Forex Advanced Level 2
In this chapter we are going to cover the following
1)Trading Divergences
2)Regular Divergence
3)Hidden Divergence
4)Market Environment
5)Trending Market
6)Range-Bound Market
7)Trend Retracement or Reversal
8)How to Identify Reversals
9)Trade Breakouts
10)Volume / Volatility
11)Types of Breakouts
12)Trade Breakouts Using Trend Lines, Channels and Triangles
13)Measure the Strength of a Breakout
14)Detect Fakeouts
15)Fade the Breakout
16)Trade Fakeouts
17)Fundamental Analysis
18)Interest Rates
19)Monetary Policy
20)Hawkish and Dovish Central Banks
21)Fundamental Factors
22)Forex News and Market Data
23)Market Expectations of News and Their Impact
24)Currency Crosses
25)Currency Crosses to Trade the Majors
Trading Divergences
In a nutshell, divergence can be seen by comparing price action and the movement of an indicator. It doesn’t really matter what indicator you use. You can use RSI, MACD, Stochastic, CCI, etc.The great thing about divergences is that you can use them as a leading indicator, and after some practice, it’s not too difficult to spot. When traded properly, you can be profitable with divergences. The best thing about divergences is that you’re usually buying near the bottom or selling near the top. This makes the risk on your trades very small relative to your potential reward.
✅Just think “higher highs” and “lower lows“. Price and momentum normally move hand in hand like avocado and toast, Hansel and Gretel, Ryu and Ken, Batman and Robin, Jay Z and Beyonce, Kobe and Shaq, salt and pepper…You get the point. If price is making higher highs, the oscillator should also be making higher highs. If price is making lower lows, the oscillator should also be making lower lows. If they are NOT, that means price and the oscillator are diverging from each other. And that’s why it’s called “divergence.” Divergence trading is an awesome tool to have in your toolbox because divergences signal to you that something fishy is going on and that you should pay closer attention.
✅Using divergence trading can be useful in spotting a weakening trend or reversal in momentum. Sometimes you can even use it as a signal for a trend to continue! There are TWO types of divergence:
1.Regular
2.Hidden
A regular divergence is used as a possible sign for a trend reversal.
There are two types of regular divergences: bullish and bearish.
✅Using divergence trading can be useful in spotting a weakening trend or reversal in momentum. Sometimes you can even use it as a signal for a trend to continue! There are TWO types of divergence:
1.Regular
2.Hidden
A regular divergence is used as a possible sign for a trend reversal.
There are two types of regular divergences: bullish and bearish.
Regular Bullish Divergence
If price is making lower lows (LL), but the oscillator is making higher lows (HL), this is considered to be regular bullish divergence.
This normally occurs at the end of a DOWNTREND. After establishing a second bottom, if the oscillator fails to make a new low, it is likely that the price will rise, as price and momentum are normally expected to move in line with each other.
Regular Bearish Divergence
Now, if the price is making a higher high (HH), but the oscillator is lower high (LH), then you have regular bearish divergence. This type of divergence can be found in an UPTREND. After price makes that second high, if the oscillator makes a lower high, then you can probably expect price to reverse and drop.
Regular Bearish Divergence
Now, if the price is making a higher high (HH), but the oscillator is lower high (LH), then you have regular bearish divergence. This type of divergence can be found in an UPTREND. After price makes that second high, if the oscillator makes a lower high, then you can probably expect price to reverse and drop.
✅As you can see from the images above, the regular divergence is best used when trying to pick tops and bottoms. You are looking for an area where price will stop and reverse. The oscillators signal to us that momentum is starting to shift and even though price has made a higher high (or lower low), chances are that it won’t be sustained. Now that you’ve got a hold on regular divergence, it’s time to move and learn about the second type of divergence….hidden divergence.
Hidden Divergence
Divergences not only signal a potential trend reversal, but they can also be used as a possible sign for a trend continuation (price continues to move in its current direction). Always remember, the trend is your friend, so whenever you can get a signal that the trend will continue, then good for you! Hidden bullish divergence happens when price is making a higher low (HL), but the oscillator is showing a lower low (LL).
Hidden Bullish Divergence
This can be seen when the pair is in an UPTREND.
Once price makes a higher low (HL), look and see if the oscillator does the same.
If it doesn’t and makes a lower low (LL), then we’ve got some hidden divergence in our hands.
Hidden Bearish Divergence
Lastly, we’ve got hidden bearish divergence.
This occurs when price makes a lower high (LH), but the oscillator is making a higher high (HH).
By now you’ve probably guessed that this occurs in a DOWNTREND.
When you see hidden bearish divergence, chances are that the pair will continue to shoot lower and continue the downtrend.
✅Keep in mind that regular divergences are possible signals for trend reversals while hidden divergences signal trend continuation.
Regular divergences = signal possible trend reversal
Hidden divergences = signal possible trend continuation
Trade a Divergence
Remember that taking no position is a trading decision in itself and it’s better to hold on to your hard-earned cash than bleed Benjamins on a shaky trade idea.Divergences don’t appear that often, but when they do appear, it’d behoove you to pay attention.
✅Regular divergences can help you collect a big chunk of profit because you’re able to get in right when the trend changes.
Hidden divergences can help you ride a trade longer resulting in bigger-than-expected profits by keeping you on the correct side of a trend.
By knowing what market environment we are trading in, we can choose a trend-based strategy in a trending market or a range-bound strategy in a ranging market. The forex market provides many trending and ranging opportunities across different time frames wherein these strategies can be implemented. By knowing which strategies are appropriate, you will find it easier to figure out which indicators to pull out from your forex toolbox. For instance, Fibs and trend lines are useful in trending markets while pivot points, support and resistance levels are helpful when the market is ranging.
✅Before spotting those opportunities, you have to be able to determine the trading environment. The state of the market can be classified into three scenarios:
•Trending up
•Trending down
•Ranging
Trending Market
A trending market is one in which price is generally moving in one direction. Sure, the price may go against the trend every now and then, but looking at the longer time frames would show that those were just retracements. Trends are usually noted by “higher highs” and “higher lows” in an uptrend and “lower highs” and “lower lows” in a downtrend. When trading a trend-based strategy, traders usually pick the major currencies as well as any other currency utilizing the dollar because these pairs tend to trend and be more liquid than other pairs.
✅Liquidity is important in trend-based strategies. The more liquid a currency pair, the more movement (a. k. a. volatility) we can expect. The more movement a currency exhibits, the more opportunities there are for price to move strongly in one direction as opposed to bouncing around within small ranges. Other than eyeballing price action, you can also make use of technical tools you have learned in previous sections to determine whether a currency pair is trending or not.
ADX in a Trending Market
A way to determine if the market is trending is through the use of the Average Directional Index indicator or ADX for short. Developed by J. Welles Wilder, this indicator uses values ranging from 0-100 to determine if the price is moving strongly in one direction, i.e. trending, or simply ranging. Values more than 25 usually indicate that price is trending or is already in a strong trend.
✅Liquidity is important in trend-based strategies. The more liquid a currency pair, the more movement (a. k. a. volatility) we can expect. The more movement a currency exhibits, the more opportunities there are for price to move strongly in one direction as opposed to bouncing around within small ranges. Other than eyeballing price action, you can also make use of technical tools you have learned in previous sections to determine whether a currency pair is trending or not.
ADX in a Trending Market
A way to determine if the market is trending is through the use of the Average Directional Index indicator or ADX for short. Developed by J. Welles Wilder, this indicator uses values ranging from 0-100 to determine if the price is moving strongly in one direction, i.e. trending, or simply ranging. Values more than 25 usually indicate that price is trending or is already in a strong trend.
The higher the number is, the stronger the trend. However, the ADX is a lagging indicator which means that it doesn’t necessarily predict the future. It also is a non-directional indicator, which means it will report a positive figure whether the price is trending up or down.
Moving Averages in a Trending Market
If you’re not a fan of the ADX, you can also make use of simple moving averages. Check this out! Place a 7 period, a 20 period, and a 65 period Simple Moving Average on your chart. Then, wait until the three SMAs compress together and begin to fan out. If the 7 period SMA fans out on top of the 20 period SMA and the 20 SMA on top of the 65 SMA, then the price is trending up.
Moving Averages in a Trending Market
If you’re not a fan of the ADX, you can also make use of simple moving averages. Check this out! Place a 7 period, a 20 period, and a 65 period Simple Moving Average on your chart. Then, wait until the three SMAs compress together and begin to fan out. If the 7 period SMA fans out on top of the 20 period SMA and the 20 SMA on top of the 65 SMA, then the price is trending up.
On the other hand, if the 7 period SMA fans out below the 20 period SMA, and the 20 SMA is below the 65 SMA, then price is trending down.
Bollinger Bands in a Trending Market
One tool that is often used for range-bound strategies can also be helpful in trend discovery. We’re talking about Bollinger Bands or just Bands.
One thing you should know about trends is that they are actually quite rare. Contrary to what you might think, prices really range 70-80 percent of the time. In other words, it is the norm for the price to range. Bollinger Bands actually contain the standard deviation formula. But don’t worry about being a nerd and figuring out what that is. Here’s how we can use Bollinger Bands to determine the trend! Prepare for the craziness. Place Bollinger Bands with a standard deviation (SD) of “1” and another set of bands with a standard deviation (SD) of “2”. You will see three sets of price zones: the sell zone, the buy zone, and the “No Man’s Land“.
✅The Bollinger Bands make it easier to confirm a trend visually.
Downtrends can be confirmed when the price is in the sell zone.
Uptrends can be confirmed when the price is in the buy zone.
Range-Bound Market
A range-bound market is one in which price bounces in between a specific high price and a low price.
