trader is risking a lot while profiting a small amount. Although they might feel good about being on the winning side of the trade frequently, they are blind-sided when the strategy is negative after a basket of 20 or 50 trades.

Many traders fall into this camp because they get emotionally tied to a trade and take profits too quickly or hang onto losing trades too long. There are many reasons for getting emotionally attached from lacking confidence in their trading knowledge or perhaps over leveraging their account. Regardless of the reason, the outcome has a negative bias associated with taking profits too quickly while exposing your account to relatively larger losses.

On the other hand, Strategy B wins on fewer trades, but the trader is confident in their approach in that their edge is the risk management on the trade. They are not as concerned about winning on each trade and are more concerned about progress being made over a basket of trades.
Whether you are analyzing your own trading performance or the performance for choosing a Forex automated strategy, take a minute and run through the calculations above to see if the strategy yields a positive expectancy.

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

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Talking Points

• EURAUD opens US trading below S4
• A bias towards lower lows remains under 1.4257
• A move above 1.4296 would signal a potential false breakout

EURAUD 30min Chart

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The EURAUD began its sharp overnight decline on Aussie CPI data coming out in line with expectations. Price began to immediately drop, and move below trading range support at 1.4296. The end result was price breaking out and now trading under the S4 support line found at 1.4257. As price continues to move towards lower lows, breakout and trend traders will look to take advantage of the currency pairs continued downside momentum.

Price of the EURAUD has repeatedly tested the S4 line of support, and Breakout traders should always be aware of the potential for a false breakout. A move back above the S3 Camarilla pivot point, would signal another price reversal for the day and an end to current market conditions. At this point, breakout and momentum trading should be concluded and traders can consider fresh entries with the markets new influenced direction.

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---Written by Walker England, Trading Instructor


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Talking Points

• AUDUSD Moves to Support at .9431
• R3 Range Resistance Sits at .9476
• Price Under S4 Signals a Breakout to New Lows

AUDUSD 30min Chart

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The AUDUSD spent most of the overnight trading session reversing between key points of support and resistance. With price failing to break out below S4 pivot support, range traders will look to take advantage of prices reversals back into the defined trading range pictured above. Currently, range support for the AUDUSD is found at .9431 as denoted by the S3 pivot point. With price above this pivot, range traders can consider new buy entries in anticipation of an early morning price reversal. Range resistance currently stands at the R3 camarilla pivot which can act as potential range targets near .9476.

Range reversal traders should always be cautioned of the potential for a breakout. A move below the S4 support line at .9409 would signal a short term move towards lower lows, and signal a change in current market conditions. At this point, range trading should be concluded and traders can consider entries with the markets new influenced direction.
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---Written by Walker England, Trading Instructor


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Talking Points

• Price Hovers Near Range Resistance
• Range Support Sits at 1.4533
• Price Above R4 Signals a Breakout

EURCAD 30min Chart
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For the beginning of Wednesdays trading, the EURCAD remains locked between defined values of support and resistance. Range resistance, as marked above by the R3 camarilla pivot, resides at 1.4566. Range support is found below at 1.4533 creating a 33 pip trading range for the pair. Traders looking for a potential price reversal will monitor the EURCAD under resistance while looking for a move back towards price support.

A breakout should also always be in consideration, in the event that range bound markets come to a conclusion. Utilizing camarilla pivots, a breakout would be identified by price moving above either the R4 resistance pivot or the s4 support pivot. Currently the R4 camarilla pivot sits at 1.4583.A price advance over this value would signal a change in market conditions, in which traders should consider concluding any range trades. A break of R4 would also suggest a move to higher highs where traders may consider entries with the markets new influenced direction.

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---Written by Walker England, Trading Instructor


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Article Summary: The Fibonacci equal wave pattern provides us at least a 1-to-2 risk-to-reward ratio trading opportunity. Below, we provide two examples of how you can incorporate the equal wave pattern into your current forex strategy and technical analysis.

Remember, the objective of the equal wave pattern is to anticipate where wave C might terminate. Therefore, we draw on the Marketscope charts using the Fibonacci expansion tool connecting the beginning of wave A to the end of wave A, then connecting the end of wave B. So while using the Marketscope charts Fibonacci expansion tool, it requires 3 points to draw the pattern.

GBPJPY Carves an Equal Wave Pattern

The GBPJPY has been trending to the upside, so let’s look to the equal wave pattern to time potential reversal zones to buy into this uptrend.

Learn Forex: Fibonacci and Price Channels

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Notice in the above pattern for the GBPJPY how the equal wave relationship placed a support zone near 140.11. Incorporating other forex technical analysis we can see two additional points of support converging near the similar price zone.

The black price channel shows support near 139.82. Meanwhile, a previous swing low (green circle) occurred at 139.37. Therefore, with several different points of support all converging near the same price zone AND wave C equals the length of wave A in the same area I can feel confident in the approach of buying the pair in this support zone. If you would like additional levels of confirmation, then you can apply candlestick analysis or use an oscillator to time your entry. In essence, the equal wave pattern suggests levels where prices are likely to see a reaction and pivot.

Equal Wave and Elliott Wave Theory

For those who understand Elliott Wave theory, a simple A-B-C move where wave A equals the length of wave C may look familiar to you. A pattern where wave A equals the length of wave C implies it is a corrective move and the whole pattern is likely to be retraced. In the example above regarding the GBPJPY, prices eventually broke to new highs. So if a trader correctly bought in the support zone with a wide enough stop loss to absorb the market’s natural breathing, the potential for upside on the trade would have been a new swing high, nearly 400 pips away.

No Pattern is Perfect

You’ll notice in the GBPJPY chart above, prices did not stop at the equal wave length at 140.11. In reality, prices briefly penetrated lower before making the bounce higher. Patterns rarely play out in textbook fashion so don’t be confused if you never seem to find prices stopping exactly at the equal wave length. The equal wave pattern essentially helps you identify higher probability trades with good risk-to-reward ratios associated with them. Let’s look at another example on the NZDJPY.

Fibonacci Retracements and Fibonacci Expansions
A question we often get regarding the Fibonacci retracement levels is how do you know which fib line to trade?
Well, if you practice measuring out equal waves, you can use the Fibonacci expansion tool to help focus on a particular retracement level.

Learn Forex: Converging Support with Fibonacci

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In the NZDJPY above, notice how the equal waves level (the blue 1.00 line) is very close to the 50% Fibonacci retracement line (orange line). Additionally, this support zone is close to the support zone offered by the black price channel. So visually, we can see a cluster of support forming on the chart.

The last piece of confirmation with this trade includes how the CCI indicator is showing divergence. This simply means the momentum is losing steam as prices enter this support zone. Therefore, we have a trade set up incorporating several difference pieces of technical analysis.

Since this is an equal wave pattern, you’ll want to place your stop loss just below the swing low and target at a minimum a new swing high. In this case it would be risking about 75 pips for the potential reward of 300. It is not uncommon for this pattern to produce at least a 1-to-2 risk-to-reward ratio.

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


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Talking Points:

• The moving average is easy to compute, and simple to chart.
• Moving averages can help to smooth out near-term noise and volatility.
• Moving averages can be used in a variety of ways, and we address the three most popular in this article.

Simplicity: The indicator’s job is to translate the price action over the relevant period of time (using the inputs selected by the trader or user) to arrive at a particular message.

The basis for all indicators

The moving average is probably the most simple to use and understand of all the major technical indicators. It’s simply the past x periods divided by x. This has a smoothing effect, as near-term price movements are registered in scope of the period of activity (x).

A wise man once told me: ‘Any indicator is really just a fancy moving average.’

This pretty much blew my mind the first time I heard it, because I had never looked at technical indicators in that way. But surely, upon realization, I understood what the gentleman was getting at. Pretty much every technical indicator is based on past price information (price action). And each indicator has its own mathematical function to derive its value based on that past price action; hence – any technical indicator using past prices is really just a different way of expressing a moving average.

