Risk Upbeat as We Head to the Marquee Event of the Week

Trader thoughts

We look to the main event of the week, with a plethora of top dog central bankers speaking in a fairly tight window at the Jackson Hole Symposium – the title of the conference is “Navigating the Decade Ahead: Implication for Monetary Policy” and at the risk of being dramatic, it promises to be a defining moment in monetary policy setting.

Fed chair Jay Powell takes centre stage when he speaks at 23:10 aest, but while we also hear from BoE Gov Bailey at 23:05aest, and BoC Gov Macklem just after Powell. ECB chief economist Philip Lane rounds out proceedings with his talk at 01:50aest.

One may have felt that risk may have been shunned into Jackson Hole, but quite the opposite can be seen. European equities closed up modestly higher with the DAX leading the charge with a 1% gain. In US trade, tech has smashed it once again and from 22:30aest the buyers stepped in and pushed the index towards 12k. I was looking at reversing the long call, but the selling just never came in and I continue to hold and will do until price can close below the 5-day EMA. The US500 hones in one 3500 and has closed up 1%, yet we’ve seen the VIX gain 1.2 vols to 23.27%, while the NASDAQ VIX (VXN) has pushed 3 vols higher- an equity rally married with higher implied volatility is odd – traders are betting on movement.

Digging into S&P500 sector moves, we see comm services on fire, with tech just behind, notably buoyed by Salesforce and Adobe which have exploded 26% and 9% respectively. Microsoft has worked too, but in the universe of US stocks Pepperstone offer if I scan for names that are above the 10-day MA, 10% above its 50-day MA, and that reside at or near the 50day high – i.e. momentum/strong stocks – I see these names and they are flying. Buy strong, sell weak, as they say.

20200827 Earnings Bloomberg

On the data side, we’ve seen a monster 11.2% increase in durable goods orders in July, smashing expectations and continuing the theme of better data, which I think is just so key to the risk story. Take out transportation and we saw a 2.4% increase, which still beat consensus by 40bp. French consumer confidence was also pretty good, and that added to news that the German govt is extending measures to help business from insolvency, in turn, supporting the German labour market. We’ve also seen the news that Moderna will be presenting its new interim clinical data later today (12:30aest), and again this is helping sentiment.

The USD is down smalls vs the EUR, with EURUSD tracking a 1.1772 to 1.1839 range on the day, yet when EURUSD found a bid from the lows, so too did we see Nasdaq futures rally. This is my tongue in cheek mock-up of the perpetual motion in markets. It all rotates into one circular trade, but does it start with USD weakness?

20200827 Cycle

We’ve seen solid moves in the NZD, with NZDUSD up 1.2% and into the top of the recent channel and through R3, so it tells you it was a punchy move. Can it break out?

20200827 Chart

There are other pairs which get the attention for breakout traders, with USDCAD, GBPUSD, AUDUSD, and AUDJPY also in the mix, with price moving into the top of their respective ranges.

Any worry that Jay Powell will disappoint has not been in the precious metals space and whereas yesterday I asked if there was to be a catalyst it seems the market has found one.

Silver has gained a lazy 3.2% and gold 2% and helped seemingly by a 5bp decline in real yields on the day, where real yield remains the focus as we head to Jackson Hole. We know Powell will be dovish, we expect that he will reveal some of the findings of the long-running policy review and we have a belief that he will detail a tolerance of some sort of inflation overshoot. But how explicit will he be and how much has now been discounted and will we get the full clarity and urgency to meet the market? Given the moves, it feels like the market is confident he will be.

I will update the Telegram channel on FX/gold overnight implied volatility and implied moves as the day rolls on, so keep an eye out there if it helps.

Where Is the Catalyst for Gold?

Trader Thoughts

Looking around the traps today, sentiment continues to be upbeat, although the session has lacked the urgency and FOMO, if you will, that we saw in Monday’s trade.

I guess the news flow has been there, with the market hanging on the tailwinds of vaccine and US-China trade deal headlines. On the data side, the German IFO was marginally better, although the expectations sub-survey was a touch light.