✅The Bollinger Bands make it easier to confirm a trend visually.
Downtrends can be confirmed when the price is in the sell zone.
Uptrends can be confirmed when the price is in the buy zone.
Range-Bound Market
A range-bound market is one in which price bounces in between a specific high price and a low price.
The high price acts as a major resistance level in which price can’t seem to break through. Likewise, the low price acts as a major support level in which price can’t seem to break as well. The market movement could be classified as horizontal, ranging, or sideways.
ADX in a Ranging Market
One way to determine if the market is ranging is to use the same ADX as discussed in the ADX lesson. A market is said to be ranging when the ADX is below 25. Remember, as the value of the ADX diminishes, the weaker trend is.
ADX in a Ranging Market
One way to determine if the market is ranging is to use the same ADX as discussed in the ADX lesson. A market is said to be ranging when the ADX is below 25. Remember, as the value of the ADX diminishes, the weaker trend is.
Bollinger Bands in a Ranging Market
In essence, Bollinger Bands contract when there is less volatility in the market and expand when there is more volatility. Because of that, Bollinger Bands provide a good tool for breakout strategies. When the bands are thin and contracted, volatility is low and there should be little movement of price in one direction. However, when bands start to expand, volatility is increasing and more movement of price in one direction is likely.
✅Generally, range trading environments will contain somewhat narrow bands compared to wide bands and form horizontally. In this case, we can see that the Bollinger Bands are contracted, as the price is just moving within a tight range. The basic idea of a range-bound strategy is that a currency pair has a high and low price that it normally trades between. By buying near the low price, the forex trader is hoping to take profit around the high price. By selling near the high price, the trader is hoping to take profit around the low price. Popular tools to use are channels such as the one shown above and Bollinger Bands. Using oscillators, like Stochastic or RSI, will help increase the odds of you finding a turning point in a range as they can identify potentially oversold and overbought conditions.
Trend Retracements?
A retracement is defined as a temporary price movement against the established trend.
Another way to look at it is an area of price movement that moves against the trend but returns to continue the trend.
Trend Reversals
Reversals are defined as a change in the overall trend of price.
When an uptrend switches to a downtrend, a reversal occurs.
When a downtrend switches to an uptrend, a reversal also occurs.
Using the same example as above, here’s how a reversal looks like.
✅When faced with a possible retracement or reversal, you have three options:
If in a position you could hold onto your position. This could lead to losses if the retracement turns out to be a longer term reversal.
You could close your position and re-enter if the price starts moving with the overall trend again. Of course, there could be a missed trade opportunity if price sharply moves in one direction. Money is also wasted on spreads if you decide to re-enter.
You could close permanently. This could result in a loss (if price went against you) or a huge profit (if you closed at a top or bottom) depending on the structure of your trade and what happens after.
✅Because reversals can happen at any time, choosing the best option isn’t always easy.
This is why using trailing stop loss points can be a great risk management technique when trading with the trend.
You can employ it to protect your profits and make sure that you will always walk away with some pips in the event that a long-term reversal happens.
How to Identify Reversals
Properly distinguishing between retracements and reversals can reduce the number of losing trades and even set you up with some winning trades. Classifying a price movement as a retracement or a reversal is very important. It’s up there with paying taxes. *cough* There are several key differences in distinguishing a temporary price change retracement from a long-term trend reversal.
Identifying Retracements
A popular way to identify retracements is to use Fibonacci levels. For the most part, price retracements hang around the 38.2%, 50.0% and 61.8% Fibonacci retracement levels before continuing the overall trend. If the price goes beyond these levels, it may signal that a reversal is happening. Notice how we didn’t say will. As you may have figured out by now, technical analysis isn’t an exact science, which means nothing certain, especially in forex markets.
Another way to see if the price is staging a reversal is to use pivot points.
In an UPTREND, traders will look at the lower support points (S1, S2, S3) and wait for it to break.
In a DOWNTREND, forex traders will look at the higher resistance points (R1, R2, R3) and wait for it to break.
If broken, a reversal could be in the making!
The last method is to use trend lines. When a major trend line is broken, a reversal may be in effect.
By using this technical tool in conjunction with candlestick chart patterns discussed earlier, a forex trader may be able to get a high probability of a reversal. While these methods can identify reversals, they aren’t the only way. At the end of the day, nothing can substitute for practice and experience.
✅You don’t have to be shot down by the “Smooth Retracement”. You don’t have to lose all those pips. All you need is just to know how to distinguish retracements from reversals.
Trade Breakouts
A breakout occurs when the price “breaks out” (get it?) of some kind of consolidation or trading range.
✅You don’t have to be shot down by the “Smooth Retracement”. You don’t have to lose all those pips. All you need is just to know how to distinguish retracements from reversals.
Trade Breakouts
A breakout occurs when the price “breaks out” (get it?) of some kind of consolidation or trading range.
A breakout can also occur when a specific price level is breached such as support and resistance levels, pivot points, Fibonacci levels, etc. With breakout trades, the goal is to enter the market right when the price makes a breakout and then continue to ride the trade until volatility dies down.
With stock or futures trades, volume is essential for making good breakout trades so not having this data available in the forex leaves us at a disadvantage.
Because of this disadvantage, we have to rely not only on good risk management but also on certain criteria in order to position ourselves for a good potential breakout. If there is a large price movement within a short amount of time then volatility would be considered high. On the other hand, if there is relatively little movement in a short period of time then volatility would be considered low. While it’s tempting to get in the market when it is moving faster than a speeding bullet, you will often find yourself more stressed and anxious; making bad decisions as your money goes in and then goes right back out.
This high volatility is what attracts a lot of forex traders, but it’s this same volatility that kills a lot of them as well. The goal here is to use volatility to your advantage.
Measure Volatility
Volatility is something that we can use when looking for good breakout trade opportunities.
Volatility measures the overall price fluctuations over a certain time and this information can be used to detect potential breakouts. There are a few indicators that can help you gauge a pair’s current volatility.
Moving averages are probably the most common indicator used by forex traders and although it is a simple tool, it provides invaluable data.
Moving averages are probably the most common indicator used by forex traders and although it is a simple tool, it provides invaluable data.
Simply put, moving averages measures the average movement of the market for an X amount of time, where X is whatever you want it to be. For example, if you applied a 20 SMA to a daily chart, it would show you the average movement for the past 20 days.
Bollinger Bands are excellent tools for measuring volatility because that is exactly what it was designed to do.
Bollinger Bands are excellent tools for measuring volatility because that is exactly what it was designed to do.
Bollinger Bands are basically 2 lines that are plotted 2 standard deviations above and below a moving average for an X amount of time, where X is whatever you want it to be. So if we set it at 20, we would have a 20 SMA and two other lines. One line would be plotted +2 standard deviations above it and the other line would be plotted -2 standard deviations below. When the bands contract, it tells us that volatility is LOW. When the bands widen, it tells us that volatility is HIGH.
Last on the list is the Average True Range, also known as ATR. The ATR is an excellent tool for measuring volatility because it tells us the average trading range of the market for X amount of time, where X is whatever you want it to be. Basically, ATR takes the currency pair’s range, which is the distance between the high and low in the time frame under study, and then plots that measurement as a moving average So if you set ATR to “20” on a daily chart, it would show you the average trading range for the past 20 days.
✅When ATR is falling, it is an indication that volatility is decreasing.
When ATR is rising, it is an indication that volatility has been on the rise.
Just remember that that ATR is a volatility indicator, NOT a directional indicator.
It’s s best used as a technical indicator to help confirm the market’s enthusiasm (or lack of) for range breakouts.
When trading breakouts in forex, it is important to realize that there are two main types:
✅When ATR is falling, it is an indication that volatility is decreasing.
When ATR is rising, it is an indication that volatility has been on the rise.
Just remember that that ATR is a volatility indicator, NOT a directional indicator.
It’s s best used as a technical indicator to help confirm the market’s enthusiasm (or lack of) for range breakouts.
When trading breakouts in forex, it is important to realize that there are two main types:
1.Continuation breakouts
2.Reversal breakouts
Knowing what type of breakout you are seeing will help you make sense of what is actually happening in the big picture of the market. Breakouts are significant because they indicate a change in the supply and demand of the currency pair you are trading. This change in sentiment can cause extensive moves that provide excellent opportunities for you to grab some pips.
Continuation Breakouts
Sometimes when there is an extensive move in one direction the market will often take a breather.
2.Reversal breakouts
Knowing what type of breakout you are seeing will help you make sense of what is actually happening in the big picture of the market. Breakouts are significant because they indicate a change in the supply and demand of the currency pair you are trading. This change in sentiment can cause extensive moves that provide excellent opportunities for you to grab some pips.
Continuation Breakouts
Sometimes when there is an extensive move in one direction the market will often take a breather.
This occurs when buyers and sellers pause to see what they should do next. As a result, you will see a period of range-bound movement called consolidation. If traders decide that the initial trend was the right decision, and continue to push the price in the same direction, the result is a continuation breakout. Just think of it as a “continuation” of the initial trend
Reversal Breakouts
Reversal breakouts start off the same way as continuation breakouts in the fact that after a long trend, there tends to be a pause or consolidation.
Reversal Breakouts
Reversal breakouts start off the same way as continuation breakouts in the fact that after a long trend, there tends to be a pause or consolidation.
The only difference is that after this consolidation, forex traders decide that the trend is exhausted and push the price in the opposite or “reverse” direction. As a result, you have what is called a “reversal breakout”.
False Breakouts
Now we know by now you are super excited to start trading breakouts but you also have to be careful.
