ExoTrader | Forex trading system and free forex tips

In forex, we have a situation where prices never move in a continuous straight line. There will be periods of pullbacks following advances. After prices have moved in the direction of the trend, there will be some retracement as traders take profits and then further advance if the fundamentals for that move are still in place.

The dilemma for traders is two-fold:

1)      Is the pullback really a retracement or a change in trend?

2)      If the pullback is a retracement, at what point do prices resume their further advance?

Our free forex tip today is on how to use the Fibonacci retracement tool to answer these two questions.

Free Forex Tip 1

How do you really know when a pullback is actually a retracement or a change in trend? The best way of finding out is to use longer term charts in making this determination. All you need to do is to use at least the daily chart and watch the direction of the price action of the currency. Many times, what traders mistake as change in trend on a 1 hour chart is actually a retracement on a daily chart.

Free forex tip: Always use the daily chart as a benchmark for determining trends and retracements.

Free Forex Tip 2

You can use the Fibonacci retracement tool to determine when prices will continue their advance following a retracement.

To do this all you need to do is follow these steps.

1)      Use your daily chart to determine the price action.

2)      Apply the Fibo retracement tool from the highest candle to the lowest candle (for a downtrend) and from the lowest point to the highest point on the candlesticks for the uptrend.

3)      Apply the Stochastics oscillator on the chart, and where there is a Stochastics cross in the direction of the trend (before retracement, that is) at levels which are overbought (for downtrend) or oversold (for uptrend), you can conveniently take that Fibo level as the correc point where prices will advance and place your trade.

Free forex tip: Use the Fibo tool and the Stochs indicator as tools to determine points at which a retracement will end and further advance will begin.

With these free forex tips, trading retracements should be a breeze from now on.

I have traded forex for a long time, but I recently made a very startling discovery. I have found out that the choice of broker you make can affect your trading tremendously.

I recently traded a news time (the US GDP report). The trade went according to my analysis. The news came out a full minute before the price action reacted to the news, giving me plenty of time to enter and gross over 300 pips from that trade. This was one of the rare times that I succeeded in trading the spike (something I do not usually advocate).

I have tried trading the spike before, but I always got the news at the same time that the initial spike reaction to the news occurred, leaving me no time for a spike entry. So what was the difference this time around?

I switched to an ECN/STP broker.

Electronic Communication Network (ECN) or Straight-Through Processing (STP) brokers give you direct access to the price quotes from the liquidity provider, ensuring that what you see is what you actually get. These brokers require much higher capital requirements for broking accounts, charge a commission or do both. But I was able to get some brokers who offer ECN accounts from $1000. I switched to one and discovered that because I get the prices directly, there are no delays and no re-quotes. Prices come in earlier and I can trade the news spikes.

Market maker brokers on the other hand, are the brokers who offer cheap account opening. They usually operate a dealing desk and mark up the price quotes from the liquidity providers. They are very notorious for re-quotes and slippages. Due to the fact that they are the ones selling the currency to you, they lose money when you make it, and they make money from your losses. They actually work against you to make sure you work harder to win. They offer very low and fixed spreads and no commissions, but if you fall for this allure, you must understand that you will lose in re-quotes and slippages, what you think you gain from the no-commission structure.

Free forex tip: Switch to an ECN broker today!

The US Core Retail Sales report measures the change in the total value of sales made to the US consuming public, excluding sales of automobiles. It is an important measure of consumer spending. This news report has become very important over the years following the global financial crisis where consumer spending was badly hit as a result of the subprime mortgage crisis, which triggered foreclosures, bank collapses and the attendant loss of jobs that reduced disposable income. The Core Retails Sales report is therefore used to measure to what extent consumers are spending, as the spending habits of consumers are directly proportional to how much cash they have. The level of disposable income available to consumers to spend is a direct measure of the state of the economy. Manufacturers of consumer goods and retail outlets depend on the ability of the consuming public to buy their goods to keep them afloat. When these production outlets are afloat, then jobs can be created and a positive cycle can be perpetrated, keeping the economy healthy.

A good Core Retail Sales Number indicates that consumers are able to spend more and this is seen as a positive effect for the US economy and the US Dollar. A poor Core Retail Sales Number indicates that consumers do not have enough disposable income to spend and this is seen as a negative effect for the US economy and the US Dollar.

Free forex tips:

1)      Use the USDJPY to trade the US Core Retail Sales report.