US consumer confidence was well below expectations at 84.8 and printed a new six-year low and even pulled below the levels seen in April – the stock market didn’t react like perhaps it once would have, and if we look at the correlation between CB consumer confidence (white), the Uni of Michigan consumer confidence survey (blue) and the S&P500, this is just another chart you can add to the divergence pile.
2020/08/26 S&P500
(Source: Bloomberg)

Also, on the data docket, we saw US new home sales smash expectations with a 13.9% increase in July, while the Richmond Fed manufacturing easily beat at 18 vs 10 eyed.

In equity land, the S&P500 pushed up another 36bp, closing on the highs of the day, with healthcare and comm services leading the way, with tech not far behind. Energy was the laggard, with a 1.42% loss and that despite crude 1.8% higher for both WTI and Brent.

Where we see XTIUSD finally through the 200-day MA with Hurricane Laura tearing through the Gulf Coast, with more than 84% of output in the Gulf of Mexico temporally shutdown

The NAS100 has led again with a 0.82% gain and I hold longs for now looking to exit on a daily close through the 5-day EMA – a level which has defined the recent trend since the 12 August. That may change, where I may square and reverse, with the timeframe taken into 30 minutes chart, as I think there are risks that suggest a short opportunity in the coming session – it could be good for 150-200 points – one to watch, and react to should price react.

We’ve seen selling in US Treasuries, with yields at the longer end moving higher on a relative basis, causing a steepening of the curve. As mentioned, data was mixed, but the Treasury department got a massive $50b 2yr Treasury auction away without any issues at all and demand was good.

Inflation expectations have kept pace with Treasuries, and therefore real yields have not really moved and this is possibly a reason why gold and silver remain lost and continue to consolidate after the monster run from 1670 in June to the recent high of 2076. As we see on the daily and weekly timeframe, there is solid support into 1910/00, with buyers happy to support for now.

If 1900 goes then we may see a decent flush out of longs, which should offer a buying opportunity for a new run-up past September. If I look at the options market, the skew (‘risk reversals’) between call and put implied volatility is finely balanced and traders see risks to price moves as incredibly symmetrical – gold is in need of a new catalyst and as the headline writers say “Gold’s time to shine” is not now. Again, a good flush out would perhaps be that catalyst for a longer-term bull run.
2020/08/26 Bloomberg
Top pane – Gold 1-week – 1-year implied volatility
Middle – 1-week risk reversals (call minus put volatility)
Lower – 1-month risks reversal

On the FX side, gold didn’t really follow the USD through Asia, then suddenly caught on through US trade and as the USD moved lower, then gold caught a bid from 1914.
FX Percentage change 2020/08/26
We’re left with the USD down 32bp on the day but scanning across the respective pairs and the USD was lower vs all major currencies except USDJPY, which is 37bp higher but finding sellers into 106.58. After two bullish outside days of late, there is clear support for the pair, but the key resistance sits into 107.00, so that is one for the radar, and levels to take the timeframe right in and react accordingly as and when we get there. Cable has been a mover too, despite the recent headlines about poor EUR-UK trade talks…again, a pair consolidating and one the bulls will jump on if this break higher.
USD/JPY 2020/08/26

Staying Long NAS100, but Will Review Shortly

Trader Thoughts

There’s a bit of life in equity indices, notably in EU markets and the US30, with the latter being buoyed specifically by Boeing who have contributed 73 points to the Dow’s 378p rally.

The GER30 being the best EU market with a 2.4% rally in cash trade, with the price here now pushing into the 12 August swing high in our out-of-hours pricing. In US equities, the S&P500 closed up 1%, to new highs, where we’ve seen turnover above the 30-day average for the first time in a while in cash trade, although 1.2m S&P500 futures traded is light.

Breadth was far better today as well, which is something I touched on yesterday, with 82% of stocks higher on the day, led by energy (2.8%), financials (+2.3%) and industrials (1.8%). Healthcare (-0.5%) was the only sector to close lower. My NAS100 (0.6%) long is still working, but I will be strongly considering closing this into the Jackson Hole Symposium.

Its still no surprise that my momentum dashboard is showing some solid trends in equities, yet a messy picture elsewhere. The dashboard has conditional formatting set to detail “bearish” if price is below both the 5-day EMA and 20SMA, “bullish” if above both, and “neutral” if neither is true (i.e. its above one, but below the other).

I also want to see if price is above/below the pivot point. I have used the Excel RTD Smart Trader Tool to pull prices out of MT4 (*might be a good webinar one day), and set up, so why not check it out.