It’s because of this simplicity that many traders, especially new ones, will often dismiss moving averages as part of their trading approach; under the premise that moving averages ‘don’t work.’
Well – by this tune, no indicator ‘works.’

Indicators, like price action, are just ways of looking at what’s happened in the past. And what’s happened in the past may help us to forecast the future, but you have to be honest with yourself in realizing that the past is never going to be perfectly predictive of the future. New events happen, and things change – and this is why technical analysis will never be a panacea; because it will never be a ‘holy grail.’

But it can help traders get the probabilities in their favor, if even just a little bit; so that those traders can use their trade, risk, and money management to give themselves the best chances of success in the market: Not chasing holy grails, because they don’t exist anyways.

Three Ways to Proactively Incorporate Moving Averages

Moving averages can be a simple way to read and evaluate trends. With price action, this is a very subjective art of observing ‘higher-highs’ and ‘higher-lows.’ The moving average allows you to be objective around this analysis. You can definitively look at your chart and say – ‘this trend is up, so I want to buy,’ or ‘this trend is down so I want to sell.’

This is using a moving average as a trend-filter.

Using a 100-day EMA to denote trend in EURUSD (Daily Chart)

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For this purpose, traders can simply apply the moving average to their chart, and look to price action to determine whether the trend is ‘up’ or ‘down.’

The next job is to find a way to enter in the direction of that trend. If the trend has been up, the trader generally wants to look to buy in an effort to get on the side of that bias if it were to continue. This entry can be done in a variety of ways after the trader has noted the up-trend.

Another moving average can be used, often on a shorter time frame or using smaller inputs.

Moving Averages can also be used to enter positions in the direction of momentum

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Traders can also look to indicators like RSI, or MACD in an effort to buy or sell in the direction of the trend by simply waiting for a corresponding signal in the direction of the observed bias. So, for example – if the trader has determined the trend to be ‘up,’ from their moving average analysis – they can look to RSI or MACD to wait for a long-sided trigger.

Once that takes place, they can look to buy in anticipation of the longer-term trend coming back.

Lastly, traders can look to moving averages for potential support and resistance implications. One of the more interesting impacts of technical analysis is the idea of ‘self-fulfilling prophecies.’ For example, if enough traders are watching the 200-day moving average on EURUSD, and if those traders are waiting to sell until price runs up to the 200-day moving average (expecting resistance); as soon as that event takes place, and as soon as those traders sell, the additional selling orders bring on price declines. So, the relationship could be stated that price went down because the 200-day moving average reacted as resistance, but in reality there was a key component of that reaction (traders using the 200-day moving average as a trigger).

Common Moving Average Inputs can help to provide support and/or resistance to a market

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This will generally only take place at ‘common’ moving averages. As in, it’s unlikely to see this effect as vividly on the 34-period EMA on the 1-minute chart as you might see on the 200-period moving average on the daily chart; simply because more traders are likely looking at the 200-day moving average versus the 34-minute average.

Common intervals for this type of support and resistance are the 10, 20, 50, 100, and 200 period moving averages as seen on the daily chart.

--- Written by James Stanley

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Talking Points:

• A Double Bottom is formed when price tests a previous low and bounces.
• Buy orders can be placed just above previous low.
• Limit orders can be set at most recent swing high, stop set 33% of limit distance.

With the Forex market showing low levels of volatility, there is a greater likelihood that prior support and resistance levels will hold when price tests those levels again. Because of this, trading a range bound strategy might yield better results, as breakouts are less likely to occur.

One way to trade ranges, is to look for the Double Bottom chart pattern. It occurs when price tests a previous low and fails, followed by price bouncing higher. This trade setup allows traders to place relatively tight stops and generous profit targets. So we are able to risk a little in an attempt to make a lot with a positive risk:reward ratio.
Today we learn how to identify these trading opportunities and effectively trade them.

Locating Re-Tests of Previous Lows

A Double Bottom pattern starts off with a swing low followed by a sudden rebound higher. In other words, price bouncing off of a fresh support level. At the low, we want to extend a horizontal line out into the future.

Low Being Made – Highlighted and Price Extended

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The chart above gives us a clear example of price bouncing from a swing low and then moving higher. The low is highlighted in yellow with a black horizontal line extending into the future. We draw this line because we will use it to create our trade entry.

Setting Up Our Trade Entry

Double Bottoms can be tricky. They won’t always be perfect. There will be times when price will come down and hit the exact low price and bounce higher. But there will also be times when price bounces before reaching the previous low or will bounce after temporarily piercing the previous low. This is the reason why I recommend placing our entry order a few pips above the previous low. This will ensure we do not miss an entry but at a cost of getting a slightly worse entry.

The chart below shows the previous low labeled with our buy entry order set a few pips above the previous low. We are buying at this level in anticipation of a bounce and the double bottom to be fulfilled. We then will need to setup our exit strategy while we wait.

Setting Buy Entry for Double Bottom Setup

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Setting Up Our Trade Exit

So now that our Entry is set up, we need to focus on how we are going to exit our trade. We want to first set our profit target at the previous high that was made following the initial swing low that we highlighted before. The idea is that price will at least be able to have enough strength to test this swing high.

Once our limit is created, we then want to set our stop loss 33% of the limit’s distance. In our example, the distance between our entry and our limit was 27 pips. That means our stop loss will be set at 9 pips. This accomplishes two goals.

First, it will place our stop loss beyond the previous low, making it more difficult for price to reach it. And second, it will give us a juicy 1:3 risk:reward ratio. Money management is one of the Double Bottom’s greatest attributes. With a 1:3 risk:reward ratio, we only have to maintain a 25% win rate on our trades to break even. If we have higher than a 25% win rate, we should be profitable in the long run.

Double Bottom Entry with Stop and Limit Set

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In Conclusion

The Double Bottom formation is a great opportunity to trade during range bound environments that have low levels of volatility. After identifying a swing low, we can set our buy entry a few pips above. We can then set our profit target at the most recent swing high and a stop order that is 33% of our limit distance. The positive risk:reward ratio allows us to be profitable if we can maintain a win rate above 25%.

Good trading!

---Written by Rob Pasche

Talking Points

• USDJPY Stays Range Bound
• R3 Resistance Sits at .9320
• Market Breakouts Signaled Over .9335

USDJPY 30min Chart
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The USDJPY has broken out above todays R4 camarilla pivot at 102.63 going into Fridays close. This is directly in line with this week’s trend for the pair, as prices have closed at a higher high over the last four trading days. Trend and momentum traders can take advantage of this directional move and continue to look for areas to buy the USDJPY as prices progress towards higher highs.

In the event that momentum subsides, the USDJPY may produce an environment conducive for a false breakout. This should always be a consideration when volatility wanes and trading for the week comes to a close. A move back below R3 resistance would signal and end of today’s current breakout and suggest a return towards a range bound market. Currently the USDJPY range measures 20 pips, and in the event of a price decline reversal traders should monitor S3 range support at 102.33.

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---Written by Walker England, Trading Instructor


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Talking Points:

• Reversal setups can be dangerous due to the fact that the trader is expecting a change in momentum.
• Risk management is a necessity in reversals, as one ‘bad’ trade can wipe away the gain(s) from numerous others.
• We look at the Morning Star and Evening Star formation for trading reversals in this article.

The evening star and morning star formations can be some of the most powerful reversal setups available to traders. In our last article, we looked at the Harami formation, and in this article we’re going to take this a step further with three-candle formations.

As we discussed in our last article, trading reversals can be a dangerous prospect given that we’re looking to go ‘against the grain’ by expecting near-term price movements to reverse.

But as we also shared, traders can use a combination of multiple time frame analysis and risk-reward to proactively trade in these types of conditions; so that when they’re wrong, they lose small…but if they’re right, they can look to win big.

The Harami is a two-candle formation that looks to trade market reversals at the very early stage of the move. The image below, taken directly from our last article, looks at a recent bearish harami on the EURUSD daily chart.

