Summer Ranges Maybe Over Soon

It is no big secret that price action during summers tend to be range bound rather than trend driven. This summer was no exception. Major currencies as well as crosses were range bound. gbp/usd has been in 700 pip range (not a small one) since July, result of post Brexit consolidation after a huge collapse. As we have BOE coming out with interest rate decision tomorrow we may see the pair consolidate around 1.3100 area. Next week FED interest rate decision may send gbp/usd either back to support of 1.2800 or to 1.3500 and beyond that to 1.4000 or even 1.5000 level.

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eur/usd, on the other hand stayed in much smaller range of about 500 pips, July and August range being only 400 pips. After FED releases its’ interest rate decision the pair will most likely gain direction and either drop to 1.0500 or rise to 1.1700. The most likely scenario is that it will revisit the lows of 1.0500 before going upwards. A rare, but a possible case would be for the pair to keep dropping and reaching 2000 lows of 0.8200. That would have made a full bullish and bearish cycle of eur/usd. Seven years of rise and seven years of going back to the exact spot where Euro started its’ ascend.

If we look at the gold chart we can also see that it has been caged in a range for a number of months. One thing is clear that the commodity is in an uptrend after correcting downwards for a few years. At the moment, technical analysts and traders can spot a bullish flag forming on 8 hour and a daily chart, meaning that we may see a breakout upwards sooner rather than later. 

Wedge chart patterns

I want to start a series of articles on various technical chart patterns. I do believe that if you learn them and start applying in your trading you will significantly increase your chances of making stable money in financial markets. I have recently finished one series on different market conditions: calm trend, calm range, volatile trend and volatile range and I would suggest that you read those very carefully at least once. You should find a lot of useful practical tips in each article. Now, this article will cover a pretty power technical pattern: wedge. I like trading this one as we usually have a very powerful breakout out of the pattern and prices move very strongly and fast when a wedge is broken. So, let us analyze what this pattern is and how you can successfully trade it. 

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What is a wedge? It is a technical pattern with a narrowing range within two converging trendlines (that slant in upward or downward direction (depending on the type of a pattern: upward or downward)) and that usually indicates an end of a trend that can be traced in the pattern itself. It means that if you have a falling wedge (prices are going down) the breakout will most probably be upwards. Price moves between the two trendlines and the narrowing range builds pressure for an upcoming breakout. If you have a rising wedge (prices are going down) the breakout will most probably be upwards. Well, maybe the explanation was kind of difficult, but when you see the examples you will clearly understand what the pattern is like. 

When you finish reading the post I recommend reading other related posts and watch a video below:

How to do technical chart analysis

Triangles

Head and shoulders

Falling wedge

Falling wedge is recognized as a bullish technical chart pattern. You can clearly see converging trendlines in the pattern that has a downward direction. The range is narrowing towards the end of the pattern and most often than not prices break upwards starting a new trend or continuing a previous one. 

The example above in usd/jpy pair clearly shows us a nice falling wedge pattern. As the price was moving down and the range of the wedge narrowing increasing pressure and finally causing the pattern to be broken upwards with an explosive move. The pair moved around 600 pips when the upper trendline of the wedge was broken. That is precisely what you are looking for. You expect the upper trendline to be broken in a wedge. If it is not, the pattern is finally distorted and loses its’ validity. 

How to trade the pattern?

You need to place a buy stop order above the closest point where the price hit the upper trendline and then retraced. If it failed to reach the lowest low (of the pattern) you place the stop loss a few pips below the retracement (from the upper trendline). In the example above you can see that the point for entry in usd/jpy was 93.68 level (a few pips above that) since that was the place where the price hit upper trendline and retraced. The price however failed to reach previous low and started rising again. The lowest point of retracement marked a level where we need to place our stop loss order. In our case that would be 92.71 level (a few pips below that). Open your chart to find out yourself entry and stop levels for the trade. You either exit your trades by moving stop loss as the price moves in the direction of the trend till the stop is hit or you exit your trade at a predefined level. In the latter case you still need to move your stop in order to protect your profits. 

