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Tuesday, September 4, 2012

Spotting how market trends change

A few weeks ago I wrote a post on best Forex trading system. I see that it is quite popular and I get positive responses about it. I want to continue on the topic and today share a small expansion of the system by adding a few points to the system. I will go through a few examples showing how important market trends changes happen at critical support and resistance areas driven by a Central Bank interest rate decision. By Central Bank I mean any bank, not just FED. In a matter of a few months I will write a post about important changes of trends in individual stocks. The principle will be the same, the economic news will be different. So, this is the second article on the aspect of my trading system. At the time of writing I feel that I will have to write one more on the subject (besides the one about stocks). 

So, I am a swing trader that tries to find key resistance and support points and trade them around various fundamental news events: mostly around interest rate decision announcements. If you study currency pairs you will notice that key reversals happen both at those technical levels and at times when this particular piece of news is released. I think it is best to teach by example so let us look at gbp/aud chart and see a few market turns that happened after the above mentioned piece of news was released. 

Here is the chart

Now, in the chart I deal with the time period from February 2012 till August (2012). As you may see there were three important releases regarding interest rates in Australia and all of them occurred near important support and resistance levels. They also caused markets to turn around and start a new trend: from bearish to bullish, from bullish to bearish and the last one (August) from bearish to bullish. 

In this period these market trend moves would last around two months. There would be an additional news release in between the main ones, but as these would happen at not so important technical areas they would not cause major turn arounds of swings in the gbp/aud pair. 

If you did your own analysis you would see how many more major turns happened at important support and resistance levels backed up by interest rate decision (and minutes) releases from BOA. It isn’t always the case, but most often than not it is and since this is a tendency, not some occasional event you should look seriously at the confluence of technical levels and fundamental news releases while trading as they will present huge opportunities for you.

Trade tendencies, not exceptions and you will dramatically increase your chances to make profits on a regular basis

So, how do you trade these reversals? Let us look at the first example. 

Well, first of all you buy at support and sell at resistance. That is clear for most. But where do we enter?  Let us scroll to 4 hour charts and look more closely. The first example covers time period from the 17th of January to 14th of March 2012 (when a reversal upwards finally occurs). Before the period the pair was in a downtrend and during the above mentioned period the security was forming a bottom and getting ready for an upward move. When you see that happening you need to wait for an upward thrust that would form a breakout point for the coming future. This happened on the 24th of January. The pair then continued going down for some time doing more and more horizontal work. It then started showing some bullish power as higher highs and higher lows were formed. 

And finally it reached the breakout zone of 1.5000 and within a matter of week managed to break it and go higher. So, your first long position should have been above the 1.5000 area with your initial stop at 1.4770 level. It may seem too big at the time, but having in mind that you move your stops while swing trading, it is not big at all. 

You can also start buying the pair on dips even before the breakout occurs, but I will not go into the subject now. I also do not want to go into details regarding opening new positions as I expect to cover the topic in one of my upcoming posts. 

Look at the second chart now

You see how the bullish move that started on the 14th of March came to an end after about two months. The pair ranged from 15th of May till the 5th of June (the time interest rate decision from BOA was released) and then collapsed. A nice indication about an upcoming reversal were two nice peaks at the same level (double top)! It was formed quite close to previous three peaks formed at 11-08-2011, 04-10-2011 and 23-11-2011 (check your daily charts). Now, as you may see reversal did not take much time this time. It is quite often the case with bears. There is a saying that bears destroy in a month what bulls have created in 3. Bearish reversals are often faster, ranges at tops shorter. Why? This is in the nature of humans to be pessimistic and when this negativity prevails prices often collapse very fast. Just remember the crisis of 2008. Markets were crazy. Everybody lost faith in securities. 

Ok, coming back to the chart. I see 1.5800 level as key support that had to be broken in order for us to enter our short orders to get into a reversal trade. I try to round up numbers. The area could be 1.5840-1.5775. Breach of the level would have been your first short order. The rest (adding to your position) will be discussed in my future posts.

Look at the third chart now:

This time bullish reversal took place very fast. You see the resistance line as the level to enter a breakout trade. In fact, news came out about a week before the breakout occurred. So, you could have taken a ‘pilot trade’ upwards much earlier. However, I like placing my first trade at the breakout of resistance (or support if reversal is downwards). You can form your own rules about it.

When you start seeing these higher highs and higher lows, plus upcoming news (or news has come out) you get ready for a reversal. It did occur on the 16th of August and the trend has been upwards from this time up to now. (We had rate decisions previous night from BOA). In my opinion the pair is not at the crucial resistance yet. It starts around  1.5840 area (previous support now resistance). It may mean that we could have another bullish month, which will probably not be as strong as the first one, because the distance to the key resistance is very small. Plus we have interest rate decisions coming from European countries and Canada this week. So, we will see how it goes.

I hope you understand how to trade the confluence of important support and resistance levels with interest rate decisions now.

Final thoughts 

There are certain tendencies that are present in any market. One has to study and find them and then build one’s trading strategy around them. Let us be smart and not run after exceptions, but follow general rules and tendencies. This article covered a few aspects of trading currencies. I will go on to talk about other securities in my future posts. Have a nice day.

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Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.