2)      If you have access to a premium news feed, you can get the news early enough to trade the spike. If you do not have access to this, you can use pending orders if you use an ECN broker, or enter the market when the initial spike has retraced between 50 to 70% if you use a market maker broker.

3)      The difference between the previous number and the expected number serves as the deviation. Buy if the actual number is above the consensus number, and if the difference is more than the deviation. Sell if the actual number is below the consensus number, and if the difference is more than the percentage deviation.

TRADING THE CHF

The forex market is indeed a market that is never short of surprises. Last week, after much speculation, the Swiss National Bank (SNB) finally did the unthinkable. On September 6, 2011, The SNB took a number of wide ranging measures to devalue the Swiss Franc, one of which was to create a minimum exchange rate peg for the EURCHF currency pair to be set at 1.2000, with a promise to defend this peg by flooding the market with Swiss Francs to purchase “unlimited amounts” of other currencies.

The effect was instantaneous. The EURCHF soared by roughly just over 1,000 pips within 15 minutes of this announcement. Rarely do we see such a hefty move occurring in a 15 minute time frame. The EURCHF was trading at levels far below the peg, so naturally, the exchange rate had to readjust itself to the new reality. The other CHF pairs also saw corresponding moves in that day’s trading.

So what makes this intervention different from other ones? This was not one of the regular one-off interventions which simply postpone the evil day (as the fundamentals are not usually dealt with) with the currency drifting back to post-intervention levels.  This is actually a modern-day Bretton-Woods fixed exchange rate peg.

There are a few key points to note in all this. In the first place, the days of the Swiss Franc being a safe haven currency may be just about over. This is because everyone now knows that the peg now automatically means that the EURCHF cannot go below 1.2000. But then this is the interesting thing about exchange rate pegs. They have to be defended by the central bank of the country setting the peg. If the SNB makes good on its promise to defend that peg by purchasing an unlimited amount of foreign currencies with the national currency, there will be a strong support at levels around 1.2000.

However, the SNB could change official policy if it sees that it will virtually bankrupt the country trying to defend the peg. If there are widespread shorts on the EURCHF with a lot of pressure on the peg, it will take a tremendous effort on the SNB to defend the peg. If the peg defence becomes unsustainable, the peg will collapse and the EURCHF will be in a massive free fall. We saw similar situations with the GBP in 1992 when the Bank of England unsuccessfully tried to defend the Deutsch Mark – British Pound peg that had been set in 1990 as part of the European Exchange Rate Mechanism. Hefty speculative shorts on the British Pound stretched the BoE’s ability to defend the Pound and the peg collapsed, causing the value of the GBP to collapse in one trading day.

Right now, I am actually long on the EURCHF, because it would seem that the price would keep bouncing up around 1.2020-1.2040 for some time to come. But with rumours of a possible downgrade of the French credit rating and the recent resignation of ECB’s Stark, the pointers are that all is still not well with the Eurozone and if the Euro fundamentals remain poor, there will be pressure on the EURCHF peg. We have to see how it all plays out in the 4^th quarter of 2011 Forex trading strategy.

Eurozone Blues

The momentum of market focus has once more shifted back to the Eurozone. 2011 has not been a good year for the Eurozone, as Greece, Spain and more recently, Italy and Ireland just cannot seem to shake the cobwebs off.

The recent announcement by the Greek financial minister that the country has resources to pay salaries only until October is not cheery news at all. Ireland is also being asked to cut down salaries of government workers, one of he highest in the zone in an attempt to get the debt profile of the country to below 10.5% of its GDP.

The recent resignation of the ECBs Jurgen Stark just seems to add to the panic. We saw the Euro tumble against the USD by more than 800 pips since the month of September.

Many experts believe that the rumours of the downgrade of several French banks by Moody, as well as the likelihood of a default by Greece, can only be more bad news for the Euro. The general outlook for the Euro right now is not good. While the move on the EURUSD is clearly predictable and will be on the downtrend for sometime to come, that of the EURCHF is not as clearly defined, especially in the light of the new minimum exchange rate peg set at 1.2000 by the SNB.

What is going to happen here? Previously, we should have started seeing traders dumping the Euro for the CHF, but clearly, the peg has created a new attitude among traders.

We need to watch events in the Eurozone very closely. If traders start to acquire the CHF at the expense of the Euro, will the peg hold? We may see bounces off the peg quite alright, but will the peg withstand the selling pressure on the EURCHF currency pair? Will the SNB be forced to throw in the towel, or will they defend the peg resolutely?

Only time will tell.