Momentum and Trend

Asia should open with a mixed picture despite these leads, and our calls for the ASX 200 and NKY225 look strong enough, while weakness is likely in HK and China mainland markets. Apologies, I have used bright colours.

Equity Index Opening Calls

The fixed income world is gearing up for a chunky $148b in US Treasury auctions to play out over the next few days, which could impact yields, and subsequently influence yield sensitive parts of the market, like the USD, gold and NAS100. A risk to consider, but at this stage we’re seeing US Treasury yields rising into this supply, with 10s +3bp to 65bp, yet inflation expectations are rising faster (10yr Breakevens are +5bp) and thus real yields have fallen.

It’s surprising then that gold is not having any of it, with price down 0.6%, with the USD up smalls against the basket (USDX). Copper has rallied 0.3%, yet lumber is -2.9% (after rallying for 16 straight days, however), while WTI and Brent crude are up 0.1% and 1.6% respectively. It’s all a tad messy.

Major Currencies Bloomberg Terminal

Moves in FX markets have been quite sanguine, with the ZAR having a solid move, yet that was really the only mover vs the USD. The CAD is the weakest link on the day, and we see USDCAD moving into the middle esculents of the bear channel it has held since late June. GBPUSD has also been offered, with GBPUSD finding sellers into the 5-day EMA and forming a hammer candle – if this kicks lower the 1.3000/1.2980 area looks like key support, where a break sees the pair into 1.2850, although given the volatility, one would assume that won’t happen overnight. AUDUSD has traded a 0.7204 to 0.7153 range, and a look at the daily show the consolidation playing out after the run from March – one for the range traders for now.

20200825 AUD/USD Chart

By way of event risks, as detailed in yesterdays week ahead, we get the German IFO survey at 18:00aest, which is out just after German Q2 GDP and could be worth focusing on for those with GER30 and EUR exposures.

The GDP numbers won’t move the dial as its Q2 data and it’s a revision of data that that has already been announced. There is little to trouble in Asia, but I would be looking at US consumer confidence (due 00:00aest), as this poses small risk to exposures, with the market expecting a small improvement to 93.0 (from 92.6).

Two MA Cross

The Trading Strategy:

Two MA Cross

Trading Strategy Implementation:

Use the cross of the faster moving MA (in this case the 5 MA) over the slower moving MA (55 MA) as an entry. (MA selection and trading time frame, along with Money Management, would go on to create a trading system. We here are simply analyzing the strategy.)

Profits are taken at three times the distance between the entry and the stop. Stops are set at the previous low (if a buy situation) or the previous high (if a sell situation) with room for the spread plus one pip. Of course this method could be used in a variety of markets, so the spread may not have much meaning to you as a reader. For those of you who are Forex traders, the spread is certainly known, and determined by the broker and the pair traded.

This is a simple and often-used approach to trading, and as a strategy, actually carries some serious merit. The attraction to the method is that it is fairly simply to trade, and that the definition is certainly obvious.

Strategy Concerns:

There is a major concern that we have with any approach that requires an indicator to dictate entry. Indicators do lag, and even though some of these indicators do closely follow the price, they still do give reason for a trader to be concerned. (As you can see, we responsibly put the entry bar for notation not right at the cross; rather at the location of price when the cross appeared.)

Also, this trading strategy, like all MA trading strategies, requires traders to work on an active screen with a wiggling indicator. The moving average is a living, breathing thing, and this indicator does like to give false suggestions. To simply look at this indicator in frozen images, as we’ve presented, is somewhat misleading. We intend to follow up this explanation with a video presentation that touches on the weakness of such an approach. Moving averages wiggle, and deciding that one MA has definitively crossed the other is a somewhat subjective process of deliberation.

We did not bother to carry on with further accounts of the crosses for the particular day. As can be plainly seen, the market did not trend strong enough to sustain a reward that was three times the risk. These would plainly have been losses, but having said that, the fact is we’re addressing a New York Friday session, so to get in late and expect the market to trend considerably is probably a little hopeful.

Conclusion:

We Pipsters certainly do not trade with MAs dictating our decisions, yet each of us know at least a couple successful traders who are able to manage similar strategies, and manage them well. The strengths are in the simplicity. Any trade filter that would suggest an overall direction to trade (bull or bear) would be of service to such an approach.

