The UK, the FTSE 100 and the effects that the Euro difficulties that could impose on sustained UK growth in 2011

Dean Wright ,Senior Analyst ,Fxknight.com

Many questions are being asked this week as the year draws to a close of how the economical outlook for the UK will look in the following year. On the frontlines of media coverage, it would be forgiven to assume that the UK is still at the foot of the hill and struggling to climb out of a recession that has taken hold of the UK economy and not let go. Benefits and welfare have been cut, pubic sector job losses have added to the dire unemployment situation and last weeks protests against raising tuition fees for university students has stamped its mark of perception of a lean treasury chest.

Looking a little deeper into the situation however, it is not so clear to distinguish and the outlook is a little more positive. The office for budget responsibility, the new forecasting office put in place by George Osbourne, has predicted that even though growth will slow sharply in the coming quarters due to the quick fire increase in national output the UK experienced being unsustainable, there will still be a steady increase in GDP output over the next two years.

Employment in the private sector has actually risen and the GDP outlook for next year has been forecasted at 2.1% which is up from 1.8% this year. 2012 has been predicted a further increase in growth, pegged at 2.6 %.

The FTSE has had a steady climb indicating investor’s confidence with the question being raised on whether the FTSE will break the 6000 level this year.

FTSE 100

The ups and downs of the Eurozone has certainly had its effects on the FTSE 100 price with the Greek debt crises pulling the FTSE down to 5060 from 5800 in an unfounded short space of time earlier this year. However, the FTSE 100 is back up to 5826 at the close of play last week, and it is possible investors confidence will continue to grow with the economy and push the FTSE up to 6000 level.

From a purely technical point of view, there certainly is scope for the FTSE to reach the 6000. The initial bull move in July saw a pull back to the 50% level on the daily chart. This level was tested several times as support before buyers out numbered the bears and the price started to rise once again. The 161.8% Projection level has been reached, usually signalling the complete move. However the levels have been respected as both support and resistance by buyers and sellers and has closed above the 161.8 % level at 5826.

If buyers now come in at this level to push the price up then there are a number of targets where bears are most likely to come in. Firstly there is the most recent high at 5904. If the bulls have enough power to push through this level, then anticipation of sellers coming in at the 6000 mark will likely see selling coming in just before this level.

If however the 6000 mark is broken, then the 200% Fibonacci level which is at 6071 could be a final resting place before selling drives the price back down again.

To the short side, the 138.2% and 127% Fibonacci projection levels have been significant levels with which traders have respected and so 5674 and 5602 would be ideal short targets for bears.

However, the forces of economics are seldom, if ever straight forward and taking an eye of the bigger picture, even for a second, could lead to some hard faced realities.

The weather outside

The dangers of the European crises from economies such as Ireland, Spain, Portugal and Greece, may have a substantial effect on the UK output with exporting industries suffering. Rising yield prices and the cost of borrowing for many countries in the EU is increasing the strain on member countries.  A growing resentment from those countries that have abided by the rules having to foot the bill for other member countries mistakes is becoming ever more apparent and fresh whispers about the survival of the Euro have been sparked, further consolidating pro-Euro and anti-Euro camps.

The actuality of any one of these struggling economies even contemplating leaving the Euro (in order to devalue their new currency and hence growing out of their deficit through exports) would be disastrous and would reach out far beyond their own boarders having the effect of the UK suffering collateral. Weaker economies in question could find themselves in the same dangers that Greece faced if allowed to default and if no bailout was offered: A deposit run and outside investors withdrawing capital; both of which would stall economic recovery, thus leading to a knock on effect in the UK and other countries in Europe with trade and exports.

Something to be wary of as we have seen time and again that when slow reactions to a fast changing economic reality can often lead the unthinkable becoming the inevitable.

The provision of third party content is for general information purposes only and nothing sent to you should be construed as providing investment advice or a solicitation to purchase or sell any investment. InterTrader has no commercial interest in FX Knight and does not endorse any recommendation or analysis contained in their material. InterTrader accepts no responsibility for and has no control over the content (including legality, suitability, accuracy, timelines, reliability or availability) of any of the material supplied by FX Knight

EUR/ CHF – Instability in Eurozone may push Euro down further

Dean Wright ,Senior Analyst ,Fxknight.com

As the confidence in the Euro continues to fall amid the fears of the fiscal crises in Europe, the EUR dropped sharply against most currencies including the CHF.