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As we discussed in our last article, the harami is an early-stage reversal formation. We can take this type of formation a step further by looking for further confirmation in the setup.

The Evening Star

The Evening Star is a three-candle formation that looks to trade bearish reversals. The formation is comprised of an initial bullish candle, followed by an indecision candlestick, which is then followed by a follow-through movement that sees the third candle close at least half-way below the body of the first candle. The image below shows the evening star formation in action in EURUSD:

The Evening Star

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Notice how the evening star took place immediately in-front of a sizable move of over 500-pips. Let’s take a closer look at the formation itself in the image below:

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Think about the message that these candlesticks are telling you as this formation takes place… Buyers push prices higher in the first candle; and in the second sellers enter to take advantage of the new higher prices – seeing buying and selling pressure roughly offsetting. This balance of buying and selling pressure is indicative of dojis, spinning tops, and other ‘indecision’ candlesticks that can often be accented with long wicks and small bodies.

In the third candle of the formation, sellers take control and push prices at least half-way below the body of the first candle. Once this candle finishes (and confirms the close at least half-way below the body of the initial candle); the formation is complete and the trader can look to initiate a short position with a stop above the high of the formation.

If the reversal pans out, excellent – the trader can look for three, or four times their initial risk amount. If the reversal doesn’t pan out, then the loss can be mitigated as new highs are made.

The Morning Star

The Morning Star formation is the exact opposite of the evening star; and is a bullish reversal formation. The image below shows a recent morning star in GBPUSD before the most recent high came into the market.

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Let’s take a closer look at the formation in the below image:
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The Key for Trading Reversals

As we had discussed earlier in this article and in the previous piece on reversals, what can make the reversal work for traders is risk-reward. Going against the grain isn’t an easy way of trading in a market, and if movements against the trader are left unchecked (with a protective stop) it only takes one or two really bad trades to wipe away everything from that trader’s account.

So with the evening star and morning star formations, the built in risk management from the formation can be extremely helpful. When looking to buy a morning star, traders should investigate stops underneath the low of the formation, and if confluent support is around that price level – even better.

Stops for evening star entries should go above the high of the formation, so that if the down-trend doesn’t materialize the trader can exit the position before the loss becomes unbearable.

--- Written by James Stanley


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Talking Points:

• The triangle formation can show in three varieties; we outline each below.
• Triangles signal congestion or consolidation as the range of price movement decreases.
• Traders can look to trade breakouts by treating triangles like other congestion patterns.

The Triangle

Trending markets will often put in a series of ‘higher-highs’ and ‘higher-lows’ (during up-trends), or ‘lower-lows,’ and ‘lower-highs,’ during down-trends. But what about those situations in which price action isn’t putting in higher or lower prices?

This can often happen after a market puts in a sizeable move in a short period of time, as buying and selling pressure roughly offset. A prime example of this can be seen in the USDJPY chart, after the massive run the pair put in beginning with the fourth quarter of 2012. After ‘Abe-nomics’ took Japan by storm, traders around the world sold Yen in anticipation of the ‘three arrows’ approach ending the decades-long deflationary spiral that had engulfed the nation.

In short order, USDJPY had traded from sub-80 to 103.67. The move went so far, so fast that most buyers in USDJPY were already long. So by the time we hit 103, the market was heavily long and much of the announced news was ‘priced-in’ to the market.

This means there weren’t enough buyers to push prices higher. And the simple act of no new buyers can create a down-swing in price in the same way as an influx of new sellers.

USDJPY put in a 950-pip drop in a little over three weeks, establishing support slightly inside of 94. But for the next four months, the pair stayed confined between these support and resistance values of 103.67 and 94, making progressively higher lows and lower highs (the opposite of what is wanted for a trending market); and this creating converging trend lines that gave us this symmetrical triangle:

The Symmetrical Triangle

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Do you notice what happened on the right side of that chart – after the triangle was broken? The trend came right back to order, making a new high above 105. This is why we want to know how to identify these formations when they occur: They can tell us quite a bit about the general market condition and what might be going on. But this isn’t the only type of triangle that we might see on the chart. We can also see ‘biased’ triangles that have a horizontal support or resistance level.

The Ascending Triangle offers higher lows, with horizontal resistance, and the Descending Triangle is the exact opposite, with lower-highs and a horizontal zone of support, as seen below in the current US Dollar chart:

The Descending Triangle in the US Dollar Chart

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Trading the Triangle

Across the numerous sources on the internet that teach triangle trading, many of them attempt to teach traders to carry a bias into these formations.

As in – during an ascending triangle, many folks will often attempt to look at the formation as carrying a bullish bias due to the higher-lows. But keep in mind – if the market hasn’t been able to make higher-highs, this is not a trend, nor is this necessarily a bias that we can feel good about.

All that we truly know in the situation of an ascending triangle is that resistance hasn’t been able to budge.
The direction that the triangle will break is going to be determined by whether more supply or demand comes into the market at the end of the formation; which often happens around news announcements – and these are pretty unpredictable. These are all unknown factors.

Look at triangles – all of them, whether they are ascending, descending or symmetrical – as congestion patterns and congestion patterns only. All that we truly know from this formation is that supply and demand are roughly off-setting each other over a specific period of time: that’s it.

And this isn’t necessarily a bad thing, because congestion or indecision formations can be a price action trader’s best friend.

This goes right back to the allure of trading price action in the first place – in that there are no messages or formations for what will definitely happen in the future. It’s simply a way of analyzing the market to see where we, as traders, may be able to seek out strong risk-reward ratios in which we can make more if we win than we’ll lose if we’re wrong.

--- Written by James Stanley


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Talking Points:

• The Double-Top and Double-Bottom formation show multiple tests of support (or resistance) at a particular price level.
• Traders can look to trade subsequent tests of these price levels.

The Double-Top/Double-Bottom

The Double-Top or Double-Bottom formation will occur when two separate ‘moves’ bounce from a support or resistance level. This highlights that level as being especially strong, so that the next time price encounters this, traders may be able to look for a significant reaction.

In the below chart, we take a look at a recent double bottom formation in the AUDUSD pair:

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Notice how price action has reacted to this level of support two different occasions. So the next time that we approach this level of established support, it could be reasonable to assume that some type of reaction may take place.
Imagine this support level as a theoretical ‘line in the sand’ that can have the potential to pull additional buyers into the mix. But this isn’t necessarily a completely bullish prospect… because after this support level was defended, prices ended up coming right back down.

The exact opposite is true of resistance in the Double-Top formation:

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Notice how this level of resistance on the chart has been validated twice by price action, as sellers have come in to push prices lower once this level was hit.

How to Trade the Double Top/Bottom Formation

The default mannerism of trading the double bottom is to look for a bullish price reaction after the second test of support. So, using the same AUDUSD example we had looked at previously, we look at how a trader could’ve approached this formation. After support was hit for a second time, the trader knows that there could potentially be a bullish bias coming into the market. After all, if buyers jumped in to protect the ‘line-in-the-sand,’ they may do so again.

So after the double bottom was formed – the trader waits: The trader waits for a ‘higher-low’ to come into the market so that they can look to ‘buy low,’ with a stop placed below the level of support at the double-bottom. This way, if the formation doesn’t come to fruition, the loss can be mitigated; but if the formation does come through, then the trader can look to reap more upside than they had to put in to risk.

Trading the Double Bottom:

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As you can see in the above setup, the real allure of trading the double top or double bottom is the potential to have a really strong support or resistance level to use for the basis of a position’s risk management.

The exact opposite is true for the double top formation; in which the trader can look to sell ‘lower highs,’ with a stop above resistance so that if that level holds, the trader can look to manage a profitable position… but if the high point of resistance doesn’t hold, the trader can look to exit the position while mitigating the loss.