Just like Lionel Messi can fake out defenders, the market can fake you out as well and produce false breakouts. False breakouts occur when the price breaks past a certain level (support, resistance, triangle, trend line, etc.) but doesn’t continue to accelerate in that direction. Instead, what you might’ve seen was a short spike followed by the price moving back into its trading range.
A good way to enter on a breakout is to wait until the price retraces back to the original breakout level and then wait to see if it bounces back to create a new high or low (depending on which direction you are trading).
Another way to combat fake outs is by not taking the first breakout you see. By waiting to see if the price will continue to move in your intended direction, you give yourself a better chance of taking a profitable trade. The downside to this is that you may miss out on some trades in which the price moves quickly without any hesitation.
Trade Breakouts Using Trend Lines, Channels and Triangles
Trade Breakouts Using Trend Lines, Channels and Triangles
The nice thing about breakout trading in forex is that opportunities are pretty easy to spot with the naked eye. You just need to know what tools to use.
Here are just a few Chart Patterns:
Double Top/Bottom
Head and Shoulders
Triple Top/Bottom
The first way to spot a possible breakout is to draw trend lines on a chart.
To draw a trend line, you simply look at a chart and draw a line that goes with the current trend. When drawing trend lines it is best if you can connect at least two tops or bottoms together. The more tops or bottoms that connect, the stronger the trend line. So how can you use trend lines to your advantage? When the price approaches your trend line, only two things can happen.
1.The price could either bounce off the trend line and continue the trend.
2.The price could breakout through the trend line and cause a reversal.
We want to take advantage of that breakout!
Another way to spot breakout opportunities is to draw trend channels.
1.The price could either bounce off the trend line and continue the trend.
2.The price could breakout through the trend line and cause a reversal.
We want to take advantage of that breakout!
Another way to spot breakout opportunities is to draw trend channels.
Drawing trend channels are almost the same as drawing trend lines except that after you draw a trend line you have to add the other side. Channels are useful because you can spot breakouts on either direction of the trend. The approach is similar to how we approach trend lines in that we wait for the price to reach one of the channel lines and look at the indicators to help us make our decision.
✅Example
✅Example
Notice that the MACD was showing strong bearish momentum as EUR/USD broke below the lower line of the trend channel. This would’ve been a good sign to go short!
The third way you can spot breakout opportunities is by looking for triangles. Triangles are formed when the market price starts off volatile and begins to consolidate into a tight range. Our goal is to position ourselves when the market consolidates so that we can capture a move when a breakout occurs.
here are the 3 types of triangles:
1.Ascending triangle
2.Descending triangle
3.Symmetrical triangle
The third way you can spot breakout opportunities is by looking for triangles. Triangles are formed when the market price starts off volatile and begins to consolidate into a tight range. Our goal is to position ourselves when the market consolidates so that we can capture a move when a breakout occurs.
here are the 3 types of triangles:
1.Ascending triangle
2.Descending triangle
3.Symmetrical triangle
✅Ascending triangles usually breakout to the upside. So when you think of ascending triangles, think of breaking out on your forehead.
✅Descending triangles usually breakout to the downside. So when you think of descending triangles, think of breaking out on your chin.
✅Symmetrical triangles can break either to the upside or the downside. So when you think of symmetrical triangles, think of breaking out on both your chin and forehead.
When a trend moves for an extended period of time and it starts to consolidate, one of two things could happen:
1.The price could continue in the same direction (continuation breakout)
2.The price could reverse in the opposite direction (reversal breakout)
In fact, there are a couple of ways to tell whether or not a trend seems to be nearing its demise and a reversal breakout is in order.
MACD is one of the most common indicators used by forex traders and for good reason.
2.The price could reverse in the opposite direction (reversal breakout)
In fact, there are a couple of ways to tell whether or not a trend seems to be nearing its demise and a reversal breakout is in order.
MACD is one of the most common indicators used by forex traders and for good reason.
It is simple yet dependable and can help you find momentum, and in this case, the lack of momentum! MACD can be displayed in several ways but one of the “sexiest” ways is to look at it as a histogram. What this histogram does is actually show the difference between the slow and fast MACD line.
When the histogram gets bigger, it means momentum is getting stronger.
When the histogram gets smaller, it means momentum is getting weaker.
RSI is another momentum indicator that is useful for confirming reversal breakouts.
When the histogram gets smaller, it means momentum is getting weaker.
RSI is another momentum indicator that is useful for confirming reversal breakouts.
Basically, this indicator tells us the changes between higher and lower closing prices for a given period of time. We won’t go into too much detail about it but if you would like to know more check out our lesson on RSI. RSI can be used in a similar way to MACD in that it also produces divergences. By spotting these divergences, you can find possible trend reversals.
However, RSI is also good for seeing how long a trend has been overbought or oversold.
A common indication of whether a market is overbought is if the RSI is above 70. On the flipside, a common indication of whether a market is oversold is if the RSI is below 30. Because trends are movements in the same direction for an extended period of time, you will often see RSI move into overbought/oversold territory, depending on the direction of the trend. If a trend has produced oversold or overbought readings for an extended period of time and begins to move back within the range of the RSI, it is a good indication that the trend may be reversing.
Detect Fakeouts
When price finally “breaks” out of that support or resistance level, one would expect price to keep moving in the same direction of the break.
Detect Fakeouts
When price finally “breaks” out of that support or resistance level, one would expect price to keep moving in the same direction of the break.
There must have been enough momentum building up in order for price to have broken out of the level, right? It’s time to hop aboard that train. It’s all smooth sailing now. All you have to do is just wait for it… Wait for it… Just a few more moments… To see price inch one direction… Then suddenly move miles in the opposite direction!
Support and Resistance Levels Are Tricky
One thing you should remember to note about support and resistance levels is that they are areas in which a predictable price response can be expected.
Support and Resistance Levels Are Tricky
One thing you should remember to note about support and resistance levels is that they are areas in which a predictable price response can be expected.
Support levels are areas where buying pressure is just enough to overcome selling pressure and halt or reverse a downtrend. A strong support level is more likely to hold up even if price breaks the support level and it provides traders a good buying opportunity.
Resistance levels are just like support levels but work in the opposite way. They tend to halt or even reverse uptrends. Resistance levels are areas in which selling pressure is just enough to overcome buying pressure and force price back down. Strong resistance levels are more likely to hold up even if price temporarily breaks the resistance level and it provides traders a good selling opportunity.
Fade the Breakout
Fading breakouts simply means trading in the opposite direction of the breakout. Fading breakouts = trading FALSE breakouts.
You would fade a breakout if you believe that a breakout from a support or resistance level is false and unable to keep moving in the same direction. In cases in which the support or resistance level broken is significant, fading breakouts may prove to be smarter than trading the breakout. Keep in mind that fading breakouts is a great short-term strategy. Breakouts tend to fail at the first few attempts but may succeed eventually.
Fading breakouts is a great short-term strategy. It is NOT a great one to use for longer term traders.By learning how to trade false breakouts, also known as fakeouts, you can avoid getting whipsawed. Trading breakouts appeal to many forex traders. Why? Support and resistance levels are supposed to be price floors and ceilings. If these levels are broken, one would expect for price to continue in the same direction as the breakage. If a support level is broken, that means that the general price movement is downwards and people are more likely to sell than buy. Conversely, if a resistance level is broken, then the crowd believes that price is more likely to rally even higher and will tend to buy rather than sell.
Independent retail forex traders have greedy mentalities. They believe in trading in the direction of the breakout. They believe in huge gains on huge moves. Catch the big fish, forget the small fries. In a perfect world, this would be true. But the world is not perfect. Frogs and princesses do not live happily ever after. What does in fact happen is that most breakouts FAIL. Breakouts fail simply because the smart minority has to make money off the majority. Don’t feel so bad. The smart minority tends to be comprised of the big players with huge accounts and buy/sell orders. In order to sell something, there must be a buyer. However, if everyone wants to buy above a resistance level or sell below a support level, the market maker has to take the other side of the equation.
Trend lines
In fading breakouts, always remember that there should be SPACE between the trend line and price.
If there is a gap between the trend line and price, it means price is heading more in the direction of the trend and away from the trend line.
Like in the example below, having space between the trend line and price allows price to retrace back towards the trend line, perhaps even breaking it, and provide fading opportunities.
The SPEED of price movement is also very important.
If price is inching like a caterpillar towards the trend line, a false breakout may be likely.
However, a fast price movement towards the trend line could prove to be a successful breakout.
With a high price movement speed, momentum can carry price past the trend line and beyond.
In this situation, it is better to step back from fading the breakout.
How do we fade trend line breaks?
It’s very simple actually. Just enter when price pops back inside.
This will allow you to take the safe route and avoid jumping the gun. You don’t want sell above or below a trend line only to find out later that the breakout was real!
Using the first chart example, let’s point out possible entry points by zooming in a little
Chart patterns are physical groupings of price you can actually see with your own eyes. They are an important part of technical analysis and also help you in your decision-making process.
Two common patterns where false breakouts tend to occur are:
Head and Shoulders
Double Top/Bottom
The head and shoulders chart pattern is actually one of the hardest patterns for new traders to spot. However, with time and experience, this pattern can become an instrumental part of your trading arsenal.
The head and shoulders pattern is considered a reversal.
If formed at the end of an uptrend, it could signal a bearish reversal. Conversely, if it is formed the end of a downtrend, it could signal a bullish reversal.
Head and shoulders are known for generating false breakouts and creating perfect opportunities for fading breakouts.
False breakouts are common with this pattern because many traders who have noticed this formation usually put their stop loss very near the neckline.
When the pattern experiences a false breakout, prices will usually rebound.
Traders who have sold the downside breakout or who have bought the upside breakout will have their stops triggered when prices move against their positions.
