Written by John Kicklighter, Currency Strategist
During the worst of the financial crisis through the end of 2008 and even into the opening months of 2009, the market’s primary concern was risk appetite. Interest rate cuts were pervasive and expected return was the last thing on any traders mind. Sharp losses in nearly every investment class leveraged capital preservation into the upper echelons of importance. However, with interest rates bottoming out and safe havens no longer essential, we have seen speculative funds slowly finding their way out of risk-free zones and coming off of the sidelines to once again be put back to work. This leads us to a natural market truism: when fear isn’t the dominant influence, greed takes over.
Always trying to beat the market, traders are trying to find outsized returns and doing so by investing in the economy that is expected to recover from its economic recession first and most aggressively. This evaluation of relative growth potential comes with a hearty mix of objective data and highly-sensitive speculation; but with the markets, the latter is always more influential.
Since this market dynamic is developing greater clout among the speculative class, we should gauge which economies are considered leaders and laggards in the early global ‘recovery’ by market participants and which actually have the fundamental underpinnings for a timely return to expansion. As this is a highly speculative endeavor, we will have to leave out a number of factors to simplify a complex market appraisal; so we will need to narrow our focus for contributing factors. We will go over those dynamics that are essential for a genuine recovery; and you can decide whether the market’s outlook (and therefore the currency) has overshot or come up short of fundamentals
Thursday, August 13, 2009
Euro-Zone Economic Contraction Set to Ease (Euro Open)
Written by Luis Gil, DailyFX Research
The growth rate of the Euro-Zone economy will be highly watched tomorrow and is likely to shake markets if the published number deviates from expectations. Contractionary conditions might not actually be as bad as originally thought after Spain, the country with the worst jobless rate, had to revise its unemployment rate down
The growth rate of the Euro-Zone economy will be highly watched tomorrow and is likely to shake markets if the published number deviates from expectations. Contractionary conditions might not actually be as bad as originally thought after Spain, the country with the worst jobless rate, had to revise its unemployment rate down
Short-Term Forex Technical Outlook: GBP/CHF
Written by David Song, Currency Analyst
The British pound weakened against the Swiss franc for the fourth day, but looks to be finding short-term support near the 50-Day moving average (1.7743), and the GBP/CHF may continue trend higher over the near-term as market sentiment improves.
Currency Pair: GBP/CHFChart: 60 Min ChartsShort-Term Bias: Bullish
The British pound weakened against the Swiss franc for the fourth day, but looks to be finding short-term support near the 50-Day moving average (1.7743), and the GBP/CHF may continue trend higher over the near-term as market sentiment improves.
Currency Pair: GBP/CHFChart: 60 Min ChartsShort-Term Bias: Bullish
Does the Prospect of a Strong US Recovery Alter the Dollar's Profile
Written by John Kicklighter, Currency Strategist
We’ve seen the dollar endure significant volatility over the past week; but not much direction has come out of it. From pulling itself up from the next leg of a long-term decline to fading its aggressive recovery, the market’s most liquid currency is clearly at the mercy of fundamental uncertainty. As has been the case for many months, the market is having to weigh two significant fundamental themes and each is taking a different path.
We’ve seen the dollar endure significant volatility over the past week; but not much direction has come out of it. From pulling itself up from the next leg of a long-term decline to fading its aggressive recovery, the market’s most liquid currency is clearly at the mercy of fundamental uncertainty. As has been the case for many months, the market is having to weigh two significant fundamental themes and each is taking a different path.
FOMC Rate Decision and BoE Statement Will Have Long-Term Impact (Forex Video)
Written by John Kicklighter, Currency Strategist and Jaclyn Sales
The Fed puts a timeline on its quantitative easing and the BoE warns interest rates could be held down well beyond the first half of 2010.
The Fed puts a timeline on its quantitative easing and the BoE warns interest rates could be held down well beyond the first half of 2010.