Expectations for such a style of trading would have to be responsible. Some may suggest that the risk:reward ratio we suppose a trader to employ may be a little aggressive. This is possible. That said, this is a system that is based solely on one indicator crossing another, and it seems only reasonable to us that the risk:reward ratio be heavily in favor of the trader in order to offer long term probability for winning. We also feel the system would only be responsibly applied during heavy market hours in order to utilize volatility in and effort to define strong trend.

This is a trend maximizing strategy, and appears as though it would suffer in a choppy market.

Any suggestions for developing this strategy are welcome. Please do offer the community any thoughts you may have through the comments section.

Three MA Cross

The Trading Strategy:

Three MA Cross

Trading Strategy Implementation:

Use three simple MAs at different speeds and trade the crosses of the two faster moving MAs with the slower moving average applied as governance for the trend or direction of trades. This is probably somewhat a wordy explanation, and will certainly be helped with the support of images, which are provided below.

The idea is relatively simple. Three MAs are placed on a chart. In this case we are using the 15M chart. Chart preference is up to the trader. The Pipster belief is that the close to the tick chart, the less reliable the chart is. For the sake of explanation, we will apply the Three MA Cross trading strategy to the 15M chart for the sake of intraday traders.

The three MAs we have selected are the 5, 55, and 200. The reason for this has to do with speed. We need a MA that moves very close to the price action, one that moves at the speed of intraday trend, and finally, a moving average to move along with the overall market trend. The 5 is set to the price action. The 55 is set to intraday trend. And the 200 offers us an overall governor of market trend.

For the sake of simplicity, we will assign a simple color scheme to trio of MAs in order to help with understanding.

  • 5: Green
  • 55: Yellow
  • 200: Red

When the green and yellow are above the red, we are bullish. When the green and yellow are below the red, we are bearish.


As can be plainly seen in the image above, three MAs are placed on the screen, and the colors are defined as stated above.

As we dress another image of the approach (taken at random) we employ the trade strategy to the chart, and historically address the strategy’s success/failure in this market scenario. (For the sake of simplicity, the buy order and it’s relative SL and TP are color coordinated. The same can be said of the sell order.)

The trades are initiated at the point of the 5 crossing above the 55 for buys and the point of the 5 crossing below the 55 for sells. Again, as we employed with the Two MA Cross Strategy, we will set our Take Profit three times the distance of our Stop Loss. Our Stop Loss is set at the most recent trend starting area, as suggested by the image below.

In the particular image chosen at random, we see that the approach failed initially, with the buy unable to reach our intended target. The following trade, a sell, which would have been made around the 1.31490 area definitely would have led to a healthy win and net profit for the strategy.

Strategy Concerns:

As has been stated elsewhere on this Forex trading blog, any trading strategy that requires the use of an indicator for entries is going to have to be considered a risk. The reason for this is that the indicators are all derivative of price, and as a result, lag considerably. As was mentioned in the Two MA Cross, the fact is many false signals can also be given by a “wiggling” MA.  Sometimes it appears to cross, and then turn back. If the trader is to wait for the crossing, the fact is price has more than likely moved well beyond the point of the actual cross.

Conclusion:

We Pipsters do not employ such strategies, and for the most part look to do away with indicators. However, we do not claim, by any means, that they lack all relevance. This Three MA Strategy is preferred to the Two MA Strategy by us because we do like the trend following filter that is the slowest MA. Chances are the levels and time frames may need to be adjusted to properly work with certain markets. Nevertheless, there is definite merit in the approach, and we definitely can say that a sound Money Management system and strict adherence to the trade filters would likely lead to a responsible start for any trader.

Any suggestions for developing this strategy are welcome. Please do offer the community any thoughts you may have through the comments section.

Fibonacci Level Confluence

The Trading Strategy:

Fib Level Confluence

Trading Strategy Implementation:

This strategy is created by the use of confluence with Fibonacci levels. Because there is some definite contention out there in the world of technical analysis regarding which levels have the most merit, we will simply apply the ones that are most commonly referenced. This is the 38.6, 50.0. 61.8, and the 78.6.

The approach is relatively simple. The trader looks to find areas of Fibonacci confluence in order to time market turns. These areas of confluence are highly regarded, and often lead to market turns, which can, of course, produce low risk entries with high reward setups.