Head and Shoulders
Double Top/Bottom
The head and shoulders chart pattern is actually one of the hardest patterns for new traders to spot. However, with time and experience, this pattern can become an instrumental part of your trading arsenal.
The head and shoulders pattern is considered a reversal.
If formed at the end of an uptrend, it could signal a bearish reversal. Conversely, if it is formed the end of a downtrend, it could signal a bullish reversal.
Head and shoulders are known for generating false breakouts and creating perfect opportunities for fading breakouts.
False breakouts are common with this pattern because many traders who have noticed this formation usually put their stop loss very near the neckline.
When the pattern experiences a false breakout, prices will usually rebound.
Traders who have sold the downside breakout or who have bought the upside breakout will have their stops triggered when prices move against their positions.
This usually is caused by the institutional traders who want to scrape money from the hands of individual traders.In a head and shoulders pattern, you can assume that the first break tends to be false.
You can fade the breakout with a limit order back in the neckline and just put your stop above the high of the fake out candle.
You could place your target a little below the high of the second shoulder or a little above the low of the second shoulder of the inverse pattern.
The next pattern is the double top or the double bottom.
You can fade the breakout with a limit order back in the neckline and just put your stop above the high of the fake out candle.
You could place your target a little below the high of the second shoulder or a little above the low of the second shoulder of the inverse pattern.
The next pattern is the double top or the double bottom.
Traders just love these patterns! Why you ask? Well it is because they’re the easiest to spot!
When price breaks below the neckline, it signals a possible trend reversal.
Because of this, plenty of traders place their entry orders very near the neckline in case of a reversal.The problem with these chart patterns is that countless traders know them and place orders at similar positions.Similar to the head and shoulders pattern, you can place your order once price goes back in to catch the bounce. You can set your stops just beyond the fake out candle.
When price breaks below the neckline, it signals a possible trend reversal.
Because of this, plenty of traders place their entry orders very near the neckline in case of a reversal.The problem with these chart patterns is that countless traders know them and place orders at similar positions.Similar to the head and shoulders pattern, you can place your order once price goes back in to catch the bounce. You can set your stops just beyond the fake out candle.
Fundamental Analysis
Whenever you hear people mention fundamentals, they’re really talking about the economic fundamentals of a currency’s host country.Economic fundamentals cover a vast collection of information – whether in the form of economic, political or environmental reports, data, announcements or events. Fundamental analysis is the use and study of these factors. It is the study of what’s going on in the world and around us, economically and financially speaking, and it tends to focus on how macroeconomic elements (such as the growth of the economy, inflation, unemployment) affect whatever we’re trading.
👉Fundamental Data and Its Many Forms
Fundamental analysis involves studying economic trends and geopolitical events that might affect currency prices. In other words, it’s the study of financial news and economic data.
The most important economic data to watch for include:
✅Interest Rates
✅Inflation
✅GDP (Gross Domestic Product)
✅Employment Data
When a piece of economic data is released, fundamental analysis provides insight into how price action “should” or may react to a certain economic event.
Fundamental data takes shape in many different forms.
👉The release of this data to the public often changes the economic landscape (or better yet, the economic mindset), creating a reaction from investors and speculators.There are even instances when no specific report has been released, but the anticipation of such a report happening is another example of fundamentals. Speculations of interest rate hikes can be “priced in” hours or even days before the actual interest rate statement. In fact, currency pairs have been known to sometimes move 100 pips just moments before major economic news, making for a profitable time to trade for the brave. That’s why many forex traders are often on their toes prior to certain economic releases and you should be too!
👉Generally, economic indicators make up a large portion of data used in fundamental analysis. Like a fire alarm sounding when it detects smoke, economic indicators provide some insight into how well a country’s economy is doing. While it’s important to know the numerical value of an indicator, equally as important is the market’s expectation of that value. Understanding the resulting impact of the actual figure in relation to the forecasted figure is the most important part. These factors all need consideration when deciding to trade.
Fundamental analysis is a valuable tool in estimating the future conditions of an economy, but not so much for predicting currency price direction.This type of analysis has a lot of gray areas because fundamental information in the form of reports, economic data releases, or monetary policy change announcements is vaguer than actual technical indicators.
👉Intermediate or medium traders and some long-term traders like to focus on fundamental analysis too because it helps with currency valuation. We like to be a little crazy by saying you should use BOTH!
✅Technically-focused strategies are blown to bits when a key fundamental event occurs. In the same respect, pure fundamental traders miss out on the short-term opportunities that pattern formations and technical levels bring.
👉A mix of technical and fundamental analysis covers all angles. You’re aware of the scheduled economic releases and events, but you can also identify and use the various technical tools and patterns that market players focus on.
Whenever you hear people mention fundamentals, they’re really talking about the economic fundamentals of a currency’s host country.Economic fundamentals cover a vast collection of information – whether in the form of economic, political or environmental reports, data, announcements or events. Fundamental analysis is the use and study of these factors. It is the study of what’s going on in the world and around us, economically and financially speaking, and it tends to focus on how macroeconomic elements (such as the growth of the economy, inflation, unemployment) affect whatever we’re trading.
👉Fundamental Data and Its Many Forms
Fundamental analysis involves studying economic trends and geopolitical events that might affect currency prices. In other words, it’s the study of financial news and economic data.
The most important economic data to watch for include:
✅Interest Rates
✅Inflation
✅GDP (Gross Domestic Product)
✅Employment Data
When a piece of economic data is released, fundamental analysis provides insight into how price action “should” or may react to a certain economic event.
Fundamental data takes shape in many different forms.
👉The release of this data to the public often changes the economic landscape (or better yet, the economic mindset), creating a reaction from investors and speculators.There are even instances when no specific report has been released, but the anticipation of such a report happening is another example of fundamentals. Speculations of interest rate hikes can be “priced in” hours or even days before the actual interest rate statement. In fact, currency pairs have been known to sometimes move 100 pips just moments before major economic news, making for a profitable time to trade for the brave. That’s why many forex traders are often on their toes prior to certain economic releases and you should be too!
👉Generally, economic indicators make up a large portion of data used in fundamental analysis. Like a fire alarm sounding when it detects smoke, economic indicators provide some insight into how well a country’s economy is doing. While it’s important to know the numerical value of an indicator, equally as important is the market’s expectation of that value. Understanding the resulting impact of the actual figure in relation to the forecasted figure is the most important part. These factors all need consideration when deciding to trade.
Fundamental analysis is a valuable tool in estimating the future conditions of an economy, but not so much for predicting currency price direction.This type of analysis has a lot of gray areas because fundamental information in the form of reports, economic data releases, or monetary policy change announcements is vaguer than actual technical indicators.
👉Intermediate or medium traders and some long-term traders like to focus on fundamental analysis too because it helps with currency valuation. We like to be a little crazy by saying you should use BOTH!
✅Technically-focused strategies are blown to bits when a key fundamental event occurs. In the same respect, pure fundamental traders miss out on the short-term opportunities that pattern formations and technical levels bring.
👉A mix of technical and fundamental analysis covers all angles. You’re aware of the scheduled economic releases and events, but you can also identify and use the various technical tools and patterns that market players focus on.
A currency’s interest rate is probably the biggest factor in determining the perceived value of a currency. So knowing how a country’s central bank sets its monetary policy, such as interest rate decisions, is a crucial thing to wrap your head around. One of the biggest influences on a central bank’s interest rate decision is price stability or “inflation”. Inflation is a steady increase in the prices of goods and services. It’s generally accepted that moderate inflation comes with economic growth. However, too much inflation can harm an economy and that’s why central banks are always keeping a watchful eye on inflation-related economic indicators, such as the CPI and PCE.
List of countries and Banks responsible for Interest rate Decisions
List of countries and Banks responsible for Interest rate Decisions
In an effort to keep inflation at a comfortable level, central banks will most likely increase interest rates, resulting in lower overall growth and slower inflation.
This occurs because setting high-interest rates normally force consumers and businesses to borrow less and save more, putting a damper on economic activity. Loans just become more expensive while sitting on cash becomes more attractive. On the other hand, when interest rates are decreasing, consumers and businesses are more inclined to borrow (because banks ease lending requirements), boosting retail and capital spending, thus helping the economy to grow.
Interest Rate Expectations
Markets are ever-changing with the anticipation of different events and situations. Interest rates do the same thing – they change – but they definitely don’t change as often. Most forex traders don’t spend their time focused on current interest rates because the market has already “priced” them into the currency price. What is more important is where interest rates are EXPECTED to go. It’s also important to know that interest rates tend to shift in line with monetary policy, or more specifically, with the end of monetary cycles. If rates have been going lower and lower over a period a time, it’s almost inevitable that the opposite will happen. Rates will have to increase at some point.
👉While interest rates change with the gradual shift of monetary policy, market sentiment can also change rather suddenly from just a single report. This causes interest rates to change in a more drastic fashion or even in the opposite direction as originally anticipated. So you better watch out!
Interest Rate Differentials
Pick a pair, any pair.
Many forex traders use a technique of comparing one currency’s interest rate to another currency’s interest rate as the starting point for deciding whether a currency may weaken or strengthen.
The difference between the two interest rates, known as the “interest rate differential,” is the key value to keep an eye on.
This spread can help you identify shifts in currencies that might not be obvious.
👉An interest rate differential that increases helps to reinforce the higher-yielding currency, while a narrowing differential is positive for the lower-yielding currency.
Instances where the interest rates of the two countries move in opposite directions often produce some of the market’s largest swing.
An interest rate increase in one currency combined with the interest rate decrease of the other currency is the perfect equation for sharp swings!
👉An interest rate differential that increases helps to reinforce the higher-yielding currency, while a narrowing differential is positive for the lower-yielding currency.