The EUR/ CHF has been playing to a Fibonacci projection since 2008 and is currently consolidating after reaching the 161.8 % level.

It is likely that the EURO will continue to fall with the release of the bailout for Ireland in which case, the 1.3038 price level may break and act as resistance, pushing the EURO even further as sellers drive the price down to the 200 Fibonacci level at 1.2257.

Should the EUR/ CHF find buyers, it will most likely be at 1.3038, however the two long targets that have recently been strong resistance are 1.3750 and 1.3934

The provision of third party content is for general information purposes only and nothing sent to you should be construed as providing investment advice or a solicitation to purchase or sell any investment. InterTrader has no commercial interest in FX Knight and does not endorse any recommendation or analysis contained in their material. InterTrader accepts no responsibility for and has no control over the content (including legality, suitability, accuracy, timelines, reliability or availability) of any of the material supplied by FX Knight

Confidence in the Eurozone shaky at best

Dean Wright ,Senior Analyst ,Fxknight.com


The Euro continued to fall during the week amid fears that the Euro zone as the markets increasingly loose confidence in the member country’s ability to contain the Fiscal debt crises spreading to vulnerable economies such a Spain and Portugal.

The Spanish Prime minister has defiantly stated that there will be no bailout for Spain warning “those investors who are short selling Spain are going to be wrong” Meanwhile the cost of borrowing has risen for Spain showing just where the market’s confidence currently lies.

The bailout package for Ireland is expected to be released today which will outline how much and in what form the Irish government will pay back the loan in an effort to calm the markets. However the simple fact that Ireland needs this loan was enough to raise the worries of the stability of the economic community with Europe.

This will have a negative effect the on the price of Europe as investors fears that the debt crises in Greece throughout Europe is slowly being realised.

Dean Wright

Senior Analyst

Fxknight.com

The provision of third party content is for general information purposes only and nothing sent to you should be construed as providing investment advice or a solicitation to purchase or sell any investment. InterTrader has no commercial interest in FX Knight and does not endorse any recommendation or analysis contained in their material. InterTrader accepts no responsibility for and has no control over the content (including legality, suitability, accuracy, timelines, reliability or availability) of any of the material supplied by FX Knight

EUR/USD Target Hit - Next Levels to Watch

Andrei Knight, Chief Strategist, fxKnight.com

Ireland's formal request for an EU bailout continues to weigh heavily on the Euro, as Spain's bond market begins to show signs of trouble as well.  Portugal, Belgium, and Italy also remain potential trouble spots, and Greece is not out of the fire yet as well.  This, coupled with initially fairly promising holiday retail numbers out of the US (up 6% from last year, as high as 25% for some online retailers), should make for some interesting trading on the EUR/USD in the final weeks of the year.

With our target from last week hit at 1.3128, we are now looking to see whether that level can hold as the new resistance or not.  If so, the next downside target is at 1.2931, with an additional one potentially waiting at 1.2612 if we break below the first; if, on the other hand, we get back above 1.3128 and find some support there, then I will be looking for an eventual return to 1.3446, with resistance on the way at 1.3221 and 1.3296.

The provision of third party content is for general information purposes only and nothing sent to you should be construed as providing investment advice or a solicitation to purchase or sell any investment. InterTrader has no commercial interest in FX Knight and does not endorse any recommendation or analysis contained in their material. InterTrader accepts no responsibility for and has no control over the content (including legality, suitability, accuracy, timelines, reliability or availability) of any of the material supplied by FX Knight

Combining Technical and Fundamental Analysis

Technical analysis is a strong instrument in the trader’s tool kit and, in fact, many investors argue that it is the most important form of research.

Nevertheless, when a single tool has such a material impact on your decision making process it is worth appreciating its assumptions and potential limitations.

Stock Market Models

The validity of technical analysis is based on behavioural finance which studies how social, cognitive and emotional biases affect the price movements of the stock markets.

The two main observations from behavioral finance are:

1) Investors tend to make systematic errors that affect the market and take away the advantages of market efficiency

2) Traders can fail to materialise a loss and, although all indicators show that the market will continue to trend against them, they make the irrational decision to hold their position and hence incur even greater losses

A contrasting model for stock market movement is the ‘Efficient Market Hypothesis’ (EMH) which states that the price of a stock at any given moment represents a rational evaluation of all the known information.

