All’s well that ends well – Europe Interest rates and the US Job numbers

Dean Peters-Wright

Senior Analyst

fxKnight.com

The European central bank is expected to raise interest rates this week in an effort to fight the rising inflation causing panic within governments. It is expected to be raised by 25 basis points, the first time the ECB has changed the rates since May 2009. In an attempt to curb the rocketing prices which has caused global inflation, the effects will be felt in different ways across different countries. Pressure on Portugal, Spain, Greece and Ireland as they struggle with liquidity issues may result in further complications in the regions financial systems. Spanish banks are exposed to Portugal’s banking system and liquidity problems in Portugal could inadvertently cause a credit run on the Spanish markets. This in itself would not cause the case for Portugal to accept a bailout, but it will make it harder not to.

An interest rate hike will most likely cause further strengthening of the euro against most other currencies. Whilst this is good for production that use overseas materials and suppliers, this will also will put pressure on exporters and those economies that gain a substantial percentage of their GDP through tourism from visitors outside the single currency zone. If however the perceived danger to the smaller weaker economies outweighs the benefits of fighting inflation, there could be a sell off the euro as confidence decreases in the regions stability.

The US had a surge in the dollar when the non farm payroll figures were disclosed and the unemployment rate fell to 8.8%. Whilst the most powerful economy in the world celebrated along with all of its trading partners that have generally relied on the US being the engine driving world economic growth, it did highlight just how far the recovery has to go as prior to 2008 the US unemployment rate was under 5%.

The EUR/ USD has once again reached a key resistant point at 1.4234 where the euro sold off heavily before. If however the buying pressure breaks through this key level then we could be seeing new highs gained against the dollar with an ultimate target of 1.4790. Further long targets to watch for are 1.4427 and 1.4680 where key buying and selling levels have taken place through 2009.

IF the EUR/ USD retreats then 1.4037, 1.3887 and 1.3725 are significant support levels from before. 

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.

Technical Analysis of the FTSE100

For readers who are not familiar with the term FTSE100 – it is simply an index of the 100 largest companies on the London Stock Exchange.  The index is maintained and owned jointly by the Financial Times and the London Stock Exchange.

The index came into being on the 1^st of January 1984 with a base value of 1,000.  It reached a record level of 6950.6 on the 30^th of December 1999.  The financial crisis of 2007 – 2010 saw it drop dramatically to 3,500.  Since then it has recovered to a large extent, reaching a high of 6,091.33 on the 8th February 2011.

Analysis

If one looks at the price of the FTSE100 in relation to the Ichimoku Kinko Hyo cloud in Fig. 3.29, it clearly shows that the market is currently in a declining phase.  The price is well below the cloud, which indicates that a long position at the present moment cannot be recommended.

The green Chinkou Span line is also well below the price, which supports the signal given by the Ichimoku cloud.

The Index started trading below the cloud after the earthquake/tsunami disaster in Japan and closed at a low of 5552.50 on the 16^th of March.  Since then it has recovered significantly, but during the last few days it has started drifting sideways with no clear direction being evident.

If the market should recover and break through the upper level Senkou Span A line of the cloud, this could indicate that the previous bull market has been restored and that we can expect further price increases.

A drop below the blue Kijun Sen line will, however, be a signal that the downward movement has gained momentum and in that case traders should look at a short position to cash in on a potentially significant price drop.

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.

How to Trade Oil Profitably in the Current World Situation

At the moment, the oil market appears to be in something of a state of turmoil.  There are certain forces at play that will push prices up for the foreseeable future; yet recent events have created a situation that could have a dampening effect on prices, at least in the short to medium term.

Market Analysis

On the demand side, large economies, such as India and China, are still growing strongly.  If this trend continues, it will ensure constant growth in the demand for oil in the short to medium term.  On the other hand, economic activity in many important Western economies is still lacklustre.  Despite several predictions of an imminent upturn, the US and UK economies have not lived up to expectations, which will, to a large extent, keep demand for oil in check.  The upcoming summer months in the northern hemisphere will also act to keep demand for oil within reasonable limits during that period.