Rising formation

Falling wedge is recognized as a bearish technical chart pattern. You can clearly see converging trendlines in the pattern that has an upward direction. The range is narrowing towards the end of the pattern and most often than not prices break downwards starting a new trend or continuing a previous one. 

The example above in eur/usd pair shows an excellent rising wedge pattern. As the price was moving up and the range of the wedge narrowing increasing pressure and finally causing the pattern to be broken downwards with an explosive move. The pair moved around 900 pips (with minor retracements) when the lower trendline of the wedge was broken. That is precisely what you are looking for. You expect the lower trendline to be broken in a wedge. If it is not, the pattern is finally distorted and loses its’ validity. 

How to trade it?

You need to place a sell stop order below the closest point where the price hit the lower trendline and then retraced. If it failed to reach the highest high (of the pattern) you place the stop loss a few pips above the retracement (from the lower trendline). In the example above you can see that the point for entry in eur/usd was 1.3203 level (a few pips below that) since that was the place where the price hit lower trendline and retraced. The price however failed to reach previous high and started falling again. The highest point of retracement marked a level where we need to place our stop loss order. In our case that would be 1.3243 level (a few pips above that). Again, you either exit your trades by moving stop loss as the price moves in the direction of the trend till the stop is hit or you exit your trade at a predefined level. In the latter case you still need to move your stop in order to protect your profits. As you may see your stop loss was only 45 pips and the potential profit very big (900 pips). So, when you see a wedge forming next time get ready to take a trade.

Time frames

Some say that the pattern has to be three or six months in length and I could not agree less. You will notice those patterns on various time frames. If it is a continuation pattern and a wedge is formed in a counter trend move you would usually see it on hourly chart and that may last a few days. And then you have a nice breakout in the direction of the prevailing trend. On a longer term chart (lasting months and weeks) the pattern will probably signal a reversal and a change of trend. 

Ok, I will finish now. Be sure to read related articles to learn more on technical analysis. I promise to expand on this in my future posts. 

I hope you benefited from the post. If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day. 

Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog http://trend0.blogspot.com/ is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.

Day trading example with eur/usd

Hi, I wrote about my expectations regarding eur/usd pair and gave you the entrance point on the pair. It was a breakout trade that started at 1.3188 level with a stop loss order at 1.3144. I took partial profits at around 1.3240 and then 1.3290 level. As you saw the pair collapsed yesterday. Some analysts started screaming about the end of a trend. I already mentioned in my previous post that I do not expect the pair to reverse before New Year and I intend to search for opportunities to jump into the market by going long the Euro against the US dollar. And I haven’t changed my opinion on the matter. I am still watching the market closely to see for extra day trading opportunities. One of the kind presented itself today and I want to talk a little about it in the post. 

When I search for opportunities to day trade I always want to do one important thing – to enter my day trades in the direction of a prevailing tendency. If the market is not in a range, but trending or in a short term swing (as eur/usd is at the moment) I will never make counter trend trades, but only implement those in the direction of a tendency. If you look at eur/usd chart you (with no doubt) see that the pair is in an upward swing. It means I am only willing to go long Euro and sell short US dollar. 

Now, how do I choose a spot where I get into the market? Firstly, I wait for a retracement or a counter trend move. Secondly, I find some nearest support level and wait for the security to get there. Thirdly, I wait for reversal patterns at the level to see whether counter trend move is over or not. Those usually are 123 patterns and candle reversal patterns. If everything happens according to the described scenario I go long when the security leaves 123 pattern or I place a buy stop order above the bullish candle (1 hour or 4 hour chart). 

So, I saw eur/usd collapsing yesterday. Pretty sharp! It means a counter trend move started. I started searching for a possible place of support. And guess what, it wasn’t really difficult to find. You most probably know this sampler saying of classical technical analysis that resistance becomes support and support becomes resistance. I have mentioned that I took a breakout trade at 1.3188 level a few days ago. The area was resistance at the time. Guess what has it become now? Support! 

So, what happened later? The pair came to this level, formed 123 pattern and bang! Went up again. If you look at the chart below you will see the 123 pattern on 1 hour chart around the level. When I saw the pattern I placed my buy stop order above it and the market took care of it by breaking the level and going up.