--- Written by James Stanley


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Talking Points:

• Volume can increase our win rate when used properly
• Larger volume during a breakout can confirm the move is valid

Volume is an extremely popular trading tool when trading stocks, options, futures, and many other instruments. But when it comes to Forex, we do not see many traders using volume. The reason is that the Forex market is decentralized and the overall market volume is not available.

The solution for this is FXCM’s new Real Volume indicator. While it won’t show us how much volume is being traded world-wide, it will tell us how much volume is being traded in FXCM accounts. Due to FXCM’s large client base, we can use this to determine how volume is fluctuating on a relative basis. Today we look at trading potential breakouts and learn how real volume can validate or invalidate the move.

Identifying a Breakout

For those not familiar with a breakout strategy, you may want to check out my “3 Step No-Hassle Breakout Strategy.” In the simplest terms, a breakout occurs when price is able to break above or below a price level that previously price was not able to break above or below. Price levels that act like a ceiling are referred to as resistance areas and price levels that act like a floor are referred to as support areas.

There are many ways to draw support and resistance levels. We can see on the chart below that there are times when price breaks through these drawn levels, but there are also times when price appears to break higher or lower, but then turns back around. When price movements fake us out like this, it's called a "false breakout." This is the most difficult part about trading breakouts, avoiding the false breakouts.

Good and Bad Breakout Trades

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Using Volume to Confirm a Breakout

This is where volume can come in handy. A fundamental principle is that the more volume traded, the more strength and determination the move has. So if we see a large price move that coincides with a large amount of volume, we respect it more than if we saw the same large price move with a small amount of volume.
When we are looking for breakout opportunities, we want to see the breakout occur on large amounts of volume. The chart below shows potential breakout entries and the amount of volume during the break.

Using Volume to Find Good Entries

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We can see the breakout trades that were filtered out, labeled in red. They were labeled as false breakouts because they either did not close beyond support/resistance or they broke during times of low volume. We want to avoid placing trades based on low volume moves.

There were only two trades where price closed beyond support/resistance and it occurred during a high amount of volume. Those were also the two times where the breakout continued moving after the breakout occurred.


---Written by Rob Pasche


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Talking Points:

• Volume can help confirm a trend
• Volume should increase during moves in the direction of a true trend
• The EUR/USD is a current example of these principles

Trend trading is a staple in my Forex trading account; identifying the predominant direction a pair is heading and only looking for opportunities that trade in the same direction. But sometimes it is difficult to decipher whether a chart displays a trend or not. It can also be difficult to know when a trend has ended and price begins to reverse. The real volume indicator can help us in both of those respects.

Volume’s Appearance During a Trend

Just like we analyze price moves on a chart, we can also analyze volume in a similar manner. Trends are identified as a series of higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend), but volume can show a pattern during a trend as well.

It is common to see volume increase during times where price is moving in the direction of the trend and decrease when price has a countertrend move. The market is showing more enthusiasm as price is moving in the direction of a trend. During times when price pulls back against the trend, volume then decreases as people show a lack of interest. In the chart below, we can see this explanation in a visual format.

Volume Increases with the Trend, Decreases During Countertrend Moves

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This currency pair is clearly in an uptrend. Price is making higher highs and higher lows and I’ve taken the liberty of drawing arrows on the chart to mark the key moves up and down. Below price we can see real volume and learn how volume looks during an uptrend.

Volume increases each time there is a move in the direction of the trend. And volume decreases each time there is a counter-trend move. This lets us know that the trend is strong and could continue into the foreseeable future.

This chart was somewhat cherry picked to show a very clean example of the relationship between price trends and volume, however. So next I would like to look at a real world example going on right now.

A Current Example – The EUR/USD
Yesterday’s enormous drop in the EUR/USD was hard to miss. The pair fell 200 pips in a single day and FXCM had its largest amount of volume traded on the EURUSD since February 29th, 2012. But before this massive move, volume was playing a role in signaling traders to continue to sell.

The EUR/USD downtrend began back in May when price peaked around 1.4000. Since that point, price has made lower lows and lowers highs with increasing amounts of volume with each leg down. And interestingly enough, when we did see a subtle pullback in the EUR/USD the second half of June, we saw volume decrease.

As we learned earlier, during a trend, volume will increase when price moves in the direction of the trend and volume will decrease when price moves counter to the trend. That is the exact circumstance we find ourselves in with the EUR/USD.

EUR/USD Trend and Volume

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The chart above shows the initial downward move accompanied by increasing volume, followed by rising prices alongside decreasing volume, and then the current downward move we are participating in as volume has increased. This is a classic example of volume signaling the real strength of this trend.

In Conclusion

Volume can greatly enhance our ability to identify and act on a trending currency pair. As long as we see increasing volume during trend moves and decreasing volume during countertrend moves, the trend could continue for a while.

---Written by Rob Pasche


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Talking Points

• GBPNZD Opens in Range
• R3 Resistance Sits at 1.9499
• Market Breakouts Signaled Under 1.9364

GBPNZD 30min Chart
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The GBPNZD has started today’s trading at the upper end of its current daily trading range. Currently the pairs range resistance line lies near the R3 camarilla pivot at 1.9499. In the event that price respects resistance, traders can look for a potential price movement back towards range support. For today range support is found at the S3 pivot point at a price of 1.9409, completing the days 90 pip trading range.

A breakout Below the S4 pivot would signal a strong reversal back in the direction of the GBPNZD’s current daily trend. It should be noted that price has declined as much as 667 pip over the last six weeks of trading. Conversely a price break above R4 resistance at 1.9544, would indicate momentum shifting towards a new higher high. In either of the two mentioned breakout scenarios, the range should be considered invalidated for the day with traders then positioning themselves with the markets new direction.
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---Written by Walker England, Trading Instructor

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Talking Points
-Elliott Wave Theory can provide clues to our location with a trend
-Two opposing scenarios suggest the probability of a bounce is elevated
-Lack of bounce and break below 1178 suggests we’ll likely visit 1105 and possibly 956

The USDOLLAR has been a stellar currency over the past several weeks. That outperformance has also anchored lower the price of Gold. Today, we will look at a possible bearish scenario followed by a potential bullish scenario. We will outline key levels to watch for invalidation of one of the patterns.

Bearish Gold

Many traders have been watching the multi-month triangle unfold. This is a bearish triangle that suggests we retest the 2013 low of 1178 and possibly lower. Under the Elliott Wave Theory, triangles are in the position of the wave sequence that precedes an ending wave. Said another way, though the triangle is bearish, the bearish burst lower is an ending wave of a larger degree of trend. Keep that in mind if we push below 1200.

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Under this scenario, we’ll look for 5 waves lower to help us fine tune the ending move of an ending wave. It appears we are in wave 3 right now and we can establish some estimates based on Fibonacci ratios where wave 3 might terminate.
The most common wave relationship for wave 3 is to be 1.618 times the length of wave 1. Wave 1 may have finished July 15 at 1292. Therefore, wave 3 may find support near 1236 (see horizontal orange line). Prices have briefly penetrated lower, but are currently holding this line. Prices do not have to bounce from here, but this suggests an elevated probability of a bounce towards 1255 – 1270.

A bounce into the above cited zone would offer an opportunity for bears to re-establish short positions.

Bottom line under the bearish scenario, target new lows below 1178 with common wave relationships appearing at the 1105 and 956 price zones. This bearish pattern holds so long as price trades below 1290. (See idealized image below)

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Bullish Gold

It is possible the dip below the June 2014 low is simply an extension of wave D of the triangle. Under this interpretation, Gold would need to rally fairly soon for a retest of 1345.

The lows we saw last week at 1225 came right on top of the 78.6% retracement level of the early January to March 2014 up leg.

Another possible price zone that would keep the bullish bounce alive is an equal leg relationship of the ‘D’ leg. This price point is near 1195 which also comes near the 2013 lows of 1178.

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If we are still in the ‘D’ leg of the triangle, then a bullish rally would ensue taking price up to retest 1345. This scenario is invalidated on a print below 1178.