Cable Supported by 50-Day SMA...For Now (Daily Classical
Written by Joel Kruger, Technical Currency Strategist
• Euro confined to inside day ahead of 50-Day SMA• Dollar/Yen fails above Ichimoku to leave sour taste• Cable well still very well supported by 50-Day SMA• Dollar/Swiss locked in mid-range and consolidating
• Euro confined to inside day ahead of 50-Day SMA• Dollar/Yen fails above Ichimoku to leave sour taste• Cable well still very well supported by 50-Day SMA• Dollar/Swiss locked in mid-range and consolidating
US Dollar Supported by Short Term Fibonacci Levels
Written by Jamie Saettele, Senior Currency Strategist
The EURUSD, USDCHF, USDJPY, and GBPJPY have reversed at 61.8% retracements of their prior impulsive moves. The GBPUSD rally, corrective to this point, has found resistance at former congestion. The NZDUSD may be completing its rally as an ending diagonal.
The EURUSD, USDCHF, USDJPY, and GBPJPY have reversed at 61.8% retracements of their prior impulsive moves. The GBPUSD rally, corrective to this point, has found resistance at former congestion. The NZDUSD may be completing its rally as an ending diagonal.
Euro Finds Support As Germany and France Show Growth, Will U.S. Retail Sales Continue
Written by John Rivera, Currency Analyst
The Euro has started to consolidate after finding support on better than expected growth GDP figures reaching as high as 1.4282. The German economy unexpectedly grew by 0.3% as stimulus and rate cuts helped the region’s largest economy end its worst recession since WWII.
Talking Points• Japanese Yen: Weaker On Rising Optimism• Pound: Bouncing From Technical Support• Euro: Germany and France Show Growth• US Dollar: US Retail Sales on Tap
Euro Finds Support As Germany and France Show Growth, Will U.S. Retail Sales Continue Broader Optimism?
The Euro has started to consolidate after finding support on better than expected growth GDP figures reaching as high as 1.4282. The German economy unexpectedly grew by 0.3% as stimulus and rate cuts helped the region’s largest economy end its worst recession since WWII. An equal improvement in France nearly pulled the entire economic region out if recession as it only contracted by 0.1% versus expectations of 0.5%. Negative growth from Italy, Austria and the Netherlands helped dragged the broader reading lower and slowed Euro gains.
The ECB”s monthly bulletin was also released today and forecasted that growth would return to the euro-zone economy by next year. They would state “looking ahead into next year, after a phase of stabilisation, a gradual recovery with positive quarterly growth rates is expected.” The surprising GDP figures is putting a hole in the argument that Europe will lag the U.S. in a recovery and could continue to add Euro support. The ECB is expected to raise rate as soon as they deem feasible as they look to adhere to their price stability mandate. We could see the EURUSD look to test resistance at 1.446-the yearly high if optimism continues.
The Euro has started to consolidate after finding support on better than expected growth GDP figures reaching as high as 1.4282. The German economy unexpectedly grew by 0.3% as stimulus and rate cuts helped the region’s largest economy end its worst recession since WWII.
Talking Points• Japanese Yen: Weaker On Rising Optimism• Pound: Bouncing From Technical Support• Euro: Germany and France Show Growth• US Dollar: US Retail Sales on Tap
Euro Finds Support As Germany and France Show Growth, Will U.S. Retail Sales Continue Broader Optimism?
The Euro has started to consolidate after finding support on better than expected growth GDP figures reaching as high as 1.4282. The German economy unexpectedly grew by 0.3% as stimulus and rate cuts helped the region’s largest economy end its worst recession since WWII. An equal improvement in France nearly pulled the entire economic region out if recession as it only contracted by 0.1% versus expectations of 0.5%. Negative growth from Italy, Austria and the Netherlands helped dragged the broader reading lower and slowed Euro gains.
The ECB”s monthly bulletin was also released today and forecasted that growth would return to the euro-zone economy by next year. They would state “looking ahead into next year, after a phase of stabilisation, a gradual recovery with positive quarterly growth rates is expected.” The surprising GDP figures is putting a hole in the argument that Europe will lag the U.S. in a recovery and could continue to add Euro support. The ECB is expected to raise rate as soon as they deem feasible as they look to adhere to their price stability mandate. We could see the EURUSD look to test resistance at 1.446-the yearly high if optimism continues.