The EMH model has at least two interesting consequences:

1) The return on equity can be expected to be slightly greater than that available from non-equity investments. If this was not the case then the same rational calculations would lead equity investors to shift their funds to these safer non-equity investments that could be expected to give the same or better return at a lower risk level

2) Because the price of a share at every given moment is an ‘efficient’ reflection of expected value the curve of expected return prices will tend to follow a ‘random walk’. This will be determined by the random emergence of information over time

Combining Technical and Fundamental Analysis

So, how can such models be used in order to make more informed trading decisions?

When entering into a position it is important to understand the market paradigm at the time of the decision with respect to the most relevant economic indicators. For example, if an investor is trading the GBP/USD spread betting market then they should record the current situation and expectations for both economies. 

Below is an example of how an investor might combine technical and fundamental analysis when considering a position on the GBP/USD market. In this case the investor is making use of a daily chart:

Technical Summary:

-          GBP has been gaining against the USD since May of this year and is supported by a firm rising trend line

-          The 20 days EMA is above the 50 days EMA which supports the bullish view

-          MACD (12,26,9) is above 0 and seems to be consolidating with its signal line which may be just another corrective movement in a bull market

-          RSI (14) is neutral

-          Stochastic (28,6,6) is showing signs of bullish divergence

-          Summary: The investor could decide to go long above $1.595 with targets of $1.63 and $1.65

Fundamental Summary:

	US		UK
Lagging Indicators	Recent Releases	Consensus For Next Release	Recent Releases	Consensus For Next Release
Employment	9.7%, 9.6% (MOM)	9.6%	7.6%	7.6%
Overnight Interest Rates	1.0%	1.0%	0.5%	0.5%
GDP	1.8%, 2.0%	2.1%	1.2%, 0.8% (QOQ)	0.8%
CPI	1.0%, 1.1%	1.0%	0.5%, 0.0%  (MOM)	0.2%

The above table/fundamental summary is just a glance at some of the main figures, there are other key indicators that could be included such as money supply, consumer sentiment and building permits. It is also important to take into account the overall fiscal and monetary policy of the central banks and governments involved.

If we try to summarise both forms of analysis, we can observe a consolidating bullish trend combined with a divergence in monetary policies where the US is expanding and UK is pushing for austerity.

So, an investor may decide to take a bullish view on the GBP/USD market and watch out for any changes in the current market paradigm. As long as the new information is inline with consensus, it might be expected that the technical trend will continue to be sustained. Any new information that challenges current expectations could manifest in an adverse reaction on the currency pair.

The above regime may sound like laborious work, however, in my experience, most retail traders do not seem to have the discipline to follow such analysis. On the other hand, it is a known fact that most retail traders are net losers so it might be worth putting in the extra effort.

Good luck and happy trading 

Shai Heffetz 



Spread betting carries a high level of risk and you can lose more than your initial deposit, so you should ensure spread betting meets your investment objectives. 

The contents of this report are for information purposes only. It is not intended as a recommendation to trade.  InterTrader  do not accept any responsibility for any use that may be made of the above or for the correctness or accuracy of the information provided.

EUR/ USD found a high at Fibonacci

Dean Wright ,Senior Analyst ,Fxknight.com


The EUR/ USD has recently consolidated and hit the previous Bull and Bear targets over the last two weeks.

The EUR/ USD played beautifully to the Fibonacci projection with the price reversing at 1.4234, the key level discussed on the analysis published on the 10^th of October.

http://www.fxstreet.com/technical/forex-strategy/currencies-technical-strategies/2010-10-10.html

As the price of the EUR/USD has closed below the key level of 1.3726, it has a likely chance of continuing to the downside, in which case, the bear target of 1.3333 is most likely still in play.

Due to the fact that last week, buyers came in at 1.3595, this should be a key level to watch on the way down as buyers may come in again.

Should 1.3889 fail to hold as resistance, then the most likely target to the upside would be the 138.2 Fibonacci projection level at 1.3889, a key buying and selling point for traders in recent weeks. If price continues to move to the upside then a double top could occur at 1.4234 and so this should be a key level to watch for sellers coming in again.

The provision of third party content is for general information purposes only and nothing sent to you should be construed as providing investment advice or a solicitation to purchase or sell any investment. InterTrader has no commercial interest in FX Knight and does not endorse any recommendation or analysis contained in their material. InterTrader accepts no responsibility for and has no control over the content (including legality, suitability, accuracy, timelines, reliability or availability) of any of the material supplied by FX Knight

G20 discussions rise in temperature and the USD/ JPY seems to have finished cooling off

As the talks continue between the members of the G20, a growing consensus is developing that countries are moving away from the tight union observed when the financial crises started, to a more ‘do what is right for me’ type attitude.