What a ride it has been in the financial markets lately; a very bumpy ride indeed. If you have been able to make money in the forex markets, I would congratulate you. If you are like most traders I have come across lately, well, I would say that there will always be opportunities to make money to recoup. It is not too late to retrace your steps.

This brings us to the question for today: is it wise to invest money in the forex market right now?

The big answer is this: THERE IS ALWAYS A MONEY-MAKING OPPORTUNITY SOMEWHERE. It only depends on where your money is working for you.

I like to use trading platforms that give me access to a wide array of trading instruments. The fact is that there will always be times when it is just too risky to trade currencies, and you may have to put your money in something safer; like gold or the Swiss Franc.

Well, for a long time, the Eurozone has stolen the headlines, but recent events in the United States has shifted emphasis back where the markets have traditionally looked to for market-moving news: the US.

September 7 is a big day. That is the day President Barack Obama is expected to deliver his long awaited plan on solving the jobs problem in the US. The August job numbers were sobering. Obama has been in office for 32 months, and in those months, we can count on one hand how many months have had positive job numbers. Americans are asking: where are the jobs?

Well, on Wednesday, President Obama will attempt to answer the question. His political future depends on it. But since we are traders and not politicians, we will be more interested in the market perception to that speech.

If the market has been dancing around for sometime and looking for something to give it some direction, well, this is it. The markets have been paying a lot more attention to Ben Bernanke than in previous months. I think this speech by Obama is going to set the tone for some dollar movement. If the speech is USD positive, this should provide some impetus to an upward movement of the USDJPY, and rescuing the Bank of Japan which seems to have run out of ideas on how to curtail the strength of the Yen.

Personally, I have finally found a reason to focus on trading currencies once again. Watch the speech. Read all you can about what the market perception to that speech is before it happens, so you can play the numbers properly.

If you are an index trader, then you also need to keep a watch on the US indexes. They could do with some good news again.

POSSIBLE TRADE FOR THE GBPUSD NEXT WEEK: THE DESCENDING TRIANGLE

In the previous article, we identified a descending triangle as a chart pattern which is formed by the convergence of a horizontal lower trend line (which forms the base of the triangle) and a downward sloping upper trend line. The trend lines are so formed because the sloping upper trend lines mark the highs of the candlesticks which are gradually getting lower and the horizontal trend lines signifies an area of support. This pattern is a bearish chart pattern.

We have an impending setup for the GBPUSD for the one hour and daily charts. The time period you choose will determine what you can possibly set as your targets, and your stop losses. Use good money management. As described previously, you can decide to trade the range of the candles within the boundaries of the trend lines, or you just do the classical breakout trade.

1)      The 1hour chart setup.

You can range trade the candles within the boundaries of the patterns, or use the classical trade method of using a Sell Stop to trade the lower trend line breakout. This trade could play out as early as Monday.

2)      Daily chart setup

This is my preferred option. The descending triangle is better formed, and with the price currently at 1.6129, coupled with the fact that 2 successive bearish candlesticks (hanging man candles) have formed at the sloping trend line which is acting as the resistance, a Sell order placed at the open of the next candlestick can be ridden all the way to targets 1 or 2 for at least 200 to 300 pips, over the trading week. This trade will take some days to fully unravel.

Let’s see if we can ride this out. However, this trade will be subject to the fundamentals for the GBP and the USD.

***trade hint: if the US congress is able to come to a working agreement on the US debt situation, which would stave off any downgrades from the credit rating agencies (Moody, Fitch and Standards & Poor), then we will see some massive USD strength that will make this trade setup a very sweet one indeed.

PROFITING WITH CHART PATTERNS: THE DESCENDING TRIANGLE

A descending triangle chart pattern is formed by the convergence of a horizontal lower trend line (which forms the base of the triangle) and a downward sloping upper trend line. The trend lines are so formed because the sloping upper trend lines mark the highs of the candlesticks which are gradually getting lower, and the horizontal trend lines signifies an area of support.

This descending triangle chart pattern is a bearish pattern, as the lower highs signify that the upside pressure on the price action of the currency pair is waning, and the gradual pressure on the horizontal support that this produces will soon lead to a massive downward breakout. There are two ways to trade this pattern.

1)      Trading the range

In this case, after plotting the trend lines, you will see the candlesticks trading within the range of the downward sloping upper trend line and the horizontal trend line. In this case, it is safer to place a sell when the candlestick has closed at the upper trend line. Place a sell order at the open of the next candlestick, because this will be a bearish candle. See the chart below.

