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The Hidden Information in Charts During Economic News Releases That Gives You a Profitable Edge in Forex

Guest post by Kris Matthews (http://tradeforexfundamentally.com)

Let’s face it: Forex is a highly competitive game that takes more than the simple “buy when one indicator crosses the other” systems sold for $29.97 on the internet. Just look at the spreads- the fact that the cost of making a trade on the Euro can be as low as 0.0001 tells you right off that so many players and so much money comprise this market that any small newbie trader that enters is likely to get eaten alive unless he really knows how to really play.

If you want to achieve forex profits you need to gain an “edge” in this market. An edge is defined as an indication of a higher probability of one thing occurring over another. In trading this means either spotting a reoccurring pattern in price action or knowing information related to traders’ positioning in the market. In this article I want to focus on the latter. Think of it this way—if you were playing poker at the MGM in Vegas and somehow knew what the cards in the hands of the other players were, would that give you an advantage? Of course it would!

How to spy on the big dogs without cheating

Certainly, if you were discovered at the MGM using such a strategy you would probably find yourself face-planted into the red carpet entrance after some big guy threw you out. Fortunately, in the forex market, there’s a way for you to get a pretty good idea of the sentiment of the “big dogs” (the major banks and hedge funds who control the money flow in the forex market) without cheating or doing anything unethical. The secret is looking at price action during economic news releases.

Economic news releases occur almost every day and the high impact releases such as interest rate decisions, inflation, GDP, employment, retail sales, and manufacturing PMI cause the market to move considerably when the number comes out much better/worse than forecast. The reason is as follows: the big dogs put money into currencies whose countries’ economies are expected to do well and take money out of those whose countries’ economies are expected to do poorly. They decide which trades to make based on economists’ forecasts of high impact economic indicators such as those listed above. If these releases come out better than forecasted, the big dogs and other market players will make adjustments to their positions by buying more of the currency, causing price to go up.

Now that’s for the normal case. When price action does something strange, like decreasing on better than expected news after a long uptrend, that’s an indication that there is not enough demand at higher prices and sentiment is taking a turn for the downside. Do you see how that’s like the big market players showing their hands to you?

A step by step strategy for forex profits using price action and news

  • Look for a nice uptrend or downtrend to develop
  • Watch an economic calendar such as Forexfactory.com to see if any high impact news releases are coming out (usually in red).
  • If the news comes out better than expected in an uptrend but price fails to move significantly upward following the release, or vice versa for a downtrend, sentiment is likely changing direction.
  • If you’ve observed a turning point, look for a confirmation such as rejection of the upward trend at a key resistance level or a very bearish candle signifying the beginning of a new negative trend.
  • Keep losses small and hold on for as long as possible, as the moves following these turning points are often one-directional and last for a few days to weeks.

A Very Brief History of the 2008 Global Credit Crisis And Where We Stand Today

The last two years has been the most intense time of global economic hardship since the Great Depression. When Lehman Brothers and Bear Stearns collapsed in the early fall of 2008, there was a period that lasted just a few days, when the global economic system was literally balancing on the precipice of complete failure. Fortunately, Central Bank leaders around the world joined together in an unprecedented movement of decisive action and slashed short-term interest rates to historically low levels. This swift action by financial and governmental world leaders literally saved the economic system.

Then, just a short 6 months later in March of 2009, the global recession began to bottom out. Equity markets began to rally as key economic data releases began to surprise the upside, economic growth began to take off again throughout developed nations, and the global economy continued to recover and move forward, albeit at a very modest pace, until another disaster struck in November of 2009. In late November it became clear that Greece and several other EuroZone countries were in serious danger of defaulting on large amounts of sovereign debt. This fear of default in Greece caused investors to make a run on the Euro. The Euro dropped ferociously from November of 2009 through June of 2010 as forex scalping traders and investors in general questioned the very existence of the EuroZone. During the worst of the Debt Crisis, there was talk that Germany and/or France may leave the EuroZone, or Greece, Spain, and Portugal may be kicked out. No one knew what was going to happen.