Another area of contention for Fib traders is the issue of where the move begins. Is it the start of the body of the candle? Or the spike of the wick? For the sake of simplicity, we will again refer to the most commonly attributed starts and ends of moves, which is simply the highest high or lowest low.

As for time frame, we have gone with a very simple 1 hour chart, and are looking at the very liquid EURUSD. This pair is put to the test with this Fib Confluence approach, and the findings do not surprise us Pipsters.

But let us allow the images to show the merit of the system….

The first image exhibits the two ranges chosen for each of the Fibonacci zones. The first zone marked in red denotes the November 30th to December 6th range, while the second, which is marked in blue, begins with the strong move shown in the market starting December 2nd. Of course there may be confluence veterans reading this who will contend with the choice of levels, etc… but for the sake of argument, we can all agree that the area of confluence between Fib levels is without a doubt the 3205 area.

Now, we’re not trying to sell anyone on the idea, so please do not feel we went back historically to find a chart that presents our case. We Pipsters DO NOT use confluence; nevertheless, if we’re to do this trading blog any justice, we need to give visitors as complete an experience as possible.

The second image shows exactly how the market responded to the area of confluence.


As can be seen, the level turned out to be of value. Although it was not held to the pip, and it certainly did not lead to a continuation in the bull move, the trade certainly, had it been initiated, would have led to pips earned for the trader.

As with all our trading strategies, we like to suggest a risk:reward ratio that is favorable to the trader. Trading is hard to begin with… and to make it harder by taking bigger losses than you take gains generally leads to margin calls.

Strategy Concerns:

The concerns we have are related to the challenge of applying trade management to the strategy. This is simply a look at the strategy itself. Trade management/money management/ and risk management all need to be considered for those of you looking to form trading systems.

Confluence does seem to have inherent value, and should be looked at by any interested Fib traders looking to improve entry precision.

Conclusion:

Trading levels is more in line with what we Pipsters use to trade, and for this reason, we must all agree that we are fans of confluence. This is simply meant to be an introduction to the concept, and further study can be found by some of names who’ve touted the approach for years. Constance Brown has written an interesting book on the matter, and for those looking to investigate further, it’s probably a worthwhile start.

Any suggestions for developing this strategy are welcome. Please do offer the community any thoughts you may have through the comments section.

Breakout — Close of Body

The Trading Strategy:

Breakout — Close of Body

Trading Strategy Implementation:

Because there are a ton of breakout approaches out there that are frequently discussed by traders, we are going to try to define the differences of the ones we study by name. In this case, the Close of Body references a horizontal level that we define via candles as the range the market is looking to break out of.

For starters, we need to define an area that is either choppy or congested. In terms of breakout strategies that we Pipsters have employed over the years, the one constant that we discussed when prepping for this page was this:

All breakout strategies that we have considered are built around the idea that the market has bottled, and that there needs to be a release in order for the market to continue breathing.

The simplest way to define a bottling area is to simply look at the relative range of a period and compare it to a collection of other similar periods (in terms of trading range/time.)

For instance, in the image below, you’ll see that two periods are colored. They both contain the same amount of bars, yet one has a dramatically larger range than the other. The yellow area clearly is an area of congestion, and it is in these areas that breakout plays can be considered.

Now we do not mean to put together a full trading system on one page. A trading system involves money management, trade management, risk analysis, etc. This is simply a look at a commonly discussed trading strategy, and hopefully you Forex traders, or traders of any market, really, can come to your own conclusions regarding the value of the strategy.

As for time frame, for this one we decided on a 1 hour chart.

Need it be a 1 hour chart? Not at all. It’s simply a reference point. I personally traded breakouts on a 5 minute charter for nearly half a year.

So, assuming we, as breakout traders, approached this market and saw that the heavy congestion was occurring, we could very simply address this yellow area and set some definite parameters. For one, the market is either going to retrace or continue. It can’t go on in that sort of congestion range forever.

The question is, can we, with any probability, honestly and consistently take on the market and make money with breakouts?

Well, we need to start our investigation, and the ‘close of body’ breakout is as good a place as any. When we say close of body, we mean that the body, not the wick, is the area of most interest to us. And because of this, we look to define our “breakout area” by these very bodies.