The problem being that what is good for one country may not be in the best interests of its trading partner and hence why the G20 is finding it a tall order to come to any kind of agreement on trade imbalances and currency exchange rates. Unsurprising when such a complex set of economies, entwined and entangled, all have a self interest to sustain their own economic health.


Artificial devaluation of currencies is a particularly hot topic. An astute example being the United States fiercely contending that China has undervalued its currency in order to give China an unfair export advantage. The United States however is being accused of the same thing by China as Quantative Easing and easy money policies that the United States have adopted have the same effect; weakening the dollar and hence boosting exports; a feat surely welcomed by an administration that is finding its popularity consistently in question.


The fact of the matter is that any agreements made will be a long drawn out process and either one of two things will happen: Either by the time any agreements are made, the markets may have naturally solved some of the issues, or the economic conditions at a global or local level may change making the current discussions obsolete as different actions may need to be taken. For example the crises in Greece that forced the Greek government to radically change policy.


Looking at the USD specifically in relation to the JPY, we can see that the USD has declined against the JPY since the financial crises started in 2007 which has not helped Japan’s exports in any sense. However, due to the fact that the USD/ JPY is almost at the lowest point the USD/ JPY has been since 1995 at 79.846, a purely technical rational may see buyers come in as any bear traders or traders waiting to buy at a bargain price do not have much else as a frame of reference.


This means that we could see the USD/ JPY rally. Due to the fact that the pair has been in a heavy down trend and if the move has indeed stopped, the price will most likely move into a consolidation pattern and so therefore traders may want to watch close key levels such as 84.76 and 90.50 to the upside This also depends on whether the Japanese government intends to interfere with the markets.


However, if 79.84 breaks, then from a purely technical point of view, the USD/ JPY will be looking for support in which case the Fibonacci movement can provide some indication of where buyers are most likely to come in, and so 78.35 which is at the 161.8 Fibonacci projection level is a likely key buying level.


It is doubtful that the bank of Japan is likely to let the USD depreciate against the JPY any further than this for the reasons discussed, however the next long term target down would be 67.66 at the 200% Fibonacci projection level. The currency pair is more likely to see buyers come in sooner rather than later, but these things can not ever be for certain.

The provision of third party content is for general information purposes only and nothing sent to you should be construed as providing investment advice or a solicitation to purchase or sell any investment. InterTrader has no commercial interest in FX Knight and does not endorse any recommendation or analysis contained in their material. InterTrader accepts no responsibility for and has no control over the content (including legality, suitability, accuracy, timelines, reliability or availability) of any of the material supplied by FX Knight

market review from LS Trader

Stocks

The S&P 500 reached new 2 year highs at 1224.5 on Tuesday but then moved lower from there, back below the 1200 level and closing the week at 1195.4 and may yet fall further to support at 1167.

The European indexes held up better than the US markets and Friday saw some late buying on the Germax Dax, with the Dax ending higher having been sharply lower earlier in the day. The Asian markets also showed weakness having also been higher earlier in the week.

The stock indexes remain in a long term uptrend and are all above support.

The stock markets continue to be bullish and the long term trend remains up almost across the board for indexes.

Volatility Index (VIX)

It's been a fairly strong week for the VIX, which has once again continued higher from the 17.90 support area and ended with a weekly gain of 12.87%. The next upside target is around the 24.50 area and it remains to be seen over the coming weeks as to whether 17.90 was a significant bottom.

Commodities

Last week we wrote that we were looking for $1400 early in the week as well as the market closing above that level in order to be able to push on. We got a move above $1400 on Monday and a new all time high at $1424.3 on Wednesday and the market managed 2 daily close above $1400. On the weekly chart we did not get the close above $1400 and saw a very steep sell off on Friday of almost $53. In spite of this move the long term trend is still very much up and the market remains above support.

Sugar had a very volatile week having reached a new 30 year high on Thursday but then made the steepest 2 day sell off in 30 years, falling through short term support. Cotton was also lower as were most of the commodities. Overall the long term trend remains up for virtually every commodity market.