Finally in the late spring of 2010, after months of speculation and political bantering, the European Central Bank and the International Monetary Fund joined together and created a bailout fund for struggling EuroZone countries. This effort reassured market participants that there would be no EuroZone member sovereign default, at least in the short term, and the market began to cover its short Euro positions, and the Euro began a strong rally back up. Currently, the Euro has just finished a massive run against the U.S. Dollar in the months of June and July.

Now, two years later, each developed nation is emerging from the recession at a different velocity, which is making for some very interesting economic and political developments around the globe.

The EuroZone

In order for Greece, Portugal, Italy, Ireland, and Spain to receive bailout funds from the ECB and IMF, they have each been required to institute very strict fiscal austerity measures. In other words, the very loose fiscal budgets that have been in place for years in these countries (which are the very root of the Debt Crisis) have had to be modified significantly. These countries have had to initiate huge government spending cuts, which has set off riots and protests in every country. Minimum wages have been lowered, pensions have been cut, jobs have been slashed, and minimum retirement ages have been raised. These are just a few examples of the many cuts these countries have had to make over the last 2 months.

Many economists are concerned that these austerity measures will eventually weigh heavily on the economic recovery in the EuroZone in coming months. The idea is that if austerity measures are introduced when a country is still in a very weak state of recovery, as all these countries are, then the chance of falling back into economic contraction is very strong. Thus, the outlook in EuroZone is bleak.

United States

The U.S. economy appeared to be recovering quite nicely in early 2010. In fact, the Federal Reserve began closed door talks of when to possibly begin tightening monetary policy. These talks have all vanished in the months of June and July. In June, key economic data of the United States began confirming that the U.S. recovery was hitting a major wall. Currently, in early August it is clear that this slow-down is quite serious. The Federal Reserve has announced it will institute another round of quantitative easing in an attempt to stimulate the U.S. economy. The U.S. Dollar has been feeling the effects of these talks in forex trading, as the Dollar has plummeted in value versus the Euro and Pound in June and July.

The scary thing about the current global economic outlook for 2010 is that no one knows for sure what is going to happen. Two years after the Crisis erupted, experts are still very uncertain concerning the economic future of developed nations. In fact, Chairman Bernanke testified before Congress at the end of July, and in his testimony he declared the outlook for the U.S. economy is “unusually uncertain.” Unfortunately, it doesn’t seem that the history of the 2008 Credit Crisis has been fully written quite yet.

Forex Fundamentals: What are the impacts of global crises?

Forecasting the direction of foreign exchange flows is essentially based on two types of analysis, fundamental and technical. While technical analysis is primarily focused on a study of the past behavior of forex price movements, fundamentals refer to factors that either relate to the fundamental state of the economy or fundamentally alter the outlook of one economy relative to the world economy. A crisis of global proportions can have a dramatic impact on the foreign exchange market, but predicting the direction of these impacts is not as easy an exercise as it might appear at first blush.

The universe of fundamentals may be classified into four categories, economic, financial, political, and crises. Economic factors in the form of public data releases are generally known as far as date and time of their release. Financial factors are tied to the actions of a Central Bank, which more often than not are cloaked in secrecy. Political factors can vary greatly in terms of certainty even if election dates are known in advance. A crisis on the other hand may or may not be an important factor, depending entirely on the predictability of the crisis. When the crisis is global in nature, a wise trader needs to quickly determine what information is important, how to interpret it, and what weights to apply instantly, and then execute effectively to gain the advantage.

In some cases, the global phenomenon of migrant workers and remittance flows back to their home countries, estimated to be in the range of $300 billion annually, must be understood to assess future online forex price directions. Often during national catastrophes, the flow of funds homeward actually increases, thereby offsetting the outward-bound flow of escaping capital. However, the current economic crisis has not followed this trend. Many migrant workers have had to keep funds on hand to survive, thus cutting back on expected outbound remittance flows and impacting currency charts

The last four decades have witnessed a tremendous upswing in the price of a barrel of oil. There have also been four perceived oil induced crises that have had serious impacts on the weighted U.S. Dollar index, with results not nearly as obvious as they seem without further inspection. Each case illustrates the interdependence that a variety of factors can produce on a forex future pricing pattern.

The oil shock of 1973 saw the price for a barrel of oil skyrocket from $4 to $10 in a month’s time. The Dollar, already on a strengthening move, continued to spike up in early bullish behavior, but it soon turned bearish. Over the following six months, it effectively declined six percent. The price pattern was also affected by the actions of the Federal Reserve that was raising interest rates in order to deal with expected inflation. The final result was that the Dollar erased all of its earlier gains.

