|
Massive Head and Shoulders Breakdown
Traders have been speculating for weeks about a potential head and shoulders breakdown in the Great Britain Pound – Japanese Yen (GBP/JPY) currency pair. Well, speculate no more, this chicken has come home to roost (see figure 1).
Figure 1: GBP/JPY plunges lower after forming a massive top. Source: Saxo Bank
In our December 4 newsletter, we mentioned the short GBP/JPY trade as one of Goldman Sachs' top trading ideas for 2008. At that time, GBP/JPY was trading at nearly 228.00, so we have seen a vicious downward move of about 1400 pips in just over a month. If you haven't already sold short, I'd consider selling rallies, as this pair could have more downside if it breaks the support level near 212.00. Thinking of going long? Be careful, when the Japanese Yen catches fire like it has here, recent history shows that the moves tend to be vicious.
Questions of the Week
Now that we are well into 2008, it seems that many of you have made a New Year's resolution to learn more about Forex trading. Now that more and more traders have entered this massive market, which boasts a daily turnover of $3.2 trillion dollars, it's important for all traders to understand the opportunities and the pitfalls of trading in this global market. Please keep those questions coming, and if I didn't get to your question this week, please check back next week. OK, here we go!
Q) Hi, I am one of the newbies, enjoying greatly your newsletters. I want to know how to find the trend for the day or possibly the week without the use of indicators.
Ed Ponsi) Thank you for your question. Different people mean different things when they speak about the trend, but for me a trend is something that exists on a longer-term chart, which for me would be a daily or weekly chart. Once I've identified that trend, the idea is to drill down to a shorter term chart to seek opportunities to enter a trade in the direction of that long term trend, using support and resistance, oscillators, and other techniques.
But how does one identify this trend? There are numerous ways to do this with or without the help of indicators. One of the most commonly used methods is to use moving averages, or MAs. When the moving averages assemble themselves into what traders call their "proper order", trending techniques can be implemented. We can define the proper order of moving averages for an uptrend as: the 10-period MA is located above the 20 MA; the 20 MA is located above the 50 MA; the 50 MA is located above the 200 MA. Here is a weekly chart of the Euro – US Dollar (EUR/USD), which demonstrates the proper order of moving averages for an uptrend (see figure 2).
Figure 2: EUR/USD moving averages are in proper order. Source: Saxo Bank
In the case of a downtrend, the order would be reversed. In other words, the 200-period MA is located above the 50 MA; the 50 MA is located above the 20 MA; and the 20 MA is located above the 10 MA. This is the case with the current weekly chart of the U.S. Dollar – Singapore Dollar, which is currently in a downtrend (see figure 3).
Figure 3: USD/SGD chart shows proper order of moving averages. Source: Saxo Bank
Another technique for determining the strength and viability of a trend is the Average Directional Index indicator, known as ADX. Simply put, the higher the reading of the ADX indicator, the stronger the trend is considered to be. Here we are viewing the same chart of EUR/USD as in figure 2, only now we have added the ADX indicator to confirm the trend. ADX shows a reading of 39.97, indicating a strong trend (see figure 4).
Figure 4: EUR/USD weekly chart, with ADX added. Source: Saxo Bank
Regarding your question about locating trends without the use of indicators, let's not forget what may be the simplest, yet the most effective way, to determine a trend – simple observation. There is a saying in the legal world, "Res ipsa loquitur", which loosely translates to "it speaks for itself". A really good trend, one that shows a steady directional bias over a period of weeks or months, can often be identified without the use of indicators – it simply speaks for itself and "jumps right off of the chart" at the viewer. For example, let's take one more look at the weekly chart of EUR/USD; even without the benefit of technical indicators, the trend is evident (see figure 5).
Figure 5: EUR/USD weekly uptrend, without technical indicators. Source: Saxo Bank
If we look at a chart and it is not obvious that the market is trending, what should we do? If this is the case, perhaps this trend isn't strong enough to merit our attention. Instead of twisting yourself into a pretzel in an effort to find a trend that isn't really there, simply move on to the next chart. We want to get the best possible results from our trading, and traders get better results when they are selective about the trends they choose to trade. I'd rather place one good trade than ten mediocre trades, because we are rewarded on the quality of our trade selection and execution, not the quantity. If we trade weak trends, we are likely to get weak results.
Special Free Event in New York It's finally here! It's time for the big free seminar event in New York! John Bang, Tony Michaels, and the whole gang at Online Trading Academy New York would like to invite you to attend a free seminar and book-signing event with me on Wednesday January 9, 2008. Hey, what else would you expect from the Online Trading Academy's Franchise of the Year? Mark your calendars and don't miss this event - I can't wait to see all of my friends in the New York area!
Q) Hi Ed I've been looking at NZD/USD for a while now and see a nice range from .7550 low to high .7950 is in place. I'm a little confused on the future of this pair, as on the one side there is high yield and also strong fundamentals along with decreasing us rates, however we have the flip side of risk aversion and as seen in august when people panic and stock market falls, this pair seems to suffer on carry trade unwinding. What's your view on this pairing is there a possible collapse in store?
Ed Ponsi) Thank you for your question. There is no doubt that NZDUSD is stuck in a consolidation phase after a long run higher, as evidenced by the weekly chart (see figure 6).
Figure 6: NZD/USD weekly chart shows consolidation. Source: Saxo Bank
I agree with your assessment of the fundamentals, and although New Zealand does not benefit from the commodities rally to the extent that the Australian Dollar does, I really like the 'Kiwi', especially with that sweet 8.25% interest rate. In this case, I like the idea of waiting for the market to decide, in other words I'm interested in buying NZDUSD if it can break above the .8000 figure, and I'd consider selling a sustained break below .7400. As long as this pair is floating around between support and resistance, it is a less attractive trade because NZD/USD has been fairly aimless for several months now. I'd wait for this pair to make up its mind, and then go with the breakout – whichever direction that turns out to be. Good luck!
Have a question about Forex trading? Send an email to eponsi@tradingacademy.com and we may use your question in an upcoming newsletter. Until next time, best of luck to you in trading.
|
|
Ed Ponsi is a globally recognized name as a lecturer and teacher and is the former Chief Trading Instructor for Forex Capital Markets. An experienced professional trader and money manager, Ed has advised hedge funds, institutional traders, and individuals of all levels of skill and experience. Ed has appeared on CNBC, CNN International and TheStreet.com, and has recently written his first book for Wiley Finance, "Forex Patterns and Probabilities" (which you can purchase through