Currencies

The US dollar has had a good week with the Dollar Index pushing up to test resistance at the high of the bearish engulfing pattern formed on the 21st October, which is also at a resistance point that has held for over 5 weeks. Friday saw a doji pattern which points to indecision at this level. Due to the market's proximity to this level we will likely see a breakout or a reversal on Monday. If this level can be cleared then we will likely see a move higher towards 80.

The British Pound held up better than most of the majors and buying is entering the market on any falls to around the $1.60 level at present. The Pound also continued the recent revival against the Yen, showing some short term strength in reaching new 6 week highs. The long term trend remains down against the Yen but up against the dollar.

Interest rate futures

Interest rate futures sold off during the past week with the longer term 30 year T Bonds being the most heavily sold, taking the market through support. This has been the weaker link in the interest rate futures sector but the trend overall in the sector remains up.

If you like the idea of such a system that can be followed in less than 1 hour per week, you can visit the link below to sign up and get started right now.




Kind Regards

Robert Stewart & Phil Seaton
The LS Trader Team

The provision of third party content is for general information purposes only and nothing sent to you should be construed as providing investment advice or a solicitation to purchase or sell any investment. InterTrader has no commercial interest in LS Trader and does not endorse any recommendation or analysis contained in their material. InterTrader accepts no responsibility for and has no control over the content (including legality, suitability, accuracy, timelines, reliability or availability) of any of the material supplied by LS Trader

EUR/ JPY – 115 Holding as resistance.

The EUR/ JPY has re-traced back to the 200% Fibonacci projection level and has hit the first bull target from June.

Should this level break as resistance, then we could expect a further target to be the 161.8 % projection level @ 119.70; a key support level from February this year. If this level also break then we could expect sellers to also come in at 122.44.

As re-tracement down will likely end up at 108.11 where buying power has come in before, however, if the price breaks lower than this level and actually re-tests 108.11 as resistance, then we could see a fall back to 2001 levels of the EUR/ JPY.

There is a support level @ 99.91 which could see sellers take off positions and enough buying to come in to stall the fall, however should the price go lower, then the ultimate target would be at 89.36 where the 423.6% Fibonacci projection levels are as well as the decade low.

The provision of third party content is for general information purposes only and nothing sent to you should be construed as providing investment advice or a solicitation to purchase or sell any investment. InterTrader has no commercial interest in FX Knight and does not endorse any recommendation or analysis contained in their material. InterTrader accepts no responsibility for and has no control over the content (including legality, suitability, accuracy, timelines, reliability or availability) of any of the material supplied by FX Knight. 

Getting Properly positioned

How many of us have experienced a profitable trade turning into a stop loss disaster? Or, on the other hand, a trade that went bad from the beginning then getting stopped out exactly when the market reaches a key reversal point and makes good? These occurrences cannot be fully avoided, but we can reduce their occurrence by better managing our trading positions.

Let’s start at the beginning. Before you open your position, it’s important to document the current situation, from both a technical and fundamental perspective.  The first means mark the price at which the trade is executed. According to the horizon of your trade, (be it hours, days or weeks)  capture the current level of key indicators such as  the 20, 40 and 89 exponential moving averages, and mark the first and second support and resistance lines (if you are proficient in channel plotting  that could be of use as well). One should also record the level of key indicators like MACD (moving average convergence/divergence), stochastic and RSI (relative strength indicator) levels.

Arguably even before you get to this stage, though, the question you need to ask is: Which time frames should I use. The consensus configuration among professional traders is that scalpers should use 1, 5, and 15 minute charts, day traders should use 5, 15, and 60 minutes intervals and swing traders 1 hour, 4 hours and the daily chart. Those who look to trade positionally should look at 4 hours, daily and weekly numbers.

There’s good reason why we have three time frames for each type of trade. The longest is used for market perspective and the ‘long’ term trend, the middle is the one upon which you would decide the direction of your trade, and the last is merely to optimise the timing of entering into the trade.

Let’s assume you have a long position open with a day’s trader perspective. You would be using the hourly chart, and it’s important to watch out for key signs, such as getting close to support and resistance; price action can be erratic around these levels. Watch also the main overlays for any kind of moving average cross over (MACD). If the MA20 line crosses under the MA 40, it may indicate a trend reversal.

The indicators can tell you a lot – mostly the MACD. If you’re trading a long position you should expect the MACD line to positively diverge from it’s signal line – watch out for ‘fake’ crosses – while a negative divergence should alert you to a possible reversal. Those signals don’t always indicate full trend reversal, it might be just a correction or the market is taking a breather, but you must be alert and vigilant when they occur.