US Federal Reserve Decision Sparks US Dollar Volatility - What's Next
Written by David Rodriguez, Quantitative Strategist and Antonio Sousa, Chief Strategist
- Bullish Japanese Yen Outlook Clouded by Market Choppiness- British Pound Forecast Takes a Hit on Dovish Bank of England Rhetoric- Canadian Dollar, Australian Dollar, and New Zealand Dollar Rally on Commodities and Equity Gains
US Federal Reserve Decision Sparks US Dollar Volatility – What’s Next?This Wednesday, the United States Federal Reserve kept its benchmark interest rate unchanged at 0 to 1/4 percent, a record low. The decision to leave rates unchanged was widely expected but the statement released around 2:15 ET had a very mixed reaction among traders and institutional investors. Initially, Treasuries sold-off and the dollar rallied sharply against the most popular currencies. However, an out of the blue change in investor’s sentiment towards more risk-taking, possibly caused by an impressive rally in stocks, made the dollar exchange rate give back most of its early gains. In sum, the Federal Open Market Committee said that even though “conditions in financial markets have improved further in recent weeks” the committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period”. Conversely, because the current "policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth", the committee has decided to gradually slow the pace of Treasury securities purchases. “The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets”. But that said, this is certainly the beginning of the end for quantitative easing, an event that is likely to propel a rally in treasury yields and provide support to the US dollar in the months ahead.
- Bullish Japanese Yen Outlook Clouded by Market Choppiness- British Pound Forecast Takes a Hit on Dovish Bank of England Rhetoric- Canadian Dollar, Australian Dollar, and New Zealand Dollar Rally on Commodities and Equity Gains
US Federal Reserve Decision Sparks US Dollar Volatility – What’s Next?This Wednesday, the United States Federal Reserve kept its benchmark interest rate unchanged at 0 to 1/4 percent, a record low. The decision to leave rates unchanged was widely expected but the statement released around 2:15 ET had a very mixed reaction among traders and institutional investors. Initially, Treasuries sold-off and the dollar rallied sharply against the most popular currencies. However, an out of the blue change in investor’s sentiment towards more risk-taking, possibly caused by an impressive rally in stocks, made the dollar exchange rate give back most of its early gains. In sum, the Federal Open Market Committee said that even though “conditions in financial markets have improved further in recent weeks” the committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period”. Conversely, because the current "policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth", the committee has decided to gradually slow the pace of Treasury securities purchases. “The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets”. But that said, this is certainly the beginning of the end for quantitative easing, an event that is likely to propel a rally in treasury yields and provide support to the US dollar in the months ahead.
Unexpected Growth in Germany May Lead ECB to Earlier Tightening
Fed Set to Trim Major Lifeline – Wall Street Journal• U.S. Logs Monthly Budget Gap – Wall Street Journal
• Citi hires external help to probe management – Financial Times
• Goldman, JPMorgan Face Carbon Market Curbs Under U.S. Senators' Proposals – Bloomberg
• Stocks, Commodities Rise on German Economic Expansion, Fed; Bonds Decline – Bloomberg
EURUSD – Euro-Zone 2Q GDP contracted by -0.1% but beat estimates of -0.5% as Germany and France unexpectedly saw growth for the period . At the same time, GDP contracted at an annual pace of 5.9% versus forecasts for a 6.6% contraction, while the seasonally adjusted figures crossed the wires at -7.1% versus -7.6% expected.The broader index was weighed down by Lithuania contracting at a double digit pace for the second quarter in a row. Economic activity in Germany unexpectedly improved during the second quarter, with the growth rate expanding 0.3% amid expectations for a 0.2% drop in GDP. The European Central Bank stated in its monthly bulliten that it anticipates a retrun to growth by 2010 which could start to raise interest rate expectations as they look to stem off future infaltion. Discuss the topic and your trade ideas in the EUR/USD Forum.