The oil crisis of 1979 was a repeat performance of 1973, although the increase in oil prices took place over a year’s time. The Dollar once again was initially bullish, but a bearish trend followed brought on again by the Federal Reserve increasing interest rates.

Between June and October of 1990, the price of oil once again spiked over 100% in a short period of time as a result of the Gulf War. If a trader had based his forecast for the movement of the U.S. Dollar on the last two oil crises, he would have been dead wrong. The behavior of the Dollar was more one of persistent weakness than the previous bullish then bearish rollercoaster. The reasons were twofold. First, the price of oil began to retreat over the ensuing six months. Lastly, the Federal Reserve was cutting interest rates, not increasing them. As monetary policy was loosened, the weakness of the Dollar followed in suit as GDP growth stagnated.

That brings us to the fourth and final oil crisis, the oil price increases in 2007 and 2008. The consequent onset of a global recession and a growing, unchecked Federal deficit in the United States produced the same characteristics as in 1990. Once again the Federal Reserve was lowering interest rates to deal with the economic slowdown. Even with growing inflationary pressure, the Dollar continued to weaken.

Over the past few months, we have witnessed a mild up-tick in the strength of the Dollar, perhaps tied more to economic issues in Greece, Spain and Portugal. As this “European” crisis plays itself out, a wise trader would be advised to search for all of the factors that might influence the global forex reaction to these events. A few experts have stated publicly that they expect the Euro to fall to 1.20 Dollars from 1.35. Anticipation and speculation have fueled the markets, but a few hundred pips are well short of the predicted devastating drop. As with previous crises, other fundamental factors are surely at play.

How to Secretly Spy on the Market and Determine What Currencies Money is Flowing to for Maximal Forex Profits

Guest blog by Kris Matthews (http://tradeforexfundamentally.com)

What you see is not what you get

When you pull up a chart of the GBP/USD pair and notice that there has been an uptrend, how do you know whether that’s due to GBP strength or USD weakness? The answer is, you don’t (at least just by looking at the chart). The danger of just looking at a trend on a chart and buying dips or breakouts is that you don’t know if the trend is sustainable. In an uptrend, it could be that the GBP is actually weak, but the Dollar is even weaker so the currency pair trends up, but if the Dollar gains any strength whatsoever, you can kiss your long position goodbye. There is simply not enough information in the chart that you see in front of you.

So what to do? You know the basic rule of making money trading forex is to buy low and sell high, right? Either said than done, but it’s much easier if we take it one step further and buy strengthening currencies and sell weakening currencies, because money flows from weak currencies to strong currencies, and that’s what produces profitable long term trends in forex.

How a currency meter reveals true trends

So how do you buy strong currencies and sell weak ones? By using a currency strength meter. Currency strength meters basically take one individual currency (e.g. USD) and compare its relative performance to all other major currencies (EUR, GBP,CAD,etc.), then they take another individual currency (e.g. EUR) and compare it to all other currencies, and so on, until the performance of each individual currency is recorded. The net result is an indication of which currencies are weak and which are strong in relation to all other currencies.

The chart below shows a currency meter in action (this currency meter is called the “CCFp Cluster Indicator” and is available for free in the MQL4 code database and works with the MetaTrader charting platform). The various colored curves represent the strengths of each of the major currencies with time, and the bold black line represents the zero line. All currencies below that line are considered weak and all above are considered strong. Notice how the red line representing GBP is above the zero line and the USD line in green is below, leading to a Pound rally. It would’ve made sense to buy the GBP because it was strong and to sell the USD because it was weak during this period.

How do you know a trend will continue?

Notice how the AUD/USD (in the chart below) and the GBP/USD (above) are both making new highs before the violet colored line representing a certain time. If you were just looking at a chart, both looked a good buy at the time. However, if you look at the currency meter, the GBP went below the zero line and became a weak currency while the pair was at its highs, and the pair ranged and soon declined. The AUD stayed strongly positive after this period and as you can see would’ve been very profitable for bullish traders who stuck around after watching the currency meter.