Fundamental analysis, meanwhile, is trying to capture the current sentiment in the market. You have to be aware of the general price direction, what fundamental information is driving that price, and what are the up-coming expectations. The common tools for that are economic calendars, especially the detailed ones that offer some market commentary as well.  

Last but no least, decide in advance the different potential courses of action, both for better and worse, of where, when and how to make your exit.  Just like the prior examples, the reasons for doing this (and the movements that prompt you to exit) can be both technical and fundamental. A good example for a technically-influenced exit would be to set a breakout or a breakdown over the current trading channel, or a high-probability reversal pattern such as a ‘head and shoulders’ formation. A fundamental reason would be to revaluate the trade when a GDP, unemployment, or a relevant interest rate announcement is expected. This sheet should then guide you when you monitor your open positions.

So far, the easy part. What’s harder is managing yourself when there is money on the table. It’s very hard not to give in to one of the two most basic desires – fear and greed. Fear will appear whenever the market is trading against you, either creating a loss or eating into unrealised profit. At this point, it’s critical to make an effort to stay rational and analyse the situation. Check: has something materially changed from a technical or fundamental perspective since the position was opened? If the answer is no, then you must be strong and stick with the plan. On the other hand when profits are running and you have reached your target, unless something again has materially changed close your position, or you will suffer - perhaps not this time, but some time soon - from greed.

The other more dangerous manifestation of greed is actually when a trade is going against you and about to hit your stop, and you decide to extend the stop. In most cases this will just make you lose more money; do not fall into this trap. It’s much more probable that your analysis, made before there was money on the table and greed preying on your mind, is still accurate. 

Another, and more proactive, manner of managing trade is hedging. Just to be clear, opening an opposite position on the exact same instrument is NOT hedging: it’s a waste of money. Hedging is a position established in one market in an attempt to offset exposure to price fluctuations in some opposite position in another market, with the goal of minimising your exposure to unwanted risk.

Therefore, if you want to use hedging, which is an advanced method of managing risk on your open positions, you need to do it on a different market. Let’s assume your medium term perspective (3-6 months) on the EUR/USD cross is bearish, therefore it would make sense to sell the December futures contract. It might be that while this position is running a shorter term analysis is indicating a bullish correction. At this point you can either use the October or the spot contract to hedge your position; it can be a perfect, partial or even an over-hedge. Another more advanced technique for hedging would be to use OTM (Out Of Money) options, but this requires a much more detailed analysis as a whole new level of complexity is introduced when trading options.

Another consideration that one should take into account is the trading session. In the UK we have three major trading sessions in the day: Asian, European and American, though some overlap with the others. Some traders prefer to close their position when the underlying market session is over, while others are happy to keep their positions open overnight. 

If you decide you wish to keep position open after market hours or just let them run while you sleep it is highly recommended to take protective measures before signing off. A lot can happen while you sleep, therefore revaluate your stop-loss order and consider adding a limit if you don’t already have one.

As I hope I’ve outlined, managing your positions is a serious and complex craft which can have a significant impact on your trading results. It all starts by making a well-informed decision and documenting relevant information, followed  by a building a rigourous regime with a central message: stick to your plan.

Good luck and happy trading 

Shai Heffetz 



Spread betting carries a high level of risk and you can lose more than your initial deposit, so you should ensure spread betting meets your investment objectives. 

The contents of this report are for information purposes only. It is not intended as a recommendation to trade.  InterTrader  do not accept any responsibility for any use that may be made of the above or for the correctness or accuracy of the information provided.

NZD/ USD consolidating in Channel

The NZD/ USD is still in consolidation finding support and resistance within a channel which has appeared to be finding lower lows and lower highs. The currency pair also seems to be find support and resistance along the Fibonacci projection that completed May 2009.

Should the pair break out to the Long side then obviously selling prices are 0.7319 and 0.7759 respectively.

If the pair continues to  find lower lows then we could see support at the most recent key level of 0.6555. However, it should be noted that a strong support level could be where the lower channel line and the Fibonacci level intersect at 0.6406.

This information is brought to you by 

Dean Wright,Senior Analyst at FX Knight ,fxknight.com

The provision of third party content is for general information purposes only and nothing sent to you should be construed as providing investment advice or a solicitation to purchase or sell any investment. InterTrader has no commercial interest in FX Knight and does not endorse any recommendation or analysis contained in their material. InterTrader accepts no responsibility for and has no control over the content (including legality, suitability, accuracy, timelines, reliability or availability) of any of the material supplied by FX Knight.