USDCHF – Producer and Import Prices in Switzerland were slightly weaker than expected, with the monthly reading holding flat in July versus expectation for a 0.1% gain. Meanwhile, the annualized rate crossed the wires at -6.1% amid a -5.8% forecast, which was the largest decline in nearly 34 years, and the slump in crude oil may continue to hamper the outlook for inflation as energy prices remain well below the previous year’s peak. Mounting risks for deflation could lead the Swiss National Bank to intervene in the currency markets again as policymakers pledge to stem the appreciation in the exchange rate.
• Citi hires external help to probe management – Financial Times
• Goldman, JPMorgan Face Carbon Market Curbs Under U.S. Senators' Proposals – Bloomberg
• Stocks, Commodities Rise on German Economic Expansion, Fed; Bonds Decline – Bloomberg
EURUSD – Euro-Zone 2Q GDP contracted by -0.1% but beat estimates of -0.5% as Germany and France unexpectedly saw growth for the period . At the same time, GDP contracted at an annual pace of 5.9% versus forecasts for a 6.6% contraction, while the seasonally adjusted figures crossed the wires at -7.1% versus -7.6% expected.The broader index was weighed down by Lithuania contracting at a double digit pace for the second quarter in a row. Economic activity in Germany unexpectedly improved during the second quarter, with the growth rate expanding 0.3% amid expectations for a 0.2% drop in GDP. The European Central Bank stated in its monthly bulliten that it anticipates a retrun to growth by 2010 which could start to raise interest rate expectations as they look to stem off future infaltion. Discuss the topic and your trade ideas in the EUR/USD Forum.
USDCHF – Producer and Import Prices in Switzerland were slightly weaker than expected, with the monthly reading holding flat in July versus expectation for a 0.1% gain. Meanwhile, the annualized rate crossed the wires at -6.1% amid a -5.8% forecast, which was the largest decline in nearly 34 years, and the slump in crude oil may continue to hamper the outlook for inflation as energy prices remain well below the previous year’s peak. Mounting risks for deflation could lead the Swiss National Bank to intervene in the currency markets again as policymakers pledge to stem the appreciation in the exchange rate.
Yen Crosses Forming Secondary Tops
Written by Jamie Saettele, Senior Currency Strategist
The Yen crosses have been fluctuating wildly as of late. Following the break of support lines, the crosses quickly reversed. Sharp rallies led to tests of 61.8% retracements as well as the underside of the former support lines in some of the crosses.
The Yen crosses have been fluctuating wildly as of late. Following the break of support lines, the crosses quickly reversed. Sharp rallies led to tests of 61.8% retracements as well as the underside of the former support lines in some of the crosses.
New Zealand Dollar Tumbles vs Japanese Yen on S&P 500 Tumbles
Written by David Rodriguez, Quantitative Strategist
A pullback in the S&P 500 has fueled a fairly sharp rally in the Japanese Yen, with the highly-correlated New Zealand Dollar/Japanese Yen pair the biggest mover among G10 currency pairs. Indeed, the correlation between the S&P and the NZDJPY trades near record-highs—underlining JPY traders’ sensitivity to financial market risk sentiment.
Barring a substantial shift in market dynamics, we would continue to expect both the New Zealand Dollar and the Japanese Yen to trade off of broader moves
A pullback in the S&P 500 has fueled a fairly sharp rally in the Japanese Yen, with the highly-correlated New Zealand Dollar/Japanese Yen pair the biggest mover among G10 currency pairs. Indeed, the correlation between the S&P and the NZDJPY trades near record-highs—underlining JPY traders’ sensitivity to financial market risk sentiment.