Bottom line for this scenario, prices are near a bounce point with another level down near 1195. So long as we are above 1178, respect the possibility of this scenario. (See idealized image below)

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Conclusion

As a result, both scenarios taken together suggest an elevated probability of a bounce towards 1255. What happens above 1270 could eliminate the first scenario and lead to gains towards 1345.

On the other hand, a print below 1178 eliminates the second scenario and leads to declines towards 956 and 1105.
A bounce to 1255 that holds below 1290 keeps both scenarios on the table. Keep in mind, Elliott Wave Theory is probabilistic in that these are just two of the higher probability scenarios in my opinion. As market action develops, the more probable patterns emerge.


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Talking Points:

• Massive volatility has brought large moves to the currency market.
• This article uses price action to show traders how they can look to approach such environments.
• Traders need to focus on risk and cost of positions when trading in stretched markets.

So the past week has brought in a maelstrom of volatility. For many traders, this is a very, very good thing. Volatility to a trader is like opportunity. Low volatility environments means range-bound markets offering limited upside, combined with choppy or direction-less trends that can confound swing traders and position-builders alike.
As proof – take a look at most of the popular hedge funds and how they’ve performed over the past 18 months. It hasn’t been pretty.

But as summer has begun to fade into fall, volatility has found its way back in the market thanks to ECB-action, middling economic performance out of Japan, and improving data out of the United States; leading many to believe that interest rate hikes might not be too far off in the future.

These facts have helped to provide some nice moves for traders to work with… but it can present a challenge moving forward. With markets stretched, it can be difficult to find a comfortable entry – and further – with the potential for volatility that’s been seen thus far, traders have to account for the potential for that volatility to continue or perhaps even increase.

In this article, we’re going to look at a market that is beginning to look quite stretched and how traders might be able to approach it in an effort of taking a risk-conscious strategy into the environment.

The Yen

This is the theme that I’m personally most excited about right now; and the reason is the fundamental implications driving the move combined with what these types of themes have shown us previously.

In 2012, Shinzo Abe offered hope to the people of Japan after a two-decade deflationary spiral had engulfed the economy. This was marked by an extremely strong yen that made it extremely difficult for Japanese companies to remain competitive.
How might a strong currency destroy an economy? We covered that in the article, The Nucleus of the Forex Market; in which we showed how a strong yen made it more difficult for Japanese exporters to do business overseas. For an export-based economy, this can wreak disastrous consequences; as evidenced by the value of the Nikkei from its peak in the late 80’s going into the 2000’s.

The Nikkei Crash (as evidence of Japanese economic weakness)

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In the summer of 2012, hope was rather dismal for the economy of Japan. The economic pressures of the previous 20 years had turned political, and turmoil had reared its ugly head with Japan’s top ranks. The country went through six different prime ministers from 2006 to 2012, and the future looked rather bleak.

Hope sprang from the campaign of Mr. Shinzo Abe; a man who had previously held the post of PM but had resigned in shame amidst scandal(s) in his cabinet. Mr. Abe based his campaign around economic initiatives designed to end and reverse the two-decade deflationary cycle.

Mr. Abe proposed three different ways to turn around the Japanese economy that became known as the ‘three arrows’ approach in an effort to address monetary, fiscal, and structural issues within Japan. The three arrows were/are fiscal stimulus, monetary easing, and structural reform.

The first two arrows were launched in Abe’s first few weeks on the job; but traders didn’t wait for Abe to take office to begin pricing these moves into USDJPY. The fiscal stimulus and monetary easing were very similar to the QE program embarked upon by the United States; and just like the US flavor of QE, these policies saw considerable weakness come into the currency.

The third arrow of structural reform is considerably more difficult; and this has been somewhat of a struggle thus far. So much of a struggle that Japan’s economy, and further their markets have yet to illustrate signs of recovery.

The most recent GDP print out of Japan was a 7.1% annualized contraction; and traders have begun to look for another round of QE out of Japan. Japanese economists including Mr. Kuroda at the head of the BOJ have begun alluding to the benefits of Yen weakness… this has created price movements showing anticipation of future intervention.

Will there be another round of intervention in Japan? Nobody knows, including those at the BOJ. We’re in a ‘wait-and-see’ mode.

But one thing is clear, and that is the trend in USDJPY. This market has moved higher so quickly that the chart is now appearing stretched; and trading in these environments can be even more daunting than a low-volatility type of environment.

How to Trade in a Stretched Market

The first thing we have to realize is that the market is stretched for a reason… and until prices move back to their previous range, we have to imagine that those reasons may continue to exist, and further – that these moves may continue in that direction.

But just as with any other environment we don’t want to blindly seek out reward without at the very least investigating the risk or cost of a position. We looked at this topic in How to Manage Risk with Price Action.

Traders have two ways of trading in a stretched market, and the way that they should look to is based on how aggressively they want to treat the trade.

Necessary for trading in a stretched market is risk management and the ability to get out of the position if it becomes clear that the trend will not continue.

The Aggressive Manner

The aggressive trader has a fear of missing out. This fear can be dangerous because it can be costly. But if a market is really hot, and if a move is going to continue – this aggressive mannerism of entering a position can allow for entries while the more conservative manner might not.

The aggressive way of entering a market is moving down to a shorter time frame to find a recent swing low. Traders can then place their stop under that swing low so that if this move doesn’t continue at the brisk pace the trader is looking for – the position can be closed before a bigger reversal may come into the market.

The chart below shows the setup in USDJPY on the hourly chart, along with recent swing lows that can potentially be used for stop placement. Notice that there is an aggressive and conservative support level offered, so traders can approach USDJPY in an aggressive manner with either conservative, moderately aggressive, or aggressive risk management.

Trading a Stretched Market in USDJPY

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The Conservative Method

The conservative method of trading in stretched markets involves patience; and using the same support levels we looked at in the aggressive method but rather than entering a trader (for fear of missing out), the trader waits for price action to move towards a prior swing low so that a more affordable stop can be placed.

The best case scenario of the conservative method would be waiting for a ‘higher-low’ to develop so that the trader can place their stop below the previous low, allowing for somewhat of a cushion in the position.

--- Written by James Stanley


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Talking Points
-Don’t get married to a trade or currency
-Identifying the Next Likely FX Leader
-Know When That Has Failed

“If you cannot make money out of the leading active issues, you are not going to make money out of the market as a whole.”
“The leaders of today may not be the leaders of tomorrow.”
Jesse Livermore

Trading is simple but it isn’t easy. The simplicity is that trading often involves finding a strong currency via an uptrend on the charts and a weak currency via a downtrend on the charts. Once you’ve identified a strong currency and a weak currency, you can buy the strong against the weak until the trend ends. However, when that trend ends, it’s easy to become confused as to the next currency to focus on.

Don’t Get Married To a Trade or Currency

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Traders can run into difficultly when a trade that was a sure thing is no longer performing like it once did, yet they’re trying to squeeze a few more pips out of it. If the trader has stayed in the trade or continues to enter short-term trades that start to show more losses it could be that the trend has changed and could be just getting started. As you can see above, the Euro started in an uptrend from 1.2750, the 2013 low, up to a high in early May ’14 of 1.3992 and due to recent ECB action, only a few monthly later, we’re back near the 2013 low of 1.2750 and could easily surpass that low.

Like the Euro in early 2014, what was once the leader doesn’t always remain the leader so you need to be able to have a flexible outlook and be ready to look for another trade when the leader is dethroned.

Identifying the Next Likely FX Leader

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Many traders know that currencies can flip from strong to weak. However, they’re not sure where to look for the currency that could soon become the new strongest currency. It’s important to know that there is no guarantee but we can definitely find with probable cause what can become the next leader in FX.

The first place you can look when identifying the next likely big mover is to look for the next strongest currency. Another way to state this is a currency that is trending higher against all other currencies except the current leader. As of the time of this article, the British Pound meets this requirement. The GBP is up vs. the EUR, JPY, AUD, and other currencies but not the USD as the USD is the leader. Should the USD begin to weaken, the next strongest currency could become the British Pound.