Instances where the interest rates of the two countries move in opposite directions often produce some of the market’s largest swing.
An interest rate increase in one currency combined with the interest rate decrease of the other currency is the perfect equation for sharp swings!
Nominal vs. Real Interest Rates
When people talk about interest rates, they are either referring to the nominal interest rate or the real interest rate.
What’s the difference?
The nominal interest rate doesn’t always tell the entire story. The nominal interest rate is the rate of interest before adjustments for inflation.
Real interest rate = Nominal interest rate – Expected inflation
The nominal rate is usually the stated or base rate that you see (e.g., the yield on a bond).Markets, on the other hand, don’t focus on this rate, but rather on the real interest rate.
What’s the difference?
The nominal interest rate doesn’t always tell the entire story. The nominal interest rate is the rate of interest before adjustments for inflation.
Real interest rate = Nominal interest rate – Expected inflation
The nominal rate is usually the stated or base rate that you see (e.g., the yield on a bond).Markets, on the other hand, don’t focus on this rate, but rather on the real interest rate.
National governments and their corresponding central banking authorities formulate monetary policy to achieve certain economic mandates or goals.
Central banks and monetary policy go hand-in-hand, so you can’t talk about one without talking about the other.
While some of these mandates and goals are very similar between the world’s central bank, each has its own unique set of goals brought on by their distinctive economies.
Ultimately, monetary policy boils down to promoting and maintaining price stability and economic growth.
☝️To achieve their goals, central banks use monetary policy mainly to control the following:
👉the interest rates tied to the cost of money,
👉the rise in inflation,
👉the money supply,
👉reserve requirements over banks (the portion of depositors’ balances that commercial banks must have on hand as cash)
and lending to commercial banks (via the discount window)
Central banks and monetary policy go hand-in-hand, so you can’t talk about one without talking about the other.
While some of these mandates and goals are very similar between the world’s central bank, each has its own unique set of goals brought on by their distinctive economies.
Ultimately, monetary policy boils down to promoting and maintaining price stability and economic growth.
☝️To achieve their goals, central banks use monetary policy mainly to control the following:
👉the interest rates tied to the cost of money,
👉the rise in inflation,
👉the money supply,
👉reserve requirements over banks (the portion of depositors’ balances that commercial banks must have on hand as cash)
and lending to commercial banks (via the discount window)
Types of Monetary Policy
Monetary policy can be referred to in a couple of different ways. Contractionary or restrictive monetary policy takes place if it reduces the size of the money supply. It can also occur with the raising of interest rates. The idea here is to slow economic growth with high-interest rates. Borrowing money becomes harder and more expensive, which reduces spending and investment by both consumers and businesses.
👉Expansionary monetary policy, on the other hand, expands or increases the money supply, or decreases the interest rate.The cost of borrowing money goes down in hopes that spending and investment will go up.
👉Accommodative monetary policy aims to create economic growth by lowering the interest rate, whereas tight monetary policy is set to reduce inflation or restrain economic growth by raising interest rates.
👉Finally, neutral monetary policy intends to neither create growth nor fight inflation.
👉Expansionary monetary policy, on the other hand, expands or increases the money supply, or decreases the interest rate.The cost of borrowing money goes down in hopes that spending and investment will go up.
👉Accommodative monetary policy aims to create economic growth by lowering the interest rate, whereas tight monetary policy is set to reduce inflation or restrain economic growth by raising interest rates.
👉Finally, neutral monetary policy intends to neither create growth nor fight inflation.
The important thing to remember about inflation is that central banks usually have an inflation target in mind, say 2%. They might not come out and say it specifically, but their monetary policies all operate and focus on reaching this comfort zone. They know that some inflation is a good thing, but out-of-control inflation can remove the confidence people have in their economy, their job, and ultimately, their money. By having target inflation levels, central banks help market participants better understand how they (the central bankers) will deal with the current economic landscape.
Hawkish and Dovish Central Banks
Interest rates are ultimately affected by a central bank’s view on the economy and price stability, which influence monetary policy. Central banks operate like most other businesses in that they have a leader, a president, or a chairman. It’s that individual’s role to be the voice of that central bank, conveying to the market which direction monetary policy is headed. And much like when Jeff Bezos or Warren Buffett steps to the microphone, everyone listens.
☝️While the head of a central bank isn’t the only one making monetary policy decisions for a country (or region), what he or she has to say is only not ignored, but revered. entral bank speeches have a way of inciting a market response, so watch for quick movement following an announcement. Speeches can include anything from changes (increases, decreases, or holds) to current interest rates, to discussions about economic growth measurements and outlook, to monetary policy announcements outlining current and future changes. But don’t despair if you can’t tune into the live event. As soon as the speech or announcement hits the airwaves, news agencies from all over make the information available to the public.
💹Currency analysts and traders alike take the news and try to dissect the overall tone and language of the announcement, taking special care to do this when interest rate changes or economic growth information are involved. Much like how the market reacts to the release of other economic reports or indicators, forex traders react more to central bank activity, and interest rate changes when they don’t fall in line with current market expectations. It’s getting easier to foresee how a monetary policy will develop over time, due to increasing transparency by central banks. Yet there’s always a possibility that central bankers will change their outlook in greater or lesser magnitude than expected. It’s during these times that market VOLATILITY is high and care should be taken with existing and new trade positions!
Interest rates are ultimately affected by a central bank’s view on the economy and price stability, which influence monetary policy. Central banks operate like most other businesses in that they have a leader, a president, or a chairman. It’s that individual’s role to be the voice of that central bank, conveying to the market which direction monetary policy is headed. And much like when Jeff Bezos or Warren Buffett steps to the microphone, everyone listens.
☝️While the head of a central bank isn’t the only one making monetary policy decisions for a country (or region), what he or she has to say is only not ignored, but revered. entral bank speeches have a way of inciting a market response, so watch for quick movement following an announcement. Speeches can include anything from changes (increases, decreases, or holds) to current interest rates, to discussions about economic growth measurements and outlook, to monetary policy announcements outlining current and future changes. But don’t despair if you can’t tune into the live event. As soon as the speech or announcement hits the airwaves, news agencies from all over make the information available to the public.
💹Currency analysts and traders alike take the news and try to dissect the overall tone and language of the announcement, taking special care to do this when interest rate changes or economic growth information are involved. Much like how the market reacts to the release of other economic reports or indicators, forex traders react more to central bank activity, and interest rate changes when they don’t fall in line with current market expectations. It’s getting easier to foresee how a monetary policy will develop over time, due to increasing transparency by central banks. Yet there’s always a possibility that central bankers will change their outlook in greater or lesser magnitude than expected. It’s during these times that market VOLATILITY is high and care should be taken with existing and new trade positions!
Hawkish
Central bankers are described as “hawkish” when they are in support of the raising of interest rates to fight inflation, even to the detriment of economic growth and employment.
They are known as “hawks” and use words like “tighten” and “heating up” will be used.
For example, “The Bank of England suggests the existence of a threat of high inflation.”
The Bank of England could be described as being hawkish if they made an official statement leaning towards the increasing of interest rates to reduce high inflation.
Dovish
On the other hand (or claw?), central bankers are described as “dovish” when they favor economic growth and employment over-tightening interest rates.
They also tend to have a more non-aggressive stance or viewpoint regarding a specific economic event or action.
They are known as “doves” and use words like “soften” and “cooling down” will be used.
This picture summarizes the difference between hawkish and dovish monetary policies:
Central bankers are described as “hawkish” when they are in support of the raising of interest rates to fight inflation, even to the detriment of economic growth and employment.
They are known as “hawks” and use words like “tighten” and “heating up” will be used.
For example, “The Bank of England suggests the existence of a threat of high inflation.”
The Bank of England could be described as being hawkish if they made an official statement leaning towards the increasing of interest rates to reduce high inflation.
Dovish
On the other hand (or claw?), central bankers are described as “dovish” when they favor economic growth and employment over-tightening interest rates.
They also tend to have a more non-aggressive stance or viewpoint regarding a specific economic event or action.
They are known as “doves” and use words like “soften” and “cooling down” will be used.
This picture summarizes the difference between hawkish and dovish monetary policies:
Fundamental FactorsThere are several fundamental factors that help shape the long-term strength or weakness of the major currencies and will affect you as a forex trader.
Economic Growth and Outlook
It’s easy to understand that when consumers perceive a strong economy.
Consumers feel happy and safe, and they spend money. Companies willingly take this money and say, “Hey, we’re making money! Wonderful! Now… uh, what do we do with all this money?” Companies with money spend money. And all this creates some healthy tax revenue for the government. They jump on board and also start spending money. Now everybody is spending, and this tends to have a positive effect on the economy. Weak economies, on the other hand, are usually accompanied by consumers who aren’t spending, businesses who aren’t making any money and aren’t spending, so the government is the only one still spending. But you get the idea.
Both positive and negative economic outlooks can have a direct effect on the currency markets.
The most commonly used measure of economic growth is GDP.
GDP stands for “Gross Domestic Product” and represents the total monetary value of all final goods and services produced (and sold) within a country during a period of time (typically one year).
GDP provides an economic snapshot of a country, used to estimate the size of an economy and growth rate.
Here’s a visualization that shows the $86 TRILLION global economy in one chart:
✅As you can see:
👉The United States is still the world’s largest economy.
👉China is the world’s second-largest economy.
👉The United States and China together make up nearly 40% of the global economic GDP.
👉The top 15 economies represent a whopping 75% of the total global GDP.