Barring a substantial shift in market dynamics, we would continue to expect both the New Zealand Dollar and the Japanese Yen to trade off of broader moves
The EURCHF Range is Stable but Still at Risk to GDP Volatility
Written by John Kicklighter, Currency Strategist
Volatility is clearly widespread in today’s session with both the majors and yen crosses facilitating two of the market’s dominant, fundamental drivers. Not only is the risk of breakout discouraging range trades; but many of those pairs that could be approached with a high tolerance for risk have seen significant retracements and subsequently make it very difficult to develop reasonable risk/reward structured trades
Volatility is clearly widespread in today’s session with both the majors and yen crosses facilitating two of the market’s dominant, fundamental drivers. Not only is the risk of breakout discouraging range trades; but many of those pairs that could be approached with a high tolerance for risk have seen significant retracements and subsequently make it very difficult to develop reasonable risk/reward structured trades
FX Technical Weekly
It is possible that the US dollar has turned from a significant bottom. Although the EURUSD and USDCHF have failed to test their December 2008 price extremes, all other dollar majors (including the US dollar index) have done so. This sets up a non confirmation / divergence that tends to occur at significant turning points. In fact, a similar warning signal was evident at the last major USD bottom in July 2008 when the EURUSD made a new high and the US dollar index failed to make a new low.
EUR/USD: Trading the Euro-Zone GDP
Written by David Song, Currency Analyst
The advanced 2Q GDP reading for the Euro-Zone could weigh on the exchange rate as economists forecast the growth rate to contract 0.5% from the first quarter, and fears of a slower recovery could hamper the outlook for future policy as the European Central Bank anticipates price pressures to remain subdued throughout the second-half of the year
The advanced 2Q GDP reading for the Euro-Zone could weigh on the exchange rate as economists forecast the growth rate to contract 0.5% from the first quarter, and fears of a slower recovery could hamper the outlook for future policy as the European Central Bank anticipates price pressures to remain subdued throughout the second-half of the year
Dollar Makes a Critical Bearish Break but Risk Appetite Provides Little Follow Through
Written by John Kicklighter, Currency Strategist
The sharp rally that opened this week seemed to confirm that the next wave of a five-month bull trend was underway. However, this optimistic outlook was immediately deflated when momentum failed support the transition. What is the source of this hesitation? Fundamentals.
The sharp rally that opened this week seemed to confirm that the next wave of a five-month bull trend was underway. However, this optimistic outlook was immediately deflated when momentum failed support the transition. What is the source of this hesitation? Fundamentals.
Dollar Makes a Critical Bearish Break but Risk Appetite Provides Little Follow Through
The sharp rally that opened this week seemed to confirm that the next wave of a five-month bull trend was underway. However, this optimistic outlook was immediately deflated when momentum failed support the transition. What is the source of this hesitation? Fundamentals
Forex Technical and Fundamental Forecasts for August
Our Forex Monthly Technical and Fundamental Outlook report examines long-term forecasts for major currencies, as we explore key themes ranging from chart patterns, fundamental valuations, and interest rate forecasts. Visit any of the links above to see Fundamental, Technical, and Valuation forecasts for major forex pairs.We always want to hear your feedback on new DailyFX articles. Want more articles like this? Less? What do you want to see? Send e-mails to jskruger@fxcm.com, drodriguez@fxcm.com, and ispivak@fxcm.com
The dollar made the bearish break to new lows for the year last Monday, but it was not catalyzed by any specific fundamental driver nor supported by a
The Australian dollar will see the first of the four central bank decisions we'll see this week at 00:30 ET, but the currency's reaction will have more to do with what the Reserve Bank of Australia (RBA) says, rather than what they do.
The US dollar, euro, British pound, Australian dollar, and Canadian dollar all face very high event risk this week due to employment reports and a total of four rate decisions. Among the central banks that are meeting, including the RBA, BOE, ECB, and BOC, none are expected to reduce rates, but there is still the question of their policy bias going forward, especially when it comes to credit and quantitative easing. • Reserve Bank of Australia (RBA) Rate Decision – June 2The Reserve Bank of Australia is anticipated to leave their cash rate target unchanged at 00:30 ET on Tuesday for the second straight month at 3.00 percent, and the Australian dollar may only respond to a surprise rate cut or a biased monetary policy statement. After the central bank’s last meeting, RBA Governor Glenn Stevens said that future rate cuts would be based on “how economic and financial conditions unfold, and how they impinge on prospects for a sustainable recovery in economic activity.” As a result, it will be important to look to Stevens’ statement, as signs that the economy or financial markets are not holding up strongly enough for the RBA’s liking may suggest that the central bank will consider cutting the cash rate target again, and this news could weigh on the Australian dollar. On the other hand, indications of a broadly neutral bias and comments suggesting that 3.00 percent is essentially the floor for the cash rate target could support the currency.