2)      Trading the bearish breakout

This is the classical descending triangle trade setup. You can place a Sell Stop about 15 pips below the base of the triangle. Do not wait until the convergence of the two trend lines is almost complete as you may be too late to catch the breakout that would almost certainly have occurred.

This particular trade was good for 100 pips if you used method 1, or 65 pips if you used method 2. In the next article, I will put up a descending triangle setup which is set to produce a bearish move on the GBPUSD for next week, baring any fundamental surprises. Look out for it.

NEWS TRADING: HOW TO ANALYZE ECONOMIC INDICATORS

The news is what moves the forex markets, and the reason why this is the case is because traders look at the numbers and form a mindset about the future outlook of a nation’s economy and its currency. Traders can carry these sentiments for a long time, and that is why economic news can have a prolonged effect that lasts for months on the forex markets.

Economic indicators can be divided into 3 depending on their market impact: high impact, medium impact and low impact news. Using the Euro, a news item like the GDP in the Eurozone is a low impact news item, while the ECB statement by outgoing chairman Jean-Claude Trichet can be describes as a high-impact news item. Once this is established in the trader’s mind, the next thing is to look at how a typical news trade occurs.

In the first phase, there is an initial spike immediately after news release, depending on how far off the numbers are from the pre-release consensus. This spike is mostly caused by the large trade volumes from institutional traders (who get the news before retail traders from premium news services like Bloomberg).

After this, there is a period where the price seems to stall, followed by a retracement as the institutional traders who were able to get in early start to take profits. This initial phase lasts about 5 to 10 minutes.

After retracement to levels that can be determined using the Fibonacci retracement tool, the price action will resume the move in the direction of the numbers over a period of hours to days, as the market slowly absorbs the impact of the news item.

Many retail traders are caught out because they try to catch the initial spike. You do not have access to premium news that the big dogs get about 5 minutes before it reaches the retail trading platforms, so trying to get in will only result in getting the “requote” message from your broker. You will most likely be filled in when there is a retracement, and then your trade will be a losing one because by now, the market is heading against your entry.

The best bet is to wait for the initial spike and retracement to occur, then you can decide on entering after you must have absorbed the news and decided on a trade. Such an entry will then have to have a technical basis to support it.

To trade the news, understand these points above and also study the behaviour of the news item you want to trade.

If you are trading a news item like the ECB statement, you have to understand the primary focus of the ECB is to control inflation in the Eurozone using interest rates as a primary measure, so traders look for hints in Trichet’s speech that will suggest that the ECB will hike, lower or stagnate rates. Once he uses terms like “i have no bias towards rates”, this is a sign that there will be rate cuts. If he starts to talk of “upside risks” or says things like “inflationary risk is a big concern”, then the ECB is considering hiking rates and you will see traders buying the Euro and sending it soaring.

Let us look at an illustration of what we have described above.

The chart represents the 1hr chart for the EURUSD. After a 3-day slide due to possible hint of a debt crisis in Italy, attention shifted to a possible downgrade of the US economy following the inability of the US congress to raise the debt ceiling to enable it get more credit to settle its liabilities.

This triggered the formation of an inside day candle at the S2 point, leading to a bullish recovery. So here we see that there was a news item that impacted the markets, and there was a technical basis of entry using the Advanced Bollinger system that we have elucidated here previously.

Applying these principles above will help the trader go a long way to making progress in news trading.

CHART PATTERNS: THE FALLING WEDGE

I hate trading on Monday mornings because nothing ever seems to happen at this time. Well, that used to be my thinking until I understood that Monday mornings are like the calm before the storm.

Since I came to this realization, I use Monday mornings to study charts. I woke up this morning to take a look at my chart recognition software, and I saw something I knew would make easy pips. Here it is:

It was a classical falling wedge pattern. As we must now know from one of our earlier blog posts, falling wedges are bullish reversal patterns. I quickly identified the buy zone, and with nothing on the economic horizon for today, I quickly placed a buy order for this trade. It took some hours, but my patience eventually paid off for a good 43 pips.
Here’s the lesson here:

1) Make sure when you are plotting your trend lines, they touch at least three points of the highs and lows.
2) Once the apex of the wedge is broken, pull the trigger at the open of the next candle.
3) Set the profit target to the nearest area of resistance.

This trade was good for 43 pips. And I was even late in my entry, else I should have picked at least 60 pips.
The Japanese say “good thinking, good product.”  This is one example where good thinking will give traders good results.