AUD has recently flipped from strongest to weakest among G10 FX

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The next place you can look is a developing fundamental story that hasn’t been priced into the market yet. A fundamental approach means a central bank move or a series of news events that begin to show weakness in a strong currency or strength in a weak currency. In early 2014, the very weak AUDUSD had a case of both stronger economic data and a central bank that was no longer talking down a currency.

Know When That Idea Has Failed

It’s important to have a short leash on a new trade idea. Because you’re trying to get in early, you have very little proof and should take counter-hypothesis price action seriously and not be afraid of closing out the trade with a small loss.

Happy Trading!

---Written by Tyler Yell, Trading Instructor


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Talking Points:

• Increased Volatility is good for breakout trading
• Donchian Channels can find breakout trade entries
• Sentiment can strengthen our Donchian Channel signals

We’ve seen an uptick in volatility the past couple of weeks across the board. This has led to some exciting opportunities for breakout traders as they take advantage of larger than normal price moves. One mistake that traders often make is ignoring the conditions of the market they are trading. They might be trading an excellent strategy, but if market conditions do not match up with the strategy’s style, traders might not like the results that they see.
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David Rodriguez’s Weekly Outlook explains how much volatility has risen lately and how most pairs are ripe for breakout trading. So today we will look at a breakout strategy that has been a staple in my own account for years, Donchian with a Sentiment filter.

Download & Setup Donchian Channels

Donchian channels are not available on FXCM’s Trading Station Desktop by default. We must download and install this tool from FXCMApps.com. Follow the instructions below to get this tool available on your own charts at home.

• Go to the Donchian Channel download page, select purchase (it’s free).
• Input your information and download the file.
• Unzip the file and double click on the .exe file that’s inside.
• Complete the installation steps and close/re-open Trading Station Desktop.

Now that we’ve installed the indicator on our platform, we need to add it to our charts with the proper settings. Click the “Add Indicator” button above the charts (or click the “I” key on your keyboard). Select the Donchian Channel from the indicator list and click OK. We next want to adjust the settings to match the image below. Click OK.

Preferred Donchian Channel Settings

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We should now see the Donchian Channels on our chart. It should appear as a price channel that adjusts to the high and low of the last 24 candles. Now we are ready to look for trade setups.

Finding Breakout Trades Using Donchian Channels

My preferred time frame for this strategy is a 1-hour chart. Once we are setup, it is very easy to identify breakouts. We simply need to wait until the current candle closes outside the Donchian Channel and then place a trade in the same direction. So when we have a candle that moves and closes above the upper line, we would initiate a buy trade. When a candle moves and closes below the lower line, we initiate a sell trade. The chart below shows a textbook example of a breakout sell trade.

Breakout Sell Trade Setup

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Using SSI as Confirmation Filter

To further refine our breakout entries, I’ve found it’s a good idea to use SSI as a direction filter. For a full write-up on how retail sentiment is read and used, read My Favorite Trading Tool, How to Use the SSI. In essence we only want to take breakout trades that would put us in a position that is opposite of the retail majority. So we want to only take buy trades when SSI is negative and only take sell trades when SSI is positive.

EURUSD SSI

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For the breakout example above on the EURUSD, Donchian gave us a sell entry. That means we want SSI to be positive in order to confirm the trade. It turns out that the SSI for the EURUSD is positive giving us a green light on this break out trade. Not every trade will be successful, but it turns out this breakout trade had stellar results, as seen below.

Successful Donchian & Sentiment Trade

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In Conclusion

The increase in volatility is sight for sore eyes for most Forex traders, but this also means we need to adapt our trading technique to match these changes. The breakout strategy explained above is, in my opinion, a great way to attack this kind of market.

Good trading!

---Written by Rob Pasche


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Talking Points

• EURGBP Stays Range Bound Post NFP
• Range Support Sits at .7864
• Range Reversals Triggered Under .7808

EURGBP 30min Chart
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Traders looking to avoid the volatility of this morning’s NFP event, can set their sights on currency crosses such as the EURGBP. Thia pair remained quiet, despite the rest of the market’s volatility, and has maintained its 38 pip trading range. Currently price has bounced off of range support, found at the R3 pivot depicted above. This will allow reversal traders to target the R3 line of resistance at .7864, in the event that price stays range bound.

If price moves out of the marked trading range, traders can begin positioning for a breakout. A drop below the S4 pivot, at a price of .7808, would signal the creation of a lower low and a move back in the direction of the daily trend. A move above R4 resistance at .7882 would create a bullish bias on the EURGBP on a break to new high highs. In either breakout scenario, traders should consider concluding any range bound positioning and trading with the markets new found momentum.
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Yesterdays Update
Yesterday began with the NZDUSD breaking out to higher highs above R4 resistance. After prices attempted to retrace, the NZDUSD had again tested new highs by the conclusion of the trading day. To learn more about yesterday’s action, check out Thursday’s FX Reversal article linked below.

---Written by Walker England, Trading Instructor


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Talking Points:

• EUR/USD Sentiment Flips to Negative
• Long-Term Channel Support Near $1.25
• Potential Exits: Stop at 1.2480 & Limit at 1.2950

The Euro has taken a turn this week after its relentless free-fall the past few months. After falling to $1.25 last week, it has now risen as high as 1.2675. I am predominantly a trend trader and look to trade in the path of least resistance (in this case, selling the EUR/USD as its fallen), but there are a couple compelling reasons to consider buying the EUR/USD at this price.

EUR/USD SSI Flips to Negative - Bullish

First, we want to look at the recent shift in sentiment. The EUR/USD has had more retail buyers than sellers for almost three months; this has coincided with a drop in price for the pairwhic is often the case. We focused on this downtrend back in August when 66% of EURUSD Retail Traders were buying, and readers following SSI are now consequently sitting on a hefty profit.

But today, the SSI has actually flipped negative. This means there are more retail traders selling the EUR/USD than buying, a bullish signal. The chart below shows historical SSI alongside price and the most recent change in SSI’s direction.

EUR/USD Historical SSI & Price

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The Speculative Sentiment Index is not a guaranteed signal. It does not mean that the EUR/USD is guaranteed to begin moving higher. But it certainly has piqued my interest in a potential long Euro trade, opposite of the retail trading crowd.

Weekly Chart Channel Support at $1.25 - Bullish

Moving on to technical analysis, the Euro has bounced at not only the psychological level of 1.2500, but a very significant supporting trend line. While trend lines typically require more than two points to become valid, we were able to project this trend line into the future by drawing a line parallel to the trend line created at the top of the chart pictured below. This method is further explained here.

EURUSD Weekly Chart – Bullish Channel

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This weekly chart shows how strong the EURUSD bounce has been off of this key level. We are banking on this support level to continue holding to give us a successful buy trade.

Potential Exit Strategy for Euro Bulls

No trade setup is complete without an exit strategy. Looking at this setup in particular, it is clear that we want to set our stop loss below the most recent swing low. Traders can set their stop losses at 1.2480 to give our long position room to breathe as well as allow the trade to be closed out at a loss if a new low is created.

EUR/USD - Buy Trade Exit Strategy

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Using a 1:2 risk:reward ratio (see Forex Fast-Track II), we can set our profit target around 1.2950. This will place the limit before price would hit the psychologically important $1.30 level and will put our exit right in the middle of a consolidation area we saw 3 weeks ago. We hope this will get us out of our winning trade before these potential resistance levels have an effect on price action.

The Euro’s Fork in the Road

No one knows with certainty if the EUR/USD will bounce higher or not. We can only look at similar situations in the past to create an educated guess on what may happen in the future. With the EUR/USD turning around at such a key level and SSI flipping negative, an argument can be made that the Euro could rally higher against the US Dollar.