The US dollar, euro, British pound, Australian dollar, and Canadian dollar all face very high event risk this week due to employment reports and a total of four rate decisions. Among the central banks that are meeting, including the RBA, BOE, ECB, and BOC, none are expected to reduce rates, but there is still the question of their policy bias going forward, especially when it comes to credit and quantitative easing. • Reserve Bank of Australia (RBA) Rate Decision – June 2The Reserve Bank of Australia is anticipated to leave their cash rate target unchanged at 00:30 ET on Tuesday for the second straight month at 3.00 percent, and the Australian dollar may only respond to a surprise rate cut or a biased monetary policy statement. After the central bank’s last meeting, RBA Governor Glenn Stevens said that future rate cuts would be based on “how economic and financial conditions unfold, and how they impinge on prospects for a sustainable recovery in economic activity.” As a result, it will be important to look to Stevens’ statement, as signs that the economy or financial markets are not holding up strongly enough for the RBA’s liking may suggest that the central bank will consider cutting the cash rate target again, and this news could weigh on the Australian dollar. On the other hand, indications of a broadly neutral bias and comments suggesting that 3.00 percent is essentially the floor for the cash rate target could support the currency.
Forex Weekly Trading Forecast - 08.10.09
The dollar made the bearish break to new lows for the year last Monday, but it was not catalyzed by any specific fundamental driver nor supported by a meaningful trend in risk appetite. To reverse the currency's fortunes and potentially change its future, a true bull trend requires an underlying fundamental driver, meaning either a break the dollar's ties to investor sentiment (as a safe haven currency) or a collapse of risk appetite
Forex Weekly Trading Forecast - 08.10.09
The dollar made the bearish break to new lows for the year last Monday, but it was not catalyzed by any specific fundamental driver nor supported by a meaningful trend in risk appetite. To reverse the currency's fortunes and potentially change its future, a true bull trend requires an underlying fundamental driver, meaning either a break the dollar's ties to investor sentiment (as a safe haven currency) or a collapse of risk appetite
Futures Positioning Favors Dollar Bulls
The COT Index is the percentile of the difference between net speculative positioning and net commercial positioning measured over a specific number of weeks (either 52 or 13). A reading close to 0 suggests that a bottom is forming and a reading close to 100 suggests that a top is forming. The readings are for the actual currency, not the currency pair. For example, a reading of 100 on the Canadian Dollar suggests that the Canadian Dollar is close to a top (USDCAD close to a bottom). Readings of 95 and higher as well as 5 and lower are in boldfaced red type to indicate potential market extremes. For example, an increasing index is bullish until the index is extreme (near 100), at which time the risk of a reversal or pause in the trend increases.
Forex Strategy Outlook: US Dollar Reversal Critical
A strong US Dollar reversal led many of our trend-following trading strategies to close USD-short positions, and indeed the shift has prompted some systems to go long the US currency. Friday’s Nonfarm Payrolls sparked the long-overdue bounce that picked the USD off its lows. The question now becomes whether we can expect a more sustained US Dollar rally.
Our bias towards "Momentum" and "Breakout" systems brought mixed results through last week's trade. We clearly benefited when the EURUSD and GBPUSD rallied to fresh year-to-date peaks--Momentum1, Momentum2, and Breakout2 all floated sizeable gains on the US Dollar breakdown. Yet the reversal quickly pulled us out of said positions, and the slow-moving Momentum1 strategy gave up most of its previous gains. We are admittedly torn in establishing trading biases for the week ahead
Our bias towards "Momentum" and "Breakout" systems brought mixed results through last week's trade. We clearly benefited when the EURUSD and GBPUSD rallied to fresh year-to-date peaks--Momentum1, Momentum2, and Breakout2 all floated sizeable gains on the US Dollar breakdown. Yet the reversal quickly pulled us out of said positions, and the slow-moving Momentum1 strategy gave up most of its previous gains. We are admittedly torn in establishing trading biases for the week ahead
Post of the Day: Earlier Entries vs Later Entries
Student’s Question:
These patterns (Morning Star/Evening Star) seem to give you an indication of a trend reversal quite late on!