In the 2nd image we’ll share, the yellow area is defined with body defined horizontal levels. Assuming we watched this period and range develop in real time, we definitely would have noticed that one large engulfing bar essentially set the range, and that this range is pretty much defined in that bar.

We then, once we’ve captured the range, define areas to enter the market anytime we have an OPEN outside of this range. The Stop Loss is set at the opposite horizontal line. (If it’s a long play, our SL is placed a spread’s distance plus one behind the red line, and vice versa.)

Our third image shows that we actually gapped through the area and ended up with a full bar breakout. Assuming we needed the proof of history to enter, we can make the claim that a reasonable entry took place at 0.8336.

This puts our SL at 0.8290 or thereabout, and forces us to consider our Take Profit, which, as responsible traders, ought to be at least 2 times the distance of our SL. So our TP 280 pips away. This is a LONG TARGET, and carries obvious risk. We’re really looking at a swing trade here, but the issue of swing or intraday is not so much the issue; it’s the matter of defining the breakout strategy.

Strategy Concerns:

In this case the trade definitely would have led to success. But our concerns about catching breakouts (and not fakeouts) has been readily discussed privately by us Pipsters, and we remain in a state of deliberation.

The main concern we Pipsters voiced when discussing this trading strategy during our daily webinar is that we’ve all worked with breakouts, and although they can be tremendously lucrative, they are HARD to trade — particularly on the emotions. Breakouts come with fakeouts, and there is simply no getting around it.

Plus, the breakout always seems to retrace, so money management needs to consider the fact that this is not going to be precision trading. And this matter is an added stress, in the opinion of us Pipsters.

Also, there is the issue of timing. Timing breakouts can be a challenge. The chart we selected (at random… remember, we’re not advising anything here) did offer a nice win, as can be seen below.

The market went as high as 0.8675, so to be honest, there was plenty of room to place a trail and really see some nice returns on the risk.

Conclusion:

We Pipsters have since moved away from the breakout, but the truth is we all are impressed by those who have mastered the approach. In the coming weeks we will be showcasing other breakout strategies, and hopefully these offer you some suggestions for comparison.

Breakout trading is a challenge, but when done right, the risk:reward ratio can be favorable, and quick wins can be had.

Any suggestions for developing this strategy are welcome. Please do offer the community any thoughts you may have through the comments section below.

Correlation — US Dollar Index Trading

The Trading Strategy:

Correlation — US Dollar Index Trading

Trading Strategy Implementation:

Correlation trading, just like all other sorts of trading approaches, comes in variety, and as a result it’s unfair to bulk the approaches as a single system. In order to be fair, we’re going to address one of the more common Forex correlation approaches — that being an effort to monitor US Dollar strength and weakness relative to two majors; and in doing so, look for overall US Dollar strength or weakness. This is a precarious way to trade because Dollar Indexing, as we like to it, can be problematic.

But before we get to some of the concerns we have regarding this approach, let’s begin by discussing the trading strategy itself, and in doing so outline the strategy as we understand it.

For starters, we need to define the chart we are looking at. Because this is what we consider to be an intraday approach, we’ll take a look at the 15 minute charts. These charts will certainly give us an idea of overall correlation (or lack thereof). The Dollar Index is made up of a variety of currencies and their relation to the US Dollar; but for the sake of study, we’re going to focus on the big two:  GBPUSD and EURUSD.

In order to measure US Dollar strength or weakness, we are going to look for parallel movement within a 15 minute bar.

The underlying belief is that the market moves in two general directions… for and against the US Dollar.  (This is not entirely true. There are plenty of occasions where we’ve seen both the USDJPY and the GBPUSD rise during the same session, as will be witnessed when addressing the chart below. But Dollar Index traders will tell you that the method is one where if there is deviation, trading does not take place. )

The main tenet behind this approach is this:

When the pairs do correlate, and strength or weakness in the US Dollar is apparent; it’s as simple as trading in the direction of momentum, and protecting trades with defensive trade management in order to protect equity against sharp reversals.

The overall idea, as presented above, is seemingly sound.

But let’s push a little further as we investigate….

We’re looking for periods where the market correlation between Dollar strength and weakness will lead to a high probability trade. (Remember, high probability trades are all that we can ever hope to achieve. Wasting time searching for an approach that never fails is to simply disregard the market’s ability to be dynamic. A trader looks for high probability setups, and then uses trade management that will give him or her the best long term outlook for consistent earnings without having to jeopardize the account.)