---Written by Rob Pasche


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Talking Points
-Elliott Wave Theory can provide clues to our location within the USDJPY trend
-USDJPY continues climbing higher in 5th of 5th wave
-Daily chart shows wave relationships and reaction level in the 119 handle

USDJPY Daily

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Fibonacci Wave Ratio Analysis

• Green wave 5 projects to 119.54 (green waves 1-3 times .618)
• Within green 5, red wave 5 projects to 119.81
• Intraday charts appear to be unwinding a series of wave 4 and 5’s (see video)

Bottom line, look for near term trends to finish off the larger picture wave 5 of 5. A shorter term trader can look to buy dips near 117.50-118.00 in anticipation of a smaller degree wave 5 towards 119.50
119.54-119.81 appears to be a point of attraction. This does not mean we want to short at those prices. This means the probability of a strong reaction lower is elevated if prices dig into the 119 handle.

If the longer term labeling is correct, then if a correction unfolds, dips could run for several weeks and retrace several hundred pips. The green 4th wave territory would provide longer term support should a dip develop that deep.


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


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Talking Points
-Elliott Wave Theory can provide clues to our location within the EURUSD trend
-EURUSD finished a proposed ending wave of an ending wave of an ending wave suggesting a multi-week low on December 8, 2014
-Initial target zone is as high as 1.2900

EUR/USD Daily Chart

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Fibonacci Wave Ratio Analysis

• 5 clear waves higher from the December 8 low suggests the shorter term trend has moved higher
• One scenario suggests an immediate thrust higher under a small wave 3 to 1.2765 (see video and scenario #1 below)
• A second scenario suggests a drop towards 1.2340-1.2370 with the movement since December 11 creating an expanded flat formation (see video and scenario #2 below)

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Bottom line, look for opportunities to buy EUR/USD on a breakout higher above this morning’s high or on a dip near 1.2340-1.2370. A move below 1.2450 will begin to suggest a deeper dip is likely towards the 1.2340 area. The December 8 low is the risk level on a deeper dip.

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If wave 3 unfolds, either immediately or next week, upside targets towards 1.2765 would be the initial step in a multi-week rally.

From a longer term perspective, wave 4 of the previous trend, meaning the green wave 4 often times acts like a magnet in counter trend rallies. Green wave 4 is near 1.2900 so there are a few pips available should the wave labeling be correct and a rally develop.

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


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Talking Points
-Equal Waves pattern is a simple three wave pattern
-Compare the alternating waves of the pattern to determine if they are equal in length
-Equal Waves patterns can provide clues about the larger Elliott Wave structure

http://youtu.be/JORKrdF01uU

Many traders ask how to begin labeling their chart using Elliott Wave Theory. Try starting with the Equal Waves pattern. The video above describes what the pattern is, how to measure it, and what you can anticipate once the pattern is identified.

The Equal Waves pattern is a three wave structure. Therefore, it can also indicate what the larger degree Elliott Wave pattern in development.

Attachment 11531

For example, depending on where it shapes, the pattern could be the A or B leg of a flat correction, one of the legs of a triangle, an entire zig zag correction, one leg of a complex correction, or one of legs of a diagonal motive wave.

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

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Talking Points
-Short term triangle keeps the larger triangle pattern in play
-An immediate move below 117.28 negates the short term triangle
-Look for resistance 119-120 to end wave D of a bullish triangle

The USDJPY has been stuck in a sideways range since December and appears to be carving out a larger degree 4th wave triangle. That means that each of the 5 sub-waves of the triangle should shape up as a zig-zag, triangle, or combination between them.
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Indeed, the price action for the past week appears to be carving out a smaller degree triangle. Triangles are one of my starting points in identifying a wave count because there are only certain places in the count where triangles form.
Therefore, this smaller degree triangle is in play so long as we are above 117.28. Use this level as risk for a revisit to the 119-120 handle.

USD/JPY 2 Hour Price Chart


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Talking Points

• EURUSD opens to a false breakout
• Today’s trading range starts at 1.0707
• A breakout above 1.0796 may signal a broader reversal

EURUSD 30 Minute Chart

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The EURUSD has opened this morning attempting to breakout towards lower lows. However, despite printing a new weekly low at 1.0675 price has failed to stay below its S4 pivot at 1.0678. Price is currently being seen moving back inside of its pivot range, starting at the S3 Camarilla pivot found at 1.0707. If price remains supported at this value, it may suggest a price bounce from this point towards values of resistance. Currently todays R3 pivot sits at 1.0767, completing todays 60 pip range.

In the event that price trades back below its S4 pivot, this would open the possibility of another daily close lower for the week. However, a reversal through today’s trading range and a breakout above the R4 pivot at 1.0796 would suggest a reversal back in the direction of the EURUSDs previous short term trend.

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---Written by Walker England, Trading Instructor

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Talking Points

• USDJPY starts trading in a 59 pip range
• Price is bouncing from support at 124.47
• R4 breakouts begin at 125.35

USDJPY 30 Minute Chart

http://tradingview.com/i/8UjsmMGa
The USDJPY has moved to a new 2015 high this week, peaking at a price of 125.05. However, price found resistance at this point, under today’s R3 Camarilla pivot at 125.06. After testing resistance the USDJPY quickly descended through today’s 59 pip trading range, back to values of support. The pair is currently being supported by the S3 Camarilla pivot, found at 124.47. It should be noted that prices have already traversed through today's pivot range once, causing traders to look for ranging market conditions to continue unless a breakout scenario develops.

In the event of a breakout, traders will begin looking towards the R4 pivot found at 125.35. Such a move would create a new high for the USDJPY, and suggest a return of momentum back in the direction of the daily trend. Conversely, a move below the S4 pivot at 124.18 would suggest a bearish reversal counter to the markets primary direction. In either scenario, a breakout would signal an end to the present range bound market and traders can begin to adjust their strategies accordingly.

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---Written by Walker England, Trading Instructor

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Talking Points:

• EURGBP trading volume was muted on 3 attempts at multi-year lows
• Double Bottom Pattern looks to have attractive risk: reward
• EURGBP SSI shows 84% of traders are short favoring further upside off higher low

“All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.”
Arthur Schopenhauer, German philosopher (1788 – 1860)

A failure on a chart can easily communicate as much as a confirmed move. Some of the best trades come when a prior held move is invalidated because it isn’t catching the bids it previously had. Such a scenario seems to be playing out cleanly on EURGBP. This failure has brought together a chart pattern, sentiment signal, as well as volume validation of a trade against the prior trend.
The failure on EURGBP brings a clear message for the time being. The message is that the market has little to no interest in additional exposure long GBP and short EUR below 0.7000. The inability for the market to build momentum past this point favors the new move higher. A key way to recognize this lack of momentum is to see whether price and volume are in agreement or disagreement around this level. Because volume dropped when approaching this key zone, we’ll look for a trade set up that favors a new directional bias.

Attachment 13972

Complementing sentiment and volume is the technical analysis approach. Technical analysis looks for potentially repeatable patterns that can provide an edge, so long as risk is managed. The chart above shows EURGBP working out a potential double-bottom patter. This is a reversal pattern and should be watched carefully for invalidation.

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Talking Points
-Today’s break below 1.1200 clears the wave picture
-Expanded flat downward correction likely continues towards 1.09-1.10
-Long opportunity near 1.09-1.10 with 1.0815 as risk level

With the EURUSD breaking below 1.1200 earlier today, it elevates the potential of an expanded flat downward correction according to Elliott Wave Theory.

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For those unfamiliar with Elliott Wave Theory, it is a form of technical analysis that assesses the characteristics of the waves without regard to the corresponding news. When reading this article, remember that Elliott Wave is probabilistic in that anything is possible so long as it conforms to the Elliott Wave theory rules.

With that said, each pattern has an idealized look and guidelines exist as to its ‘typical’ shape. Those counts that fit many guidelines are considered higher probability in nature, but that doesn’t mean what is anticipated will occur. As with any risk in the market, know where you are wrong and get out of the trade when the market is carving something else.