By the time the 3rd bar closes it seem that most of the profit potential is gone.
Is there a way of forecasting the reversal earlier by moving to a shorter timeframe (or am I missing something?)
Thanks
Power Course Instructor’s Response:
You make a fair observation...
Yes…a trader could go to a shorter time frame to see how price action is behaving in that "faster" time frame and take that as an “early warning”, if you will.
Keep in mind, however, that using the shorter time frame, the greater the potential for a "false entry" will be. With longer time frames a trader will take fewer trades but their success ratio will be higher. With shorter time frames they will take a greater number of trades but the success ratio will drop.
I would not say that “most” of the profit potential is gone by the time the third bar closes, but rather a portion of it is gone. But that portion that is gone, that movement, can play into the confirmation of the greater overall move.
There is an old trading adage that I observe...”I would rather be late and correct than early and wrong”.
These patterns (Morning Star/Evening Star) seem to give you an indication of a trend reversal quite late on!
By the time the 3rd bar closes it seem that most of the profit potential is gone.
Is there a way of forecasting the reversal earlier by moving to a shorter timeframe (or am I missing something?)
Thanks
Power Course Instructor’s Response:
You make a fair observation...
Yes…a trader could go to a shorter time frame to see how price action is behaving in that "faster" time frame and take that as an “early warning”, if you will.
Keep in mind, however, that using the shorter time frame, the greater the potential for a "false entry" will be. With longer time frames a trader will take fewer trades but their success ratio will be higher. With shorter time frames they will take a greater number of trades but the success ratio will drop.
I would not say that “most” of the profit potential is gone by the time the third bar closes, but rather a portion of it is gone. But that portion that is gone, that movement, can play into the confirmation of the greater overall move.
There is an old trading adage that I observe...”I would rather be late and correct than early and wrong”.
Does the Prospect of a Strong US Recovery Alter the Dollar's Profile?
We’ve seen the dollar endure significant volatility over the past week; but not much direction has come out of it. From pulling itself up from the next leg of a long-term decline to fading its aggressive recovery, the market’s most liquid currency is clearly at the mercy of fundamental uncertainty. As has been the case for many months, the market is having to weigh two significant fundamental themes and each is taking a different path.
Forex Correlations (August): Dollar, Swiss Franc and Japanese Yen's Role as Safe Havens Shifting
Over the past month, we have seen a sharp revival of risk appetite; but the market’s preference for safe haven versus those with potential for speculative appreciation have changed dramatically.
The following is our monthly correlations update for August. As we have stated time and again, correlations between different currency pairs will inevitably shift over time. Therefore, it is of utmost importance to keep abreast of these fluctuating relationships to fully understand your trades and portfolio. Below are the one-, three-, six- and twelve-month correlations for the seven major currency pairs. Additionally, we have included the six-month trailing correlation for the majors against the EURUSD for a different view of correlation.
In order to be an effective trader, it is important to understand how different currency pairs move in relation to each other. There are a few reasons why this is significant, but most importantly, it allows traders to understand their exposure. For example, having a portfolio that consists of the USDCHF and EURUSD is different than having a portfolio comprised of USDCHF and USDJPY. Over the past month, we have seen a sharp revival of risk appetite; but the market’s preference for safe haven versus those with potential for speculative appreciation have changed dramatically. In this period, a currency that was often hailed as one of the two three carry currencies – the Swiss franc – has seen considerable deviation from the normal path of risk appetite that has been carried by the Japanese yen alone. Through the third of these low yield currencies in – the US dollar – and the correlations (or lack thereof) are laid bare. In the past month, we have seen the trouble in the Swiss banking sector and SNB intervention break the franc’s rudder as the low risk currency in the USDCHF pair and leave the correlation between the two near zero (0.00). In the absence of risk appetite and aversion, franc traders are drawn to the health of the small economy which is heavily influenced by the health of its primary trade partner – the Euro Zone. In the past month, the correlation between EURUSD and USDCHF has soared to near lock-step levels (-0.96). Clearly, having a long position in EURUSD and USDCHF at the same time would have the general effect of one cancelling the other out. Of course, these two currencies may have different pip values and the correlation is not perfect, so the P/L will not be exactly zero. Falling into the middle ground, the returns of a long USDCHF and USDJPY position would in essence reflect two totally independent positions (though don’t expect this free-floating relationship to last forever).