At first look, correlation seems attractive, and then, after further study, perhaps a waste of time. Which leads? And how is one to know when one is being led or simply diverging from the other? (We placed a vertical line on both charts to mark a particular time. This shows that the charts are perfectly lined up.)

Much like an indicator… any indicator… correlation seems to work at times, and fail at others.

So is that it? Do we throw it out the window?

Strategy Concerns:

It’s very obvious that the market is not exactly a place for “works every time like a charm!” If someone has an all-encompassing solution to trading, please let us know. Of course there are thousands of products (particularly trading robots) that can be purchased for a little under $200 that seem to, at least in their advertising copy, claim that the answer can be found in a program.

Two years ago Neural Networks was the fancy term for the “answer” to the market. Today it’s something else, I’m sure. I’ve long lost interest in even following the banter. I guess I can say that we Pipsters have spent enough time with enough professionals to realize a social science like the market can’t be solved. It can only be responsibly managed. And that’s exactly what successful traders do… we manage probability.

Which brings us back to correlation.

Correlation is an aspect of trading that holds obvious value. The approach we are diagramming doesn’t seemingly hold value at first glance, but for those of us with experience with correlation trading, it seemingly must be used with an understanding that the markets do correlate at times, and fail to correlate at others. This can be particular to the day, the week, even the month.

What it can not be is panacea for a technical trader who is unwilling to bother with any of the fundamentals. If watching markets fluctuate, watching them move in and out of parallel movement, then correlation may be for you. If you would rather focus on a single chart and simply measure the movement of a market on a particular day, and trade that day, then trade that day.

Conclusion:

Correlation trading is particularly advanced, and requires a firm understanding of market parallels. This has plenty to do with market dynamics relative to macro econ stuff. For instance, in the above scenario we outlined, the USDJPY had been moving opposite the EURUSD and GBPUSD, but only on a larger time frame. At the time this chart was saved as an image, the 80 to 84 area for the USDJPY looked to be a larger floor that the market had been choppily trading. To think that it will be as simple as pinning one pair to the other, and trading synchronicity fails to look at the larger factors that go into a market. The USDJPY seemed steady against the 81-84 floor, while EURUSD and GBPUSD seemingly moved in tandom.

We will leave you with another look at that same chart, and show you something that we Pipsters find interesting. Instead of looking to the areas where the markets move in tandem, we like to address the areas where they diverge.

On this particular day, the orange area, during what I believe to be the NY session, showed definite divergence in an otherwise relatively correlating day. The price action on the EURUSD during this stretch certainly seemed to hint at the opportunities presented.

Correlation trading is advanced, and requires the mental flexibility to pick up on market changes.

Please comment if there are other aspects of Dollar Index Correlation that you think we ought to consider adding to this page.

Yen Dives Toward Retest of Our Figure

The USDJPY finally seems to be coming around to the forex figure we were discussing a couple days ago. The fact is, the market moves at its own pace, and sometimes we Pipsters have to just hang around until the market comes ’round and makes sense again. Well, sense has appeared again, and we look to be retesting our figure.

The EURUSD rested through Asia, as it apparently did through New York before that… and London before that. That said, we have seen a pretty slow creep toward the 1.3080 figure we were eyeing sometime late last week. As we Pipsters all know, support, when broken, often becomes resistance.

And to close out this pre London setup talk, Cable has decided to show some life and potentially threaten some of the highs from last week. Trends are easier to trade than the chop. This is a Pipster belief, and we’ll continue to wait to see that we’ve really broken from the choppy chop Cable has been in as of the last few weeks.

Stay safe!

EURUSD RETESTS 3080 — Then Explodes

EURUSD Explodes Through All Kinds of Levels

The EURUSD gave us quite the morning wakeup here in the States, as we woke to find that the 3080 level we were watching held, and held mightily. We currently watch as it trades in the 3306 area.

In a bit of curious news, the USDJPY hasn’t reacted much. We did break out 82.72 level, but have since crept back up. If Euro’s move holds, the USDJPY will grow more and more attractive.

Related Posts:

  1. EURUSD Through 3080… We Wait for Retest
  2. EURUSD Eyes 3080 Level