A number of countries have suffered crippling natural disasters in the past few months.  The earthquake and subsequent tsunami in Japan was no doubt the worst of these and has now raised fears of a recession in one of the world’s biggest economies.  Once the focus shifts from immediate need to rebuilding, the construction industry in Japan will no doubt receive a huge boost.  This will, in turn, lead to stronger demand for various imported commodities and stimulate economic activity, and the demand for oil will increase.

The latest unrest in various oil producing countries of the Middle East/North Africa (MENA) region has created fear of disruption to the oil supplies.  This situation has been exacerbated by recent developments in Libya, where a civil war could potentially break out after military intervention by Western powers.  This will lead to further upward pressure on the price of oil.

Something else that has to be taken into account is that the threat of a nuclear disaster in Japan has made many nuclear powers rethink their approach towards this form of energy.  Germany, for example, has already decided to close several of its older nuclear power stations.

Since nuclear energy is an alternative to oil, any development that curtails the supply of this alternative energy source will, in the long run, act to stimulate the demand for oil and push the price up even further.

What we will probably see in the short to medium term therefore, is a temporary lull in the demand for oil.  In the medium to long term, everything points to higher oil prices and it would not be surprising to see new record prices within the next two years.

Technical Analysis

Technical analysis of the situation seems to confirm the foregoing conclusions.  The market was in a strong bull run before the earthquake in Japan on 11^th March 2011, but since then there has been a significant price correction, because many traders feared an imminent recession in Japan.  The market reached a low on the 15^th of March, with Brent Oil closing at 108.28 – see fig. 3.21.

At its lowest level, the price moved marginally below the Kijun Sen (the blue line) on the Ichimoku Kinko Hyo, but rebounded sharply from there and right now it is trading above both the blue line (Kijun Sen) and the shorter-term average, the Tenkan Sen (the red line).

Trading the Current Oil Market

The Ichimoku Kinko Hyo currently indicates a clear bull market.  The Chinkou Span (the green line) is above the price of 21 days ago; the price is well above the cloud and also above both the blue and red lines of the Kijun Sen and Tenkan Sen.

A possible trading strategy is therefore to buy Brent with a stop loss placed at the red Tenkan Sen line.  Along with the Ichimoku Kinko Hyo, this line always acts as your first level of support.  Once the price breaks through the blue Kijun Sen, a long position is no longer advised.

The first resistance level is at 118.47, which was reached on 7^th March.  Once the price breaks through that level, watch out for 119.40, a previous high that was reached on 24^th February.  If the price breaks through this level, new highs are very possible.

As long as the price is above the cloud of the Ichimoku Hyo, medium term short trades cannot be advised.  This does not mean, however, that an astute day trader cannot make money from short-term corrections in the price.  In this instance, figure 3.21 should be redrawn using an hourly or even shorter-term chart.  The same rule applies when the price is trading above the cloud; take in a long-term position.  When it is in the cloud, stay out of the market and when it trades below the cloud, it is time to go short. 

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.

Technical analysis GBP/USD

GBP/USD made a valid attempt at rebound in the final week of January, yet the limit stayed well below 1.6057 resistance and eventually weakened.  Initial bias remains neutral for the upcoming week and more consolidations could still be achieved below 1.6057.  Nevertheless, even if there was another drop the pair is expected to remain bullish in the short term.  This depends on how well 1.5664 resistance turned support holds and whether the rise from 1.5343 is allowed to continue.  Above 1.6057 should resume the rise to 1.6298 first.  Still, break of 1.5664 will be proof that a rebound from 1.5343 is completed and focus should shift back to support.

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.

Technical analysis EUR/USD

EUR/USD jumped as high as 1.3757 in the final week of January.  The pair stayed at that level for a short while on bearish divergence conditions in four hours MACD.  However, strong support above 1.3245 is anticipated to bring a rally in the coming weeks.  The pair’s total decline from 1.4281 should have ended in three waves down to 1.2873 already; above 1.3757 should lift the pair closer to 1.4 to test 1.4281 resistance first.

