Daily Trading Edge

The Three Things You Need to Know Before the Trade

Friday, Jun 8, 2012

The Three Things You Need to Know Before the Trade

 

Many times trading gets boiled down to the entry, the profit target, and stop loss. Sure, these are important, in fact they are the building blocks of a trading plan, but they aren’t all that you need to know. Quite frankly, they are the last three things you need to know. So then what are the first three things that you must do before the trade? These first three things are the most influential because they determine the following:

 

  • Which pair you will even consider for a trade
  • Which direction you will enter a trade
  • Which time frame to focus on
  • Which strategy to use
  • How much risk tolerance you will need

 

The last step of a trade – the last thing you need to consider – before the entry is your risk to reward ration but all-too-often this becomes the point at which traders begin their trading plan and it’s why so many traders struggle. Unfortunately it’s because they don’t understand the larger forces at work: the risk environment, the economic environment, and the dominant psychology of the symbol they are trading.

 

We’ll examine these broadly in this article and re-visit this topic in more detail in the future, but let’s start the conversation now.

 

  1. Economic Calendar - Before the trade, any trade, I make sure I am keenly aware of the economic calendar and dominant headlines not just for today but what happened while I was away from my trading computer. For economic releases that means looking at the week in its entirety with particular emphasis on the session that proceeded, the current session, and what the market could be looking ahead to. For the headlines, I will look to sites like Forex Factory and Bloomberg...
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Aussie and Loonie in the Spotlight

Monday, Jun 4, 2012

With tonight’s RBA Rate Statement already discounted to reflect a 25 basis point cut and tomorrow’s Rate Statement from what has been a hawkish BOC, how will these two currencies fair against a U.S. dollar that has been correcting lower today.

The upcoming RBA rate decision is already forecasted at 3.50% and this represents another 25 basis point cut in addition to the 50 basis point cut from the prior meeting. Since that meeting the Australian dollar has actually stabilized but what can be seen on the AUD/USD is a U.S. dollar that has been climbing on a flight safety into the greenback.

The greenback (and yen’s) strength has been the story for May and it remains to be seen if it can continue into June with QE expectations growing from a whisper to a roar and the USD/JPY still sinking on a strong yen and a vigilant BOJ ready to sell yen as they did to - the tune of 14.3 trillion yen - last year.

With two central bank decisions coming, both the USD/CAD and AUD/USD have strong trends behind them; the former a bullish the Directional Bias and the latter a bearish one. Corrections in either market could set up a trending following swing entry.

Past performance is not indicative of future results

The Fed’s printing press seems to have not outdone the demand for the greenback as a slowdown in China and the continued saga in Europe play out. The recent U.S. equities downturn has only fueled the fire for dollar assets.

 

Past performance is not indicative of future results

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What are the pairs I am focusing on now?

Wednesday, May 30, 2012

The forex trading world is MORE than just the EUR/USD. In fact, I scan the markets each week to determine where the market clarity is best. In other words where is the trend? With a trend comes a clear driver of market psychology and this increases the chances that I’ll have a better idea of what price will do as it travels to each decision level.

Decision levels are just support and resistance and knowing who’s in control – bulls or bears – impacts how I will view the reaction at the decision level. In fact, I typically will avoid markets with non-trending daily time frames.

Here are the pairs I am focusing on now. I also want you to keep in mind that if there is a trend – as there is on each of these pairs below – I will follow the trend on the intraday time frames for trading set ups, but I will only enter counter-trend on the short-term time frames which I consider to be the five, 15, and 30-minute (with rare exceptions for the 60-minute).

Past performance is not indicative of future results

The AUD/CAD has been trending lower, and with this downtrend comes opportunities to short into rallies through what I call my “swing zone” which for a downtrend is between the 20 period SMA close and 34 period EMA low.

 

Past performance is not indicative of future results

The AUD/JPY is the risk barometer for hedge funds and traders alike. The downtrend has continued to suggest that the U.S. equities market has lower to go. And the aussie is not the only currency that the yen is...

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Question the “rally” that’s not well participated.

Tuesday, May 29, 2012

The Tuesday U.S. trading session began with the Dow Jones Industrial Average looking like the 12,600 level was squarely in its sights. However what’s important to any trader who watched intra-market relationships is that the equities rally was not well-participated which means that there was no yen selling, no dollar weakness, and little optimism in the euro.

The yen showed no signs of going along with the risk appetite that began Tuesday. Optimistic bulls were certainly hoping to see yen weakness confirm the strong Dow Jones, but as the east coast goes to lunch and the two-hour lunch time doldrums begin, equities have given back half of the early morning gains.