Capital Flows
Globalization, technological advances, and the internet have all contributed to the ease of investing your money virtually anywhere in the world, regardless of where you call home. You’re only a few clicks of the mouse away (or a phone call for you folks living in the Jurassic era of the 2000s) from investing in the New York or London Stock exchange, trading the Nikkei or Hang Seng index, or from opening a forex account to trade U.S. dollars, euros, yen, and even exotic currencies. Capital flows measure the amount of money flowing into and out of a country or economy because of capital investment purchasing and selling.
✅With more investment coming into a country, demand increases for that country’s currency as foreign investors have to sell their currency in order to buy the local currency.
This demand causes the currency to increase in value.
Simple supply and demand.
And you guessed it, if supply is high for a currency (or demand is weak), the currency tends to lose value.
When foreign investments make an about-face, and domestic investors also want to switch teams and leave, and then you have an abundance of the local currency as everybody is selling and buying the currency of whatever foreign country or economy they’re investing in.
Foreign capital loves nothing more than a country with high-interest rates and strong economic growth. If a country also has a growing domestic financial market, even better!
A booming stock market, high-interest rates… What’s not to love?! Foreign investment comes streaming in.
And again, as demand for the local currency increases so does its value.
Trade Flows and Trade Balance
Fundamental Factors That Affect Currency Values
International trade can be broadly distinguished between trade in goods (merchandise) and services. The bulk of international trade concerns physical goods, while services account for a much lower share.
Forex News and Market Data
Market news and data are available through a multitude of sources.
☝️Traditional Financial News Sources
While there are tons of financial news resources out there, we advise you to stick with the big names. These guys provide around-the-clock coverage of the markets, with daily updates on the big news that you need to be aware of, such as central bank announcements, economic report releases, and analysis, etc. Many of these big players also have institutional contacts that provide explanations about the current events of the day to the viewing public.
✅Real time feeds
If you’re looking for more immediate access to the movements in the currency market, don’t forget about that 80-inch flat-screen TV in your bathroom!
Financial TV networks exist 24 hours a day, seven days a week to provide you up-to-the-minute action on all of the world’s financial markets.
In the U.S., the top dogs are (in random order), Bloomberg TV, Fox Business, CNBC, MSNBC, and even CNN. You could even throw a little BBC in there.
Another option for real-time data comes from your forex trading platform.Check your broker for the availability of such features, not all brokers’ features are created equally.
Economic calendar
Wouldn’t it be great if you could look at the current month and know exactly when the Fed is making an interest rate announcement, what rate is forecasted, what rate actually occurs, and what type of impact this change has on the currency market? It’s all possible with an economic calendar.
If the market has already made its move, you might have to adjust your thinking and current strategy. Keep tabs on just how old this news is or you’ll find yourself “yesterday’s news.”
You also have to be able to determine whether the forex news you’re dealing with is fact or fiction, rumor, or opinion.Economic data rumors do exist, and they can occur minutes to several hours before a scheduled release of data.
The rumors help to produce some short-term trader action, and they can sometimes also have a lasting effect on market sentiment.
Institutional traders are also often rumored to be behind large moves, but it’s hard to know the truth with a decentralized market like spot forex. There’s never a simple way of verifying the truth.
Market Expectations of News and Their Impact
You can draw on the fact that there’s usually an initial response, which is usually short-lived, but full of action.
Later on, comes the second reaction, where forex traders have had some time to reflect on the implications of the news or report on the current market.
It’s at this point when the market decides if the news release went along with or against the existing expectation and if it reacted accordingly.
Consensus Market Expectations
A consensus expectation, or just consensus, is the relative agreement on upcoming economic or news forecasts.
Economic forecasts are made by various leading economists from banks, financial institutions, and other securities-related entities.
Your favorite news personality gets into the mix by surveying her in-house economist and collection of financial sound “players” in the market.
All the forecasts get pooled together and averaged out, and it’s these averages that appear on charts and calendars designating the level of expectation for that report or event.
The consensus becomes ground zero; the incoming, or actual data is compared against this baseline number.
👉Incoming data normally gets identified in the following manner:
✅“As expected” – the reported data was close to or at the consensus forecast.
✅“Better-than-expected”– the reported data was better than the consensus forecast.
✅“Worse-than-expected” – the reported data was worse than the consensus forecast. Whether or not incoming data meets consensus is an important evaluation for determining price action. Just as important is the determination of how much better or worse the actual data is to the consensus forecast. Larger degrees of inaccuracy increase the chance and extent to which the price may change once the report is out.
Market sentiment can improve or get worse just before a release, so be aware that price can react with or against the trend.
There is always the possibility that a data report totally misses expectations, so don’t bet the farm away on the expectations of others. When the miss occurs, you’ll be sure to see price movement occur.
Let’s take the monthly Non-Farm Payroll employment numbers (NFP) as an example.
As stated, this report comes out monthly, usually included with it are revisions of the previous month’s numbers.
We’ll assume that the U.S. economy is in a slump and January’s NFP figure decreases by 50,000, which is the number of jobs lost. It’s now February, and NFP is expected to decrease by another 35,000.
But the incoming NFP actually decreases by only 12,000, which is totally unexpected.
Also, January’s revised data, which appears in the February report, was revised upwards to show only a 20,000 decrease.
As a trader, you have to be aware of situations like this when data is revised.
Not having known that January data was revised, you might have a negative reaction to an additional 12,000 jobs lost in February.
That’s still two months of decreases in employment, which ain’t good.
☝️However, taking into account the upwardly revised NFP figure for January and the better than expected February NFP reading, the market might see the start of a turning point.
The state of employment now looks totally different when you look at incoming data AND last month’s revised data.
Be sure not only to determine if revised data exists but also note the scale of the revision. Bigger revisions carry more weight when analyzing the current data releases.
Revisions can help to affirm a possibly trend change or no change at all, so be aware of what’s been released.
A cross currency refers to a currency pair or transaction that does not involve the U.S. dollar. ...
A cross currency pair is one that consists of a pair of currencies traded in forex that does not include the U.S. dollar. Common cross currency pairs involve the euro and the Japanese yen
Over 80% of the transactions in the forex market involve the U.S. dollar.
This is because the U.S. dollar is the reserve currency in the world.Most agricultural and commodities such as oil are priced in U.S. dollars.
If a country needs to purchase oil or other agricultural goods, it would first have to change its currency into U.S. dollars before being able to buy the goods.
This is why many countries keep a reserve of U.S. dollars on hand. They can make purchases much faster with Greenbacks already in their pocket.
Countries such as China, Japan, and Australia are examples of heavy importers of oil, and as a result, they keep huge reserves of U.S. dollars in their central banks.
In fact, China has over 3 trillion U.S. dollars in its reserve stockpile!
Currency Crosses Provide More Trading Opportunities
Instead of just looking at the seven “major” dollar-based pairs, currency crosses provide more currency pairs for you to find profitable opportunities!
By trading currency crosses, you give yourself more options for trading opportunities because these currencies are not bound to the U.S. dollar, thus possibly having different price movement behaviors.
So while the majority of the markets will only trade on anti-U.S. dollar or pro-U.S. dollar sentiments, you can find new opportunities in currency crosses.
For example, all the dollar-based pairs might be trading sideways or in some uglier fashion where it would be smart to just SIT on the sidelines and WAIT for better trade setups
Since a majority of the forex market will deal with the U.S. dollar, you can imagine that many of the news reports will cause U.S. dollar-based currency pairs to spike.
The US has the largest economy in the world, and as a result, speculators react strongly to U.S. news reports, even if it doesn’t cause a huge fundamental shift in the long run.
What this means for your charts is that you will see several “spikes” even if there is a trend emerging. This can make it harder to spot trend or range indications.
Trade Interest Rate Differentials
By selling currencies whose country has a lower interest rate against currencies whose country has a higher interest rate, you can profit from the interest rate differential (known as a carry trade) as well as price appreciation.
News that affects the euro or Swiss franc will be felt more in EUR crosses than EUR/USD or USD/CHF.
U.K. news will greatly affect EUR/GBP.
Oddly enough, U.S. news plays a part in the movement of the EUR crosses. U.S. news makes strong moves in GBP/USD and USD/CHF.
This not only affects the price of the GBP and CHF against the USD, but it could also affect the GBP and CHF against the EUR.
A big move higher in the USD will tend to see a higher EUR/CHF and EUR/GBP and the same goes for the opposite direction.
Canada is the second-largest owner of oil reserves and has benefited from the rise of oil prices.
On the other hand, Japan is heavily reliant on the importing of oil. In fact, over 99% of Japan’s crude oil is imported as it has almost no native oil reserves.
These two factors have caused an 87% positive correlation between the price of oil and CAD/JPY.
Currency Crosses to Trade the Majors
Currency crosses can provide clues about the relative strength of each major currency pair.
Globalization, technological advances, and the internet have all contributed to the ease of investing your money virtually anywhere in the world, regardless of where you call home. You’re only a few clicks of the mouse away (or a phone call for you folks living in the Jurassic era of the 2000s) from investing in the New York or London Stock exchange, trading the Nikkei or Hang Seng index, or from opening a forex account to trade U.S. dollars, euros, yen, and even exotic currencies. Capital flows measure the amount of money flowing into and out of a country or economy because of capital investment purchasing and selling.
✅With more investment coming into a country, demand increases for that country’s currency as foreign investors have to sell their currency in order to buy the local currency.
This demand causes the currency to increase in value.
Simple supply and demand.
And you guessed it, if supply is high for a currency (or demand is weak), the currency tends to lose value.
When foreign investments make an about-face, and domestic investors also want to switch teams and leave, and then you have an abundance of the local currency as everybody is selling and buying the currency of whatever foreign country or economy they’re investing in.
Foreign capital loves nothing more than a country with high-interest rates and strong economic growth. If a country also has a growing domestic financial market, even better!
