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Charting the Forex
The Forex market, because of it’s sheer mass and
participation adheres very well to charting and technical
analysis. It is for
this very reason that I encourage traders to focus their set ups
and trade management to the charts rather than news and
fundamentals. A
good rule of thumb is this:
If
a piece of information doesn’t directly relate to a price that
could be a
potential
entry level, stop-loss level, or profit target then it is
extraneous.
This end-of-day chart of the EUR/USD has two tools active on
the chart: trendlines
and Fibonacci Retracement.
These time-tested, classic tools answer the three
questions I am asking myself when entering and managing any
trade: where to
enter, where to place my stop-loss, and where are my profit
targets.
On the 3rd of May, the market had consolidated
into a triangle pattern and we wait for a breakout to the top or
bottom. The chart
shows that to the downside we have the uptrend to break as well
as a support level and to the upside we have the downtrend to
break as well as the 0.382 Fibonacci Level.
All chart patterns boil down to support and resistance,
and that includes downtrend and uptrends.
On the 5th of May we see that the market broke out
to the upside and traded through the first potential profit
target at the 0.500 Fibonacci Level, stalling just above the
0.618, the second profit target.
Each of these resistance levels become support as prices
trade through and can easily be used as trailing stop.
The 0.618 can now be seen as a support level and a very
near term trailing stop. Not much room for wiggle, however it will protect profits
effectively. Traders
could also use the 0.500 Level.
The option is certainly there with price action
supporting either level. When you consider that Fibonacci Levels are generated from
the last major rally or sell-off, the Retracement levels are
simply support and resistance.
Prices did weaken and we see that the 0.618 Level was indeed
the reversal level and prices have closed below the 0.500
Fibonacci Level and thus closing out the long position.
The next chart shows the view as of the 10th of
May. The EUR/USD has continued to sell-off and a large
consolidation pattern (a downtrend and uptrend trying to
converge) has begun to develop.
Prices are currently trading at the 0.786 Fibonacci Level
and had bounced off the 0.886 Level earlier.
Having these levels on the chart helps a trader gauge the
strength of the market as well as have potential support and
resistance levels laid out on the chart.
Confirmation of a potential break of the uptrend line would
coincide with the 0.886 Fibonacci Level.
There is also a support level at the 1.000 (full
retracement) Level. This
support level would be the first potential profit target level
if prices break down below our entry level at the 0.886 Level.
Let’s rewind and take a look at this set up on an intraday
chart…starting on the Friday close we see the following chart.
The intraday view is of the 180 minute chart.
I will scan through the 15 minute, 30 minute, 60 minute,
180 minute, and 240 minute intraday.
Here we see prices resting right on the uptrend line.
To the upside we see a minor resistance level not far
from the 0.618 Fibonacci Level.
The uptrend line and the minor resistance level are
forming a rising wedge.
Here’s the view seven candles later.
Prices broke the uptrend lines and the sell-off sliced down
through the first profit target at the 0.786 Fibonacci Level and
are heading towards the second target at the 0.886.
The next chart is just four candles later and shows a great
example of when prices fall short of a target and what can
happen…
Here we see that the low reached 1.1807 while the profit
target was 1.1804…three lousy pips but that’s the way
trading can go. Since
we have the 0.786 Fibonacci Level just above, it makes for a
perfect trailing stop.
Let’s take a moment to talk about execution, remember since
we pay the “spread” in Forex we’re usually dealing with
about a four to five pip difference between the bid and the ask.
This means we have to think about where our order will be
waiting amongst the other orders in the “market depth”. Returning to the scenario above with the profit target of
1.1804, this order would be placed as a limit order to buy (a
“bid”) at 1.1804. With
a five pip spread, the 1.1804 bid would be trading versus a
1.1809 ask. So
consider that when the bid is 1.1804, the price that a trader
could exit at or “hit the ask” would be 1.1809.
When 1.1804 is the ask, the bid would be 1.7999.
Remember, we pay the spread when trading Forex.
All
analysis for this commentary was done using automated
EZ2TradeSoftware...soon to be available through
eSignal. Disclaimer:
The information contained in this page is based on or derived
from information generally available to the public from sources
believed to be reliable. No representation or warranty is made
or implied that it is accurate or complete. Any opinions
expressed in this paper are subject to change without notice.
This page has been prepared solely for information purposes and
if so decided, for private circulation and does not constitute
any solicitation to buy or sell any instrument, or to engage in
any trading strategy.
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