Past performance is not indicative of future results

The U.S. Dollar Index has continued to rally without U.S. equities weakness. This rally in the dollar has now extended with the post-clearing breakdown in the equities market. The congestion in equities was the primary cause of the chop and lack of follow-through seen last week.

 

Past performance is not indicative of future results

The AUD/JPY has turned sharply lower. The importance of the aussie-yen is that it is a barometer for risk and the yen strength versus the aussie dollar here shows that the bears are back in control of not only this pair but the risk environment.


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EUR/USD: This is why we don’t pick bottoms.

Tuesday, May 29, 2012

I started out the day reiterating to traders that there was virtually nothing that was known last October that isn’t known now. The fundamentals surrounding the U.S. and Europe have not changed in any significant way. Looking at the markets in Europe today – with many markets higher – does not support the weakness in the euro but it does remind us: Don’t pick bottoms.

The Dow – before going into lunch was up 156 points – and has since shaved half of that rally. The Dow has had four previous up days throughout May so the “sell May and go away” theme seems justified. But last week’s volatility has the bulls’ looking cautiously optimistic.

The stronger dollar doesn’t support equities optimism, neither does the strong yen, weak euro…it’s the weak euro that I will focus on here. The euro is buckling under the pressure of two factors affecting trading psychology today:

  1. The troubled Spanish banks are (once again) in the headlines and this just perpetuates the belief that Europe is nowhere near out of the woods yet.
  2. Dollar strength. Fear makes the greenback attractive. Dollar-denominated assets are still king. Consider this: Foreign U.S. government debt holding has increased 3.24% to 3.73 trillion so far this year according to the Treasury Department. This of course is not “new” news, but as governments and funds alike look for safety, the dollar is the beneficiary. As the euro falls, the dollar will continue to gain. This is a relationship – an inverse correlation - that any nearly every forex trader knows!

Past performance is not indicative of future results

The EUR/USD has been trending lower on the daily chart with all the hallmarks of a weak pair: Consistent red GRaB candles, a “four to...

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Risk Aversion Resume: Watch the Dow forex traders!

Wednesday, May 23, 2012

The risk appetite that began the week seemed to take some of the pressure off the BOJ. After all, the Bank of Japan’s desire to see the yen weaken would undoubtedly be easier if the risk appetite returned to the U.S. equities market. With risk most certainly back off the table (thank the resumption of the Dow’s downtrend and “Grexit”) the yen is gaining against all major currencies.

With the BOJ Press Conference, Overnight Call Rate, and Monetary Policy Statement behind us, it’s a clearer path to the downside for the AUD/JPY, EUR/JPY, and USD/JPY. Thank the resumption of the Dow’s downtrend for that.

Past performance is not indicative of future results

The daily Dow Jones Industrial Average has resumed the downtrend after making a 23.6% Fibonacci Retracement in an unsuccessful bid to find buying support above the 12,500 major psychological level.

 

The oversold rally which is just really a term that describes a correction is what the equities market gave traders Monday to Tuesday’s lunchtime. It was only after the European and U.K. close did the market begin to show it’s true colors.

This puts yen strength squarely in focus and the yen has

For the next two days – due mainly because of the steepness of the sell-off in the aforementioned pairs – I will likely remain short-term in my trading focusing on capitalizing on the five, 15, and 30-minute time frames.

I also am concerned that with the way that the Dow was able to recover from much greater losses mid-session that there is a chance that some choppy price action is going to come. That would be yet another reason to stay nimble, sta short term.

I like the AUD/JPY 30-minute chart and 60-minute chart...

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Shifting focus to the yen

Tuesday, May 22, 2012

With the Dow Jones strength starting the week, the yen was given an instant reason to weaken as risk appetite came into the market. What does the Fitch downgrade and tonight’s Monetary Policy Statement, Overnight Call Rate, and BOJ Press Conference gearing up, what’s next for the yen in a jittery environment where traders expect the BOJ could intervene on further yen strength? 

The Dow Jones strength could be reaching a point where the “oversold bounce” will reach sufficient selling pressure and exhaust.

Past performance is not indicative of future results

The Dow Jones shows that the 38.2% Fibonacci Retracement level could be where the bounce finds a near-term ceiling and the overall downtrend – and risk aversion – continues.