A booming stock market, high-interest rates… What’s not to love?! Foreign investment comes streaming in.
And again, as demand for the local currency increases so does its value.
Trade Flows and Trade Balance
Fundamental Factors That Affect Currency Values
International trade can be broadly distinguished between trade in goods (merchandise) and services. The bulk of international trade concerns physical goods, while services account for a much lower share.
World trade in goods has increased dramatically over the last decade, rising from about $10 trillion in 2005 to more than $18.89 trillion in 2019.
We’re living in a global marketplace. Countries sell their own goods to countries that want them (exporting), while at the same time buying goods they want from other countries (importing).
Trade balance (or balance of trade or net exports) measures the ratio of exports to imports for a given economy.
It demonstrates the demand for that country’s goods and services, and ultimately it’s currency as well.
If exports are higher than imports, a trade surplus exists and the trade balance is positive.
If imports are higher than exports, a trade deficit exists, and the trade balance is negative.
So:
Exports > Imports = Trade Surplus = Positive (+) Trade Balance
Imports > Exports = Trade Deficit = Negative (-) Trade Balance
Trade deficits have the prospect of pushing a currency price down compared to other currencies.
Net exporters, countries that export more than they import, see their currency being bought more by countries interested in buying the exported goods.
Trade surpluses tend to experience currency appreciation.
It demonstrates the demand for that country’s goods and services, and ultimately it’s currency as well.
If exports are higher than imports, a trade surplus exists and the trade balance is positive.
If imports are higher than exports, a trade deficit exists, and the trade balance is negative.
So:
Exports > Imports = Trade Surplus = Positive (+) Trade Balance
Imports > Exports = Trade Deficit = Negative (-) Trade Balance
Trade deficits have the prospect of pushing a currency price down compared to other currencies.
Net exporters, countries that export more than they import, see their currency being bought more by countries interested in buying the exported goods.
Trade surpluses tend to experience currency appreciation.
It is in more demand, helping their currency to gain value.
It’s all due to the DEMAND for the currency.
That’s because when exporters convert the foreign currencies they earn abroad into their domestic currency, this tends to put upward pressure on the domestic currency.
Currencies in higher demand tend to be valued higher than those in less demand.
The Government: Present and Future
After the Great Financial Crisis (GFC) caused the Great Recession during the late 2000s, all eyes were glaringly watching their respective country’s governments, wondering about the financial difficulties being faced, and hoping for some sort of fiscal responsibility that would end the woes felt in our wallets. A decade later, we now face a similar situation as the world tries to navigate a global health crisis and economic collapse caused by the coronavirus (COVID-19) pandemic. Instability in the current government or changes to the current administration can have a direct bearing on that country’s economy and even neighboring nations. And any impact on an economy will most likely affect exchange rates.
It’s all due to the DEMAND for the currency.
That’s because when exporters convert the foreign currencies they earn abroad into their domestic currency, this tends to put upward pressure on the domestic currency.
Currencies in higher demand tend to be valued higher than those in less demand.
The Government: Present and Future
After the Great Financial Crisis (GFC) caused the Great Recession during the late 2000s, all eyes were glaringly watching their respective country’s governments, wondering about the financial difficulties being faced, and hoping for some sort of fiscal responsibility that would end the woes felt in our wallets. A decade later, we now face a similar situation as the world tries to navigate a global health crisis and economic collapse caused by the coronavirus (COVID-19) pandemic. Instability in the current government or changes to the current administration can have a direct bearing on that country’s economy and even neighboring nations. And any impact on an economy will most likely affect exchange rates.
Forex News and Market Data
Market news and data are available through a multitude of sources.
The internet is the obvious winner in our book, as it provides a wealth of options, at the speed of light, directly to your screen, with access from almost anywhere in the world. But don’t forget about print media and the good old tube sitting in your living room or kitchen. Individual forex traders will be amazed at the sheer number of currency-specific websites, services, and TV programming available to them. Most of them are free of charge, while you may have to pay for some of the others. Let’s go over our favorites to help you get started.
☝️Traditional Financial News Sources
While there are tons of financial news resources out there, we advise you to stick with the big names. These guys provide around-the-clock coverage of the markets, with daily updates on the big news that you need to be aware of, such as central bank announcements, economic report releases, and analysis, etc. Many of these big players also have institutional contacts that provide explanations about the current events of the day to the viewing public.
✅Real time feeds
If you’re looking for more immediate access to the movements in the currency market, don’t forget about that 80-inch flat-screen TV in your bathroom!
Financial TV networks exist 24 hours a day, seven days a week to provide you up-to-the-minute action on all of the world’s financial markets.
In the U.S., the top dogs are (in random order), Bloomberg TV, Fox Business, CNBC, MSNBC, and even CNN. You could even throw a little BBC in there.
Another option for real-time data comes from your forex trading platform.Check your broker for the availability of such features, not all brokers’ features are created equally.
Economic calendar
Wouldn’t it be great if you could look at the current month and know exactly when the Fed is making an interest rate announcement, what rate is forecasted, what rate actually occurs, and what type of impact this change has on the currency market? It’s all possible with an economic calendar.
The good ones let you look at different months and years, let you sort by currency, and let you assign your local time zone. 3:00 pm where you’re sitting isn’t necessarily 3:00 pm where we’re sitting, so make use of the time zone feature so that you’re ready for the next calendar event!
Yes, economic events and data reports take place more frequently than most people can keep up with. This data has the potential to move markets in the short term and accelerate the movement of currency pairs you might be watching.
Market Information Tips
Keep in mind the timeliness of the reports you read. A lot of this stuff has already occurred and the market has already adjusted prices to take the report into account.
Yes, economic events and data reports take place more frequently than most people can keep up with. This data has the potential to move markets in the short term and accelerate the movement of currency pairs you might be watching.
Market Information Tips
Keep in mind the timeliness of the reports you read. A lot of this stuff has already occurred and the market has already adjusted prices to take the report into account.
If the market has already made its move, you might have to adjust your thinking and current strategy. Keep tabs on just how old this news is or you’ll find yourself “yesterday’s news.”
You also have to be able to determine whether the forex news you’re dealing with is fact or fiction, rumor, or opinion.Economic data rumors do exist, and they can occur minutes to several hours before a scheduled release of data.
The rumors help to produce some short-term trader action, and they can sometimes also have a lasting effect on market sentiment.
Institutional traders are also often rumored to be behind large moves, but it’s hard to know the truth with a decentralized market like spot forex. There’s never a simple way of verifying the truth.
Market Expectations of News and Their Impact
You can draw on the fact that there’s usually an initial response, which is usually short-lived, but full of action.
Later on, comes the second reaction, where forex traders have had some time to reflect on the implications of the news or report on the current market.
It’s at this point when the market decides if the news release went along with or against the existing expectation and if it reacted accordingly.
Consensus Market Expectations
A consensus expectation, or just consensus, is the relative agreement on upcoming economic or news forecasts.
Economic forecasts are made by various leading economists from banks, financial institutions, and other securities-related entities.
Your favorite news personality gets into the mix by surveying her in-house economist and collection of financial sound “players” in the market.
All the forecasts get pooled together and averaged out, and it’s these averages that appear on charts and calendars designating the level of expectation for that report or event.
The consensus becomes ground zero; the incoming, or actual data is compared against this baseline number.
👉Incoming data normally gets identified in the following manner:
✅“As expected” – the reported data was close to or at the consensus forecast.
✅“Better-than-expected”– the reported data was better than the consensus forecast.
✅“Worse-than-expected” – the reported data was worse than the consensus forecast. Whether or not incoming data meets consensus is an important evaluation for determining price action. Just as important is the determination of how much better or worse the actual data is to the consensus forecast. Larger degrees of inaccuracy increase the chance and extent to which the price may change once the report is out.
Market sentiment can improve or get worse just before a release, so be aware that price can react with or against the trend.
There is always the possibility that a data report totally misses expectations, so don’t bet the farm away on the expectations of others. When the miss occurs, you’ll be sure to see price movement occur.
Let’s take the monthly Non-Farm Payroll employment numbers (NFP) as an example.
As stated, this report comes out monthly, usually included with it are revisions of the previous month’s numbers.
We’ll assume that the U.S. economy is in a slump and January’s NFP figure decreases by 50,000, which is the number of jobs lost. It’s now February, and NFP is expected to decrease by another 35,000.
But the incoming NFP actually decreases by only 12,000, which is totally unexpected.
Also, January’s revised data, which appears in the February report, was revised upwards to show only a 20,000 decrease.
As a trader, you have to be aware of situations like this when data is revised.
Not having known that January data was revised, you might have a negative reaction to an additional 12,000 jobs lost in February.
That’s still two months of decreases in employment, which ain’t good.
☝️However, taking into account the upwardly revised NFP figure for January and the better than expected February NFP reading, the market might see the start of a turning point.
The state of employment now looks totally different when you look at incoming data AND last month’s revised data.
Be sure not only to determine if revised data exists but also note the scale of the revision. Bigger revisions carry more weight when analyzing the current data releases.
Revisions can help to affirm a possibly trend change or no change at all, so be aware of what’s been released.
A cross currency refers to a currency pair or transaction that does not involve the U.S. dollar. ...
A cross currency pair is one that consists of a pair of currencies traded in forex that does not include the U.S. dollar. Common cross currency pairs involve the euro and the Japanese yen
Over 80% of the transactions in the forex market involve the U.S. dollar.
This is because the U.S. dollar is the reserve currency in the world.Most agricultural and commodities such as oil are priced in U.S. dollars.
If a country needs to purchase oil or other agricultural goods, it would first have to change its currency into U.S. dollars before being able to buy the goods.