Overall, the question that remains is whether mid-range correction from 1.6039 has finished its three waves down to 1.1875.  The hard break above 1.35 again affirms that the fall from 1.4281 was simply a correction and the general rise from 1.1875 is ongoing.  Also, insiders are quick to note that break of 1.4281 will give new life to the argument that mid-range term correction from 1.6039 was completed in three phases down to 1.1875 and that a long-term uptrend could be resuming.  On the other hand, below 1.2873 is likely to turn the focus back to the 1.1875 low.

Over the long term, considering the five wave structure of the long uptrend from 2000’s low of 0.8223 to 2008’s high of 1.6093, price actions from 1.6039 are considered merely correction.  Thus, watchers first anticipate strong support between 61.8% retracement of 0.8223 to 1.6039 at 1.1209 and that 1.1639 will contain downside.  Second, another high above 1.6039 is expected eventually, once correction from 1.6039 has been confirmed as completed.

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.

Guide to swing trading

Swing trading represents a middle ground between fast-paced day trading and long-term trend trading.  Those who follow a swing trading strategy typically hold a stock for a period of time, usually no longer than a few days or weeks and trade shares based on the stock’s weekly or monthly fluctuations.

Keys to Successful Swing Trading

Choosing the right stock:  The most favourable candidates are the large-cap stocks that are most actively traded on the major exchanges, for example Cisco, Intel, Microsoft, etc.  In an active market, these stocks typically move broadly between high and low extremes.  The swing trader follows the trend in one direction for a period of several days or week and then switches to the opposite side of the trade when it reverses.

Choosing the right market:  Swing trading presents some unique challenges in both a bear and bull market.  In these extremes, even the most active stocks fail to exhibit the normal oscillations that occur when indexes remain relatively stable for weeks or months at a time.  In a bear market or a bull market, stocks are carried by momentum in a single direction for long periods of time and may exhibit only subtle shifts that can be difficult to catch.  Therefore, the best strategy during periods of market extremes is to trade along with the long-term trend.

A stagnant market is best suited for swing trading.  When stocks and indexes are stable, there is a greater opportunity to take advantage of short-term movements.  For the swing trader, these short-term ups and downs generate the most significant profits.

Setting the baseline:  Historical analysis has proven that a market favourable to swing trading is one in which liquid stocks tend to trade above and below a shared baseline value.  This value is often shown on a chart with an exponential moving average (EMA).  Once the swing trader has used the EMA to identify a desired stock’s typical baseline, the trader can then adjust the swing strategy to the long or short, depending on the direction of the trend.  Conventional swing trading strategy dictates going long at the baseline when the stock is trending up and short at the baseline when the stock is trending down.

The most important consideration here is that swing traders are not looking to cash in on a single trade; there’s no real incentive to allowing oneself to become preoccupied with precise timing, to buy at a stock’s rock bottom and sell at its ultimate high or vice versa.  Instead, successful swing traders wait for a stock to hit its baseline value and reveal its direction before making a move.

When a stronger trend in either direction is evident, the trader may choose to go long when the stock falls below its EMA and wait for an uptrend or may short a stock that has jumped its EMA and wait for the drop.

Taking profits:  The object of swing trading is to exit each trade as close as possible to the upper or lower limit without being overly meticulous.  Of course, this also increases the trader’s risk of missing the most lucrative opportunities.  In a strong market, when stocks are exhibiting definitive and certain directional trends, swing traders are likely to wait for the stock to reach the channel line before claiming their profits.  In a weak market, when trends are harder to predict, traders may take a profit before that limit is reached in anticipation of a sudden directional shift that forces the stock to miss the channel line.

Conclusion

Swing trading is historically one of the best strategies for novice traders, but still offers substantial profits for more experienced and even advanced players.  Swing traders are able to receive feedback on the trades in a short amount of time, which goes a long way to build motivation for those new to stock trading.  However, the long and short positions that are typical to stock trading last several days; this is generally sufficient enough to stave off distraction.  Trend trading may promise greater profit potential if the trader can catch a major market trend over weeks or months, but few traders actually have the discipline to hold a position for that long without succumbing to distraction.  On the other hand, while day trading may be more intense and exciting, buying and selling dozens of stocks each day usually proves overwhelming for the majority of traders who employ the strategy.  Thus, swing trading is a happy medium between these two extremes.

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

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.