Well, now that prices have broken below 1.1200, this elevates the expanded flat pattern identified last week as the higher probability move.

Expanded Flat

The higher probability scenario we are currently tracking is a smaller degree expanded flat correction that eventually works down towards 1.09-1.10.

Expanded flats are corrective moves meaning they move in the direction against the trend. In this case, since it is a downward expanded flat correction, we can anticipate that once this flat is exhausted, we’ll see a continuation of the EURUSD trend higher (see idealized pattern above).

Since the expanded flat is a corrective move, it will unfold in three bigger waves labeled on the chart below as (a)-(b)-(c). The sub-waves give a 3-3-5 appearance meaning wave (a) consists of three waves, wave (b) consists of three waves, and wave (c) consists of five waves.

Therefore, it appears we are in the middle of wave the (c) wave lower. Since the (c) wave typically acts as a false break on the (a) wave, prices could dig into the 1.09 handle.

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Expanded flats are challenging patterns that are designed to fool many traders. It is essentially a dual false breakout pattern. We experienced a false breakout higher above the June 4 high which means we’ll likely see a false break below the June 5 low.

Once this expanded flat is exhausted, there will be an opportunity to buy the EURUSD and target new highs above 1.15. Therefore, if a trader enters near 1.10 with a 1.08 stop loss and a target of 1.15, that provides a target 2.5 times the distance of the stop loss.

Other Possibilities

As mentioned above, Elliott Wave is probabilistic in that nothing is certain, simply likely. Therefore, another option which would transpire calls for a break below 1.0815. Therefore, this 1.0815 level is key to determining the direction of the medium term trend.


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Talking Points

• The CAC40 is set to close inside Fridays price action
• Reference resistance is set at 4,950
• Current ATR sets bullish projections to 4,904.21

Like many indicies around the world, the CAC40(FRA40) is hovering near new highs for the month of October. The index has experienced a fresh round of bullish momentum based on the most recent statements from the ECB suggesting that the central bank may exapand their current QE program. However, after Thursdays initial breakout and Fridays continuation, the CAC40 can be seen consolidating to start this weeks trading.

Attachment 16364

The CAC40 is set with the formation of an inside bar pattern. This formation is indicative of market consolidation, and is created using Fridays candle as a reference for values of support and resistance. Support is identified using Fridays low at a price of 4,822. Resistance is found using Fridays high at a price of reference of 4,950. With prices closing “inside” today, traders may begin preparing for a breakout later in the week.

Attachment 16365

In the event that the market breaks through either support or resistance, traders may use ATR to plan their projections for the index. Currently 1X daily ATR reads at 82.21 which will place bullish projections at a price of 4,904.21. Conversely, if prices break through support at 4,822, traders will begin to project prices towards a value of 4,739.79 on fresh bearish momentum.

Alternatively, if prices fail to breakout, it may signal continued consolidation for the CAC40 along with other indices. In this scenario, any breakout of support or resistance may be delayed. Traders may continue to wait for a breakout in this scenario, or opt to look for new range based positions based off of the markets current conditions.

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Talking Points
-Huge event risk this week with ECB monetary policy statement and the US jobs report
-Bullish patterns suggest a minimal move back towards 1.08-1.09
-On Balance Volume and Sentiment readings suggest a mature trend ripe for a reversal

For those who don’t closely watch the FX markets, this is a big week for the EUR/USD and a big month for the US Dollar Index. On Thursday, ECB President Mario Draghi will provide a statement regarding the ECB’s monetary policy. Economists are expecting a shift towards expansion of the QE program which could weigh heavily on the EUR.

Additionally, we have the US Non-Farm Payroll report coming out on Friday. One month ago, the NFP report was a surprise to the upside which fueled additional expectations for a Fed rate hike coming up December 16.

On the one hand, you have a central bank (ECB) which is leaning towards more easing. On the other hand, you have the Fed contemplating when to raise rates. FX traders love diverging monetary policies between two central banks as it can create strong trends. This is in large part why the EUR/USD has sold off aggressively for the past 5 weeks. However, these fundamental stories have yet to unfold and even if they do, is this the beginning of the trend or a buy the rumor then sell the news type of trade?
As we look through the technical patterns, it appears the higher probability move is for a couple hundred pips of US Dollar weakness. This could send the EUR/USD higher towards 1.08-1.09.

Attachment 16810

Bullish Scenario – Completion of the Ending Diagonal

Until November 18, 2015, the moves lower have appeared impulsive. However, the sustained move below 1.0615 has occurred in sloppy over lapping waves. As we pointed out in Monday’s US Opening Bell webinar, one pattern we keep an eye on in that situation is a diagonal pattern (image 1 above). Since the diagonal is appearing towards the end of a long move lower from August, we believe it is taking shape as an ending diagonal pattern. This pattern typically retraces to the origination which happens to be near 1.0830. A move above 1.1090 suggests the correction lower is complete with a likely retest towards 1.17 down the road.

Bearish Scenario – Wave iii of (iii)

A break below 1.0440 would leave the chart as labeled in Image 1 as incorrect. That is because on an immediate drop below 1.0440, wave iii would be the shortest of waves i, iii, v which is not allowed under Elliott’s rules.

Therefore, we shift the patterns towards being in the middle of a wave iii of (iii) lower. Since 1.0440 is the point of invalidation for longs, a stop and reverse order could be considered near there.


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Talking Points

• USD/CAD remains locked in a 57 pip range
• US Dollar pairs wait for FOMC

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Expectations are set for the Fed to raise key rates to .50%. However, if the Fed again leans towards inaction, it could cause increased volatility for US Dollar based pairs. As such, traders may continue to monitor values of support and resistance for market direction up until tomorrows even at 13:00 GMT. Currently, the USD/CAD is trading at today’s central pivot at 1.3732 after bouncing from support, which is found at 1.3703. Prices have already traded through today’s 57 pip range twice, with resistance found at the R3 camarilla pivot at a price of 1.3760.
Traders looking for a late day breakout for the USD/CAD, should continue to monitor the S4 and R4 pivots. A move above the R4 pivot point at 1.3789, would be seen as a bullish continuation after last weeks 397 pip advance. Conversely, a move below the S4 pivot at 1.3674 would be significant, as it would signal a potential change in the markets trend.

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Talking Points

• Gold Traders Prepare for a Breakout Ahead of NFP
• Bullish Breakouts Begin Over $1,248.44

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Gold prices have remained relatively quiet this morning, and are currently range bound ahead of tomorrow’s NFP (Non-Farm Payrolls) data release. Tomorrow’s NFP announcement is set to provide volatility for a variety of US Dollar based pairs, and potentially create event risk for commodities. Current expectations for the event are set at 193k. It should be noted that last month’s release came in under expectations at 151k. This miss spurred an immediate selloff in the US Dollar, while also sending Gold prices higher.

Technically, Gold is currently consolidating in a symmetrical triangle as seen in the graph above. In the event of a bullish breakout, traders will first look for prices to rise above Tuesdays high at $1,248.44. At that point, traders may begin to target a new 2016 high above $1,263.37. Conversely, bearish breakouts begin under support found near 1,225.0. In this scenario, traders can potentially look for the beginning of a new downtrend after initially targeting the triangle low at $1,190.82.

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Gold prices dropped today on the heels of the Brussels attack yesterday. From yesterday’s high to today’s low in XAU/USD, a CFD which tracks gold, we have a $45 range or over 3% of the price. This negative price action over the emotional two day period suggests the pressure in the short term on gold is to the down side.

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From a technical perspective, the gold price correction does not appear to be complete. Shorter term, there are two wave relationships showing up near $1210. Though today’s low of $1215 might be close enough to satisfy the shorter term correction, the medium term retracement has been rather shallow at near 25% in price.

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Elliott Wave technical analysis would suggest perhaps a deeper dip into the $1190-$1195 price zone may offer a compelling risk to reward ratio opportunity to the upside.

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