Oh! I forgot to tell you how I get out of my day trades. I watch for obvious resistance and support levels, but most often I close my positions at an even number. Today the pair managed to reach 1.3294 level before going back to today’s breakout point of  1.3215 (well, a bit lower) and is consolidating now. 

I would not be surprised if the pair took off upwards again tomorrow. Looks like another 123 pattern is formed at the level! I seldom trade Asian session (only about 5 percent of my day trades are implemented during that time), so I will wait for early European session to see how everything looks at the time. I might take another long in eur/usd tomorrow. 

I do not think I will keep it open longer than 8 hours as quite a few brokers will not be working during holiday season and mine seems not to be working at the time too. So, I do not want to take risks trading during this time. 

Ok, I think it is time for me to finish now. I promised to give you some thoughts of mine on Japanese Yen and I did not forget my promise. However, I will not do it today. Maybe tomorrow, but most probably some day during the weekend.



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I hope you understood the way I day trade and it will help you in your trades. See you soon.

Ok. I hope you benefited from the post. If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day. 

Vytas.

Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog http://trend0.blogspot.com/ is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.

EUR/USD short term outlook

EUR/USD short term outlook will be the topic of the post. If you look at the chart of the pair you will see that it is trying to break an important resistance level of 1.3200. If you are going to look at daily charts you will see another thing too. You will see that the pair has been in a range for about three months (from the 15^th of September when an uptrend in eur/usd ended). Another thing that you will notice is a technical pattern on this daily chart. You can clearly see inverted head and shoulders. I am not too much thrilled about the pattern, because it is usually formed at the end of a downtrend move and this one formed at the end of a uptrend move. Yet, the fact that the pair has stayed for three month in a range is very important. It might be ripe for a breakout and it is very probable that the break will be upwards. 

From the fundamental point of view US dollar is kind of a ‘safe haven’ in relationship to Euro. Why? The whole region is facing a possible bankruptcy scenario due to huge national debts. We know that US can also face the same things quite soon. However, it still finds investors to finance its’ deficits and doomsday scenario for US is postponed. 

On the other hand, this fiscal cliff question is pretty acute at the moment and a lot of investors tend to put aside problems in Europe (short term) and concentrate on this ‘fiscal cliff’ stuff. This could potentially drive eur/usd pair upwards.

We are in the second half of the last month of the year and it would be not very sound to reverse short dollar positions (long Euro positions) at the moment. In my opinion, most speculators and investors would simply hold their long eur/usd bets till the end of the year and reverse to shorting the pair at the beginning of 2013. Everybody will come back to the problems in Europe and continue selling Euro. Why? It is quite clear: government officials will not be able to solve these huge financial problems that Europe is facing. If you have an open mind you should clearly see that problems in Europe are getting worse and worse and more and more EU countries need stimulus than two years ago. Lending at an interest to solve debt problem is simply digging a deeper pit. The only way to get out of it is to stop digging. Yes, if you want to get out of your pit, stop digging. Will they? I don’t think so. 

Ok, how high can eur/usd climb? Holiday season can be a pretty volatile one! My number would be around 1.3500 level. But it is only my opinion. That is the level where the pair climbed at the end of February of 2012 and failed to break it. So, this is the peak of eur/usd in 2012. What is going to happen there is again a question of speculation. We have to watch what central bankers say in order to get further clues in terms of direction for this and any other currency pair. 

I have just placed a buy stop order at the break of 1.3188 level with 44 pips stop loss order and take profit at 1.3480. If the stop is not hit and the pair moves upward I am going to move my stop. I usually place them below daily lows in an uptrend (4-30 pips below daily lows) and above daily high in a downtrend (4-30 pips above daily high). It is not a strict rule as I usually trade a few positions or create a line of trades, so my stop levels might differ for each specific order that is open. At the moment, I have only one long eur/usd trade.

Ok, so much for today. I hope I will have enough stamina to analyze other major pairs and give you my expectations regarding them before the year ends. I will try to give my thoughts regarding Japanese Yen in the next blog post. 

Ok. I hope you benefited from the post. If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day. 

Vytas.

Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog http://trend0.blogspot.com/ is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.