 

If the Dow (and U.S. equities) were to continue back lower, this would then begin to strengthen the yen which was losing ground against all major currencies for the last session. But today is not just a day where the Fitch downgrade is weakening the yen, it comes after the Dow gained tripled digits and opened Tuesday morning on strength. It was not until after the European and U.K. close did the Dow begin to lose the morning’s gains and fears of European recession and contagion worked its way back into market psychology. 

Past performance is not indicative of future results

The daily USD/JPY has bounced within the context of the “four to six o’clock” downtrend and triggered the first blue GRaB candle. This is a...

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What are the currencies to focus on now?

Thursday, May 17, 2012

The key to trading the pairs is understanding where the movement is coming from. Right now the dollar is moving higher leading the way for the risk OFF environment that is ruling the market and despite the fact that the Dow is not selling off with the same acceleration that the greenback is rallying, there are plenty of pairs that are moving with the fear that has taken hold of the market psyche.

The hesitation I have with the dollar-correlated pair (like the EUR/USD, USD/JPY, USD/CAD) is that the dollar while very strong still has a number of technical and fundamental factors that still has the market-at-large questioning its every move higher. In fact the dollar – despite the move from 80.00 to today’s 81.83 high is still only the transitional stages of an uptrend. The dollar is also nearing the previous highs from December 2011 where the selling pressure was too much for the bulls.

Past performance is not indicative of future results

The dollar was in an uptrend as 2011 wound down. The 82.00 level continues to elude the bulls who cannot find support above the major psychological level. This resistance could cause a shift in the dollar strength that has driven the EUR/USD lower and USD/CAD higher but the dollar is not the only consideration.

 

There is clarity in the yen’s strength, not just fundamentally but technically as well. Consider that the yen is strengthening despite many traders’ concerns about the BOJ intervening. But the previous interventions have not occurred until the USD/JPY has accelerated below 78.00. Even with today’s sharp move lower from above 80.00 (the market exhausted from 80.54) the USD/JPY has yet to break below the 200DMA. 

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Watch for those larger corrections in the trend!

Thursday, May 10, 2012

The risk off environment may be taking a breather and if it does a near-term floor in the Dow and ceiling in the U.S. dollar will be put in place as both these markets are in a chop.

Mind you, shifts in psychology often come in phases and this one will have to begin with a slow down in the RISK OFF attitude in the equities markets. If the Dow respects the previous support area, then the bearish exhaustion could lead to momentum higher, but there must be respect for support first to even attract bullish attention.

Past performance is not indicative of future results

The sell-off into the European close corrected the Dow’s early gains and with a post-Europe low in place, the markets can now determine if risk is going to be able to stay on the table as the Dow’s daily range lows are tested.

 

The yen becomes an interesting currency to then watch during this important session as the strength could begin to see a slowdown as the currency is borrowed/sold in an environment where the Dow to move higher of the range floor and encourage more risk taking. The yen has already lost intraday ground to the Australian dollar, Canadian dollar, and euro.

Past performance is not indicative of future results

The move higher in the AUD/JPY shows that there is some risk appetite returning to the market but notice that the pair is still trading below the 200DMA and has retracted from this level.

 

The tricky part of...

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Three Ways I’m Playing the Euro

Tuesday, May 8, 2012

While I know the EUR/USD is by far, the most popularly traded pair, there are other ways to play the drama unfolding in Europe and with more price and psychological clarity.

One of the first things I look for is a clear psychology on the daily chart of any market I want to trade. This step is as simple as answering the following question: Is the 34EMA Wave moving in either a “twelve to two o’clock” or “four to six o’clock” direction on the daily time frame. This is what I call looking for a trending Directional Bias. If there is a trend on the daily I then know that there is a dominant psychology ruling that market.

Consider that in an uptrend that there is more likely to be buyer support waiting on pullbacks and bullish momentum willing to carry the market to higher highs. On the flip side, in a downtrend, consider that there will be selling resistance on bounces and bearish momentum pressing the market to lower lows.

My focus is preferably on pairs that have trending Directional Bias. Choppy, range-bound markets are account killers. Yet interestingly the news surrounding Europe of course will attract traders to the EUR/USD but there is no clarity in the sideways range on that daily time frame. I think that attention on the euro would be better placed through pairs like the EUR/JPY and the EUR/GBP over the EUR/USD. Let’s take a look at all three and see why.

The EUR/USD is only as interesting at the gap is making it right now. That gap has attracted attention and attention to PRICE (not just the fundamentals surrounding a pair) is a good thing.

Past performance is not indicative of future results

The daily EUR/USD remains in a choppy range and while the move lower has attracted attention...

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