Intraday Channel Trading

Constructing a Channel Spread Trading Strategy 

Trading channels is a well known and often used trading technique. 

It’s based on the observed tendency of many financial instruments to set a direction and then maintain it for a period of time. A change of such a paradigm is often well connected with planned and unplanned macro economic events. 

A recent example would be the sovereign debt crisis in EU, lead by Greece. Once the information emerged many instruments shifted and reversed some of their existing underline trends. 

A channel is defined when an instrument’s price is confined between 2 upper and lower parallel bands. The lower line is considered support and the upper line considered as resistance. 

In order to claim a channel has formed we must have at least 4 touch points, 2 on the supporting band and 2 on the resistance band. The more points connected without material breakout, the stronger the channel will be considered. 

As you may already guessed we have 3 types of channels:

• Ascending – When the price action exhibits a positive slope with rising tops and rising bottoms.
  
• Descending – When the price exhibits a negative slope with falling tops and falling bottoms.
  
• Sideways – When the price does not exhibit a particular slope. This is combined with a mix of rising and falling tops and bottoms. Sideways movement can also be broken down again into categories:
  
  
  
  • Diverging Sideways – This is best described with a combination of rising tops and falling bottoms, such that the price action diverges, yet the overall pivot line remains roughly the same.
    
  • Horizontal – When support and resistance bands are parallel with each other but with minimal or no visible slope.
    
  • Consolidation – A combination of falling tops and rising bottoms, such that the price action converges towards the pivot. Equilibrium may be achieved momentarily.
    

Channel Trading Example Chart - GBP/USD Forex Market: 




Plotting a Channel 

There are many ways of drawing a channel. The first, and most common, is drawing parallel lines, using the naked eye, which try to connect as many touch points as possible according to the principles outlined above. 

A more scientific method would be to use linear regression to plot the pivot line and build the channel around it. There are three main methods of channel building that are based on linear regression:

• Standard Deviation Channel – Two lines can form a standard deviation channel if they are parallel to the linear regression trend line. These are usually set two standard deviations either side of the regression line.
  
• Standard Error Channel – The standard error can also be used, in place of the standard deviation. This is preferred by some investors. It is the standard deviation divided by the square root of the sample size.
  
• RAFF Channel - The distance between the channel lines and the regression line is the greatest distance that any one closing price is from the regression line.
  

See in the below example how the 3 lines appear on an intra–day GBP/USD chart. 





Building your Channel Trading Strategy 

There are countless ‘off the shelf’ strategies for channel trading but this article will provide all the ingredients for building your own custom channel trading strategy. 

From each section below you should pick the method that you find most suitable for your own trading style. Once you have determined which methods to use, you will have a comprehensive strategy that covers all the necessary aspects of channel trading. 

It is highly recommended with any trading strategy, be it channel trading or otherwise, that you back test your strategy using automatic tools such as E-signal or Ninja. This may demonstrate a potential flaw before you risk your own trading capital. 


Entering the Trade 

As mentioned, there are several methods for entering into a trade; you can decide to either trade with the trend, against the trend or even trade both. 

Trading with the trend is considered the safest method as it mostly enjoys a higher accuracy rate. In fact even when a channel is broken, breakdowns do have a tendency to recover at least to the bottom of the channel which can be an exit point for either breaking even or with a small profit. 

Another option is to decide to trade both ways; SHORT on a breakout from the upper band and LONG on breakdowns from the bottom band. 

The greatest benefit of trading both sides is that one may get lucky and hit a material reversal, i.e. it could be a catching the top of an uptrend channel switching to a downtrend or vice versa. These are the rare occasions when out of scale profits can be made. 

The third method would be trending only against the trend. Some traders see the sense in this but, personally, I don’t. 

One thing to note is that with a spread betting account investors can gain quick access to a range of financial markets and you are able to trade in both directions, i.e. trade either long or short. 


Exiting the Trade 

Many traders take the view that getting out of a trade is as important, if not even more important, than getting into it. When trading channel breakouts you have several important decision points. 

The first one is channel recovery, when the price either falls or climbs back into the channel. One should pay careful attention to the patterns developing around the boundaries and decide if this is the time to close the trade. 