This is why many countries keep a reserve of U.S. dollars on hand. They can make purchases much faster with Greenbacks already in their pocket.
Countries such as China, Japan, and Australia are examples of heavy importers of oil, and as a result, they keep huge reserves of U.S. dollars in their central banks.
In fact, China has over 3 trillion U.S. dollars in its reserve stockpile!
Currency Crosses Provide More Trading Opportunities
Instead of just looking at the seven “major” dollar-based pairs, currency crosses provide more currency pairs for you to find profitable opportunities!
By trading currency crosses, you give yourself more options for trading opportunities because these currencies are not bound to the U.S. dollar, thus possibly having different price movement behaviors.
So while the majority of the markets will only trade on anti-U.S. dollar or pro-U.S. dollar sentiments, you can find new opportunities in currency crosses.
For example, all the dollar-based pairs might be trading sideways or in some uglier fashion where it would be smart to just SIT on the sidelines and WAIT for better trade setups
Since a majority of the forex market will deal with the U.S. dollar, you can imagine that many of the news reports will cause U.S. dollar-based currency pairs to spike.
The US has the largest economy in the world, and as a result, speculators react strongly to U.S. news reports, even if it doesn’t cause a huge fundamental shift in the long run.
What this means for your charts is that you will see several “spikes” even if there is a trend emerging. This can make it harder to spot trend or range indications.
Trade Interest Rate Differentials
By selling currencies whose country has a lower interest rate against currencies whose country has a higher interest rate, you can profit from the interest rate differential (known as a carry trade) as well as price appreciation.
Currency crosses offer many pairs with high interest rate differentials that are prime for these types of trades.Currency crosses offer many pairs with high interest rate differentials that are prime for these types of trades.For example, take a look at the nice uptrend on AUD/JPY. If you had a long position on this pair, you would’ve made a hefty profit.
On top of that, the interest rate differential between AUD and JPY was huge.
From 2002 to 2007, the Reserve Bank of Australia had raised rates to 6.25% while the BOJ kept their rates at 0%.
That means you made profits off your long position AND the interest rate differential on that trade!
Trade Fundamentals With Currency Crosses
On top of that, the interest rate differential between AUD and JPY was huge.
From 2002 to 2007, the Reserve Bank of Australia had raised rates to 6.25% while the BOJ kept their rates at 0%.
That means you made profits off your long position AND the interest rate differential on that trade!
Trade Fundamentals With Currency Crosses
In the chart above, notice the relative strength of AUD/JPY vs. AUD/USD.
You’re not limited to just these currency pairs, you could’ve compared AUD against like EUR, GBP, and CAD.
From there, you can look for the weakest currency to trade against.
It’s your job as a forex trader to take advantage of certain opportunities so that you can put some silver dollars into your piggy bank.
Because of currency crosses, you now have the opportunity to match the currency of the best-performing economy against that of the weakest economy without having to deal with the U.S. dollar.
The most popular EUR crosses are EUR/JPY, EUR/GBP, and EUR/CHF.
You’re not limited to just these currency pairs, you could’ve compared AUD against like EUR, GBP, and CAD.
From there, you can look for the weakest currency to trade against.
It’s your job as a forex trader to take advantage of certain opportunities so that you can put some silver dollars into your piggy bank.
Because of currency crosses, you now have the opportunity to match the currency of the best-performing economy against that of the weakest economy without having to deal with the U.S. dollar.
The most popular EUR crosses are EUR/JPY, EUR/GBP, and EUR/CHF.
News that affects the euro or Swiss franc will be felt more in EUR crosses than EUR/USD or USD/CHF.
U.K. news will greatly affect EUR/GBP.
Oddly enough, U.S. news plays a part in the movement of the EUR crosses. U.S. news makes strong moves in GBP/USD and USD/CHF.
This not only affects the price of the GBP and CHF against the USD, but it could also affect the GBP and CHF against the EUR.
A big move higher in the USD will tend to see a higher EUR/CHF and EUR/GBP and the same goes for the opposite direction.
Trading the Yen Crosses
The JPY is one of the more popular cross currencies and it is basically traded against all of the other major currencies.
EUR/JPY has the highest volume of the JPY crosses according to the latest Triennial Central Bank Survey from the Bank for International Settlements.
GBP/JPY, AUD/JPY, and NZD/JPY are attractive carry trade currencies because they offer the highest interest rate differentials against the JPY.
When trading JPY currency cross pairs, you should always keep an eye out on the USD/JPY.
When key levels are broken or resisted on this pair, it tends to spill over into the JPY cross pairs.
For example, if USD/JPY breaks out above a key resistance area, it means that traders are selling off their JPY.
This could prompt the selling of the JPY against other currencies. Therefore you could expect to see EUR/JPY, GBP/JPY, and other JPY crosses to rise as well.
The CAD/JPY
Over recent years, this currency cross has become very popular, becoming highly correlated with the price of oil.
The JPY is one of the more popular cross currencies and it is basically traded against all of the other major currencies.
EUR/JPY has the highest volume of the JPY crosses according to the latest Triennial Central Bank Survey from the Bank for International Settlements.
GBP/JPY, AUD/JPY, and NZD/JPY are attractive carry trade currencies because they offer the highest interest rate differentials against the JPY.
When trading JPY currency cross pairs, you should always keep an eye out on the USD/JPY.
When key levels are broken or resisted on this pair, it tends to spill over into the JPY cross pairs.
For example, if USD/JPY breaks out above a key resistance area, it means that traders are selling off their JPY.
This could prompt the selling of the JPY against other currencies. Therefore you could expect to see EUR/JPY, GBP/JPY, and other JPY crosses to rise as well.
The CAD/JPY
Over recent years, this currency cross has become very popular, becoming highly correlated with the price of oil.
Canada is the second-largest owner of oil reserves and has benefited from the rise of oil prices.
On the other hand, Japan is heavily reliant on the importing of oil. In fact, over 99% of Japan’s crude oil is imported as it has almost no native oil reserves.
These two factors have caused an 87% positive correlation between the price of oil and CAD/JPY.
Currency Crosses to Trade the Majors
Currency crosses can provide clues about the relative strength of each major currency pair.
Example
If EUR/GBP is trending downward, this indicates that the pound is relatively stronger than the euro at the moment.
The better choice would be GBP/USD instead of EUR/USD due to the pound’s relative strength against the euro.
Since the euro is weaker, relative to the pound, if it proves to strengthen against the U.S. dollar, it is likely to strengthen LESS than the pound.
If the U.S. dollar weakens across the board, GBP/USD you would make more pips since it would rally higher than EUR/USD.
So GBP/USD is the better trade.
✅Know Which Currency Cross to Use
Let’s say you’re bearish on the U.S. dollar. How will you trade?
👉Can’t decide whether to buy EUR/USD or sell USD/CHF? Look at EUR/CHF.
👉Can’t decide whether to buy USD/CHF or USD/JPY? Look at CHF/JPY.
👉Can’t decide whether to buy EUR/USD or sell USD/JPY? Look at EUR/JPY.
👉Can’t decide whether to buy GBP/USD or sell USD/CHF? Look at GBP/CHF.
👉Can’t decide whether to buy GBP/USD or sell USD/JPY? Look at GBP/JPY.
So always remember, looking at currency cross pairs could give you an idea of the RELATIVE strength of a particular currency.
✅When trading obscure currency crosses, watch out for wild price swings and wider spreads.
Even if you wanna stick to the majors, you can make use of currency crosses to help you decide between which pairs to trade as crosses can signal which currency is stronger.
Don’t forget that moves in currency cross pairs can have an effect on the majors.
👉 Please be conscientious of the pip value of the cross you are trading. Some crosses will have a higher or lower pip value than the majors. This information is good to know for your risk analysis.
So, on the days you may not see any opportunities in the major pairs, or if you want to avoid the volatility of a US news event, check out some the currency crosses. You may never know what you may find!
If EUR/GBP is trending downward, this indicates that the pound is relatively stronger than the euro at the moment.
The better choice would be GBP/USD instead of EUR/USD due to the pound’s relative strength against the euro.
Since the euro is weaker, relative to the pound, if it proves to strengthen against the U.S. dollar, it is likely to strengthen LESS than the pound.
If the U.S. dollar weakens across the board, GBP/USD you would make more pips since it would rally higher than EUR/USD.
So GBP/USD is the better trade.
✅Know Which Currency Cross to Use
Let’s say you’re bearish on the U.S. dollar. How will you trade?
👉Can’t decide whether to buy EUR/USD or sell USD/CHF? Look at EUR/CHF.
👉Can’t decide whether to buy USD/CHF or USD/JPY? Look at CHF/JPY.
👉Can’t decide whether to buy EUR/USD or sell USD/JPY? Look at EUR/JPY.
👉Can’t decide whether to buy GBP/USD or sell USD/CHF? Look at GBP/CHF.
👉Can’t decide whether to buy GBP/USD or sell USD/JPY? Look at GBP/JPY.
So always remember, looking at currency cross pairs could give you an idea of the RELATIVE strength of a particular currency.
✅When trading obscure currency crosses, watch out for wild price swings and wider spreads.
Even if you wanna stick to the majors, you can make use of currency crosses to help you decide between which pairs to trade as crosses can signal which currency is stronger.
Don’t forget that moves in currency cross pairs can have an effect on the majors.
👉 Please be conscientious of the pip value of the cross you are trading. Some crosses will have a higher or lower pip value than the majors. This information is good to know for your risk analysis.
So, on the days you may not see any opportunities in the major pairs, or if you want to avoid the volatility of a US news event, check out some the currency crosses. You may never know what you may find!
Thanks for completing Advance trading level 2
@Michael Malata🙏
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