Furthermore, we can tell from our tables correlations rise and fall through different periods. Monitoring the changes in these relationships, further clarifies the underlying changes in risk appetite and those currencies that are at the extremes of the speculator’s spectrum. Juxtaposing a currency that was once held a safe haven currency, but that is now holds a very different influence against its US counterpart; USDCHF has seen its relationship with AUDUSD tighten with time. Over the past year, AUDUSD would take the opposite path to USDCHF only 34 percent of the time (-0.34). However, just over the past month, these high risk currency pair (AUDUSD) and former safe haven leader (USDCHF) has seen a far more consistent pace amongst each other. Overall, having this knowledge will allow traders to effectively diversify and manage their portfolios over time.
Regardless of your trading strategy and whether you are looking to diversify your positions or find alternate pairs to leverage your view, it is very important to keep in mind the correlation between various currency pairs and their shifting trends.
The following is our monthly correlations update for August. As we have stated time and again, correlations between different currency pairs will inevitably shift over time. Therefore, it is of utmost importance to keep abreast of these fluctuating relationships to fully understand your trades and portfolio. Below are the one-, three-, six- and twelve-month correlations for the seven major currency pairs. Additionally, we have included the six-month trailing correlation for the majors against the EURUSD for a different view of correlation.
In order to be an effective trader, it is important to understand how different currency pairs move in relation to each other. There are a few reasons why this is significant, but most importantly, it allows traders to understand their exposure. For example, having a portfolio that consists of the USDCHF and EURUSD is different than having a portfolio comprised of USDCHF and USDJPY. Over the past month, we have seen a sharp revival of risk appetite; but the market’s preference for safe haven versus those with potential for speculative appreciation have changed dramatically. In this period, a currency that was often hailed as one of the two three carry currencies – the Swiss franc – has seen considerable deviation from the normal path of risk appetite that has been carried by the Japanese yen alone. Through the third of these low yield currencies in – the US dollar – and the correlations (or lack thereof) are laid bare. In the past month, we have seen the trouble in the Swiss banking sector and SNB intervention break the franc’s rudder as the low risk currency in the USDCHF pair and leave the correlation between the two near zero (0.00). In the absence of risk appetite and aversion, franc traders are drawn to the health of the small economy which is heavily influenced by the health of its primary trade partner – the Euro Zone. In the past month, the correlation between EURUSD and USDCHF has soared to near lock-step levels (-0.96). Clearly, having a long position in EURUSD and USDCHF at the same time would have the general effect of one cancelling the other out. Of course, these two currencies may have different pip values and the correlation is not perfect, so the P/L will not be exactly zero. Falling into the middle ground, the returns of a long USDCHF and USDJPY position would in essence reflect two totally independent positions (though don’t expect this free-floating relationship to last forever).
Furthermore, we can tell from our tables correlations rise and fall through different periods. Monitoring the changes in these relationships, further clarifies the underlying changes in risk appetite and those currencies that are at the extremes of the speculator’s spectrum. Juxtaposing a currency that was once held a safe haven currency, but that is now holds a very different influence against its US counterpart; USDCHF has seen its relationship with AUDUSD tighten with time. Over the past year, AUDUSD would take the opposite path to USDCHF only 34 percent of the time (-0.34). However, just over the past month, these high risk currency pair (AUDUSD) and former safe haven leader (USDCHF) has seen a far more consistent pace amongst each other. Overall, having this knowledge will allow traders to effectively diversify and manage their portfolios over time.
Regardless of your trading strategy and whether you are looking to diversify your positions or find alternate pairs to leverage your view, it is very important to keep in mind the correlation between various currency pairs and their shifting trends.
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