The second important decision point would be the pivot line; pay extra attention to this point especially when trading against the trend as counter trend movement sometimes breaks around the pivot line. 

The third and last decision point would be the opposite boundary. If you have reached this point you should be deep in profit so it’s probably the time to play it right and secure the majority of it as realized profit. 


Entry and Exit Style 

The simplest way to enter and exit trades is to decide in advance how much you are willing to risk on a specific trade and work out the desired stake size. Yet, there are also more sophisticated ways to trade:

• Scaling In - When using this method you would usually divide your overall investment into 3 batches. A third is to be placed when opening the trade. The second third would usually go in after price recovered back into the channel and the final third would be added once the price crossed the pivot line and the direction of the current movement is confirmed. When the price target has been reached the whole position will be closed.
  
  This method allows the trader to increase their stake only when price action is going their way and by trailing the stops, the risk factor may remain the same despite increasing the overall stake.
  
• Scaling Out – When using this method a trader would place the entire stake when opening the trade and reduce his exposure as price action moves his way, locking in more and more profit.

Both trading styles are very much valid and investors can alternate between them they see fit. In my experience, Scaling In works out better when trading against the trend and Scaling Out delivers better results when trading with the trend. 


Capital Management 

One important trading rule that many investors follow is 'refraining from risking more than 1-2% of trading capital' on a single trade. 

Aside from this, it is also advisable to build a well diversified portfolio where some of the contracts act as a hedge on others. This is to reduce the risk of all your holdings running against you simultaneously as the result of an unforeseen event. 

For example, let’s assume one decides to open various long positions on the US Dollar against the Japanese Yen and the British Pound. 

Both Britain and Japan are net importers of commodities and, therefore, are susceptible to changes in commodity prices. A natural hedge against these would be to take short positions on the Australian and Canadian Dollars as these two countries are net exporters and will enjoy increased commodity prices. 

This is especially necessary when trading the FX markets as positions can be very volatile. In addition, remember that the markets are well connected and you should always try to quantify your real net exposure. This can be done by summing the LONG and SHORT trades you may have in multiple positions. 


Hedging and Net Exposure Example: 

Instrument	Direction	Size	Open	Stop loss	Distance
EUR/USD	SHORT	$100,000	1.255	1.28	250
GBP/USD	SHORT	$100,000	1.502	1.52	180
USD/CHF	SHORT	$50,000	1.0675	1.08	125
AUD/USD	LONG	$100,000	0.8413	0.835	83
USD/CAD	LONG	$50,000	1.066	1.06	66
EUR/GBP	SHORT	$50,000	0.82	0.826	6

Net exposure: 

Instrument	Exposure	Overall Risk (Pips)
USD	100,000	412
EUR	-150,000	250
GBP	-50,000	120
CHF	-50,000	125
AUD	100,000	83
CAD	50,000	60

You may observe that the positions which are placed to hedge any un-favourable movement have stop losses which are placed much tighter than the ‘main’ positions. 

This is so that once the market moves in the ‘correct’ direction we will be looking to remove the hedge, allowing us to enjoy the most of the current swing in the market. It is always important to revaluate your risk once some of the positions are closed. 


Stops and Limits 

Stop losses should basically be placed very near to the closest high for short trades and next to the closest low for long trades. In essence you need to pin point a price level where the view that a reversal is imminent invalidates. 

In the chart below we can easily see how the GBP/USD was range bound in a very clear channel. 





When a trade is going well there are two key points where investors should consider trailing stops.

The first is once the market has regained the channel and completed a corrective movement, many traders choose to trail the stop close to the peak, for short trades, or bottom, for longs, of the movement. 

The second trail should come into effect once the price has pierced through the top of the channel. This is where a trader must carefully control his stops and limits in order to optimize his exit from the trade. 

Unlike stop losses, which are strongly advised in any position, limit orders are something that many traders find they can do without. 

This doesn’t mean that targets should not be set, yet when the price is getting closer to the target area it becomes important to make judgment calls according to emerging patterns, momentum and overall market sentiment. 

Please note that not all stop losses are guaranteed. 




Good luck and happy trading 

Shai Heffetz 

(Original article written 9 July 2010). 


Spread betting carries a high level of risk and you can lose more than your initial deposit, so you should ensure spread betting meets your investment objectives. 

The contents of this report are for information purposes only. It is not intended as a recommendation to trade.  InterTrader  do not accept any responsibility for any use that may be made of the above or for the correctness or accuracy of the information provided.