An effective strategy for winning consistent pips

If you want to use this tool successfully and spot forex profits do the following:

  1. Spot a weak currency and a strong currency on a higher time frame than what you’re trading. For example, if you normally trade on the 1-hour time frame, look to buy a strong currency and sell a weak currency as viewed on the currency meter on the 4-hour time frame.
  2. Go back to the lower time frame and make an entry in the direction of buying the strong currency and selling the weak currency based on your entry criteria (e.g. breakout or support/resistance level)
  3. Set your limit order for taking profit to be much greater than the stop loss size (1:2 risk/reward at least) and ride the trend caused by the flow of money from the weak currency to the strong one!

As you can see, forex currency meters are useful tools to see beyond what charts are telling you and allow you to ride trends produced by large flows of money.

The Federal Reserve Does Not Control the Market

FREE eBook reveals why the Fed is powerless to change the economic course

By Elliott Wave International

As the world’s leading markets continue to play stomach-hockey with investors via one triple-digit turn after another, the mainstream community takes solace in this core belief: No matter how uncertain things become, the Federal Reserve can at any moment swoop in to set the economy right.

In reality — the Fed has no such power. This is the revelation of Elliott Wave International’s newest complimentary resource from Club EWI: the 35-page eBook titled “Understanding the Fed.” Including excerpts from the selected works of EWI President Robert Prechter — including his 2002 book “Conquer the Crash” and several past “Elliott Wave Theorist” publications — this riveting report exposes once and for all the most dangerous myths about the Federal Reserve.

Chapter 3 (of the 8-chapter anthology) attends to the “Potent Directors Fallacy” — i.e., the false notion that the central bank is in control of the U.S.’s money, market, and economy — and offers this “Conquer the Crash” insight:

“For recent examples of the failure of the idea of efficacious economic directors, just look around. Since Japan’s boom ended, its regulators have been using every presumed macroeconomic ‘tool’ to get the Land of the Sinking Sun rising again, as yet to no avail. The World Bank, the IMF, local central banks, and government officials were ‘wisely managing’ South East Asia’s boom until it collapsed spectacularly in 1997. In America, the Federal Reserve has lowered its discount rate from 6% to 1.25%, an unprecedented amount in such a short time… What will it do if the economy resumes its contraction; lower rates to zero?

Note: The underlined sentence above was written in 2002. Today, that forecast has come to fruition after the Fed’s rate-slashing campaign since September 2008 has brought rates to the zero level.

Chapter 3 then goes on to explain WHY the Fed’s monetary policy failed to lift the hot-air balloon of the economy out of the violent credit and housing downdraft. Here, the eBook writes:

“The Fed’s ultimate goal is to influence public borrowing from banks. During economic contractions, banks become fearful. At such times, low Fed-influenced rates cannot overcome creditors’ disinclination to lend and/or customers’ unwillingness or inability to borrow. Thus, regardless of assertions to the contrary, the Fed’s purported ‘control’ of borrowing, lending, and interest rates ultimately depends upon an accommodating market psychology and cannot be set by decree.”

Once again, flash ahead to today and the disintegration of optimism and shift toward conservation can be seen in the following data from February 2010:

  • Year-over-year bank credit was (negative) – 6.8% vs. 10% in 2007
  • Loan availability to small businesses plunged to the lowest level since interest rate crisis of 1980, thus drying up a major means of debt repayment.
  • The number of banks tightening their lending standards has soared, while consumer credit and tax revenue is plunging.
  • And, residential and commercial mortgages are plunging, as more and more home/business owners are walking away from their leases.

In Bob Prechter’s own words: Once you can assimilate the truths contained in this eBook, “you will have knowledge of the banking system that one person in 10,000 has.”

Do you want to really understand the Fed? Then keep reading this free eBook, “Understanding the Fed”, as soon as you become a free member of Club EWI.

This article was syndicated by Elliott Wave International. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts lead by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Raising The BAR: Bar Patterns & Trading Opportunities

How a 3-in-1 formation in cotton “triggered” the January selloff
April 17, 2010

By Nico Isaac

For Elliott Wave International’s chief commodity analyst Jeffrey Kennedy, the single most important thing for a trader to have is STYLE— and no, we’re not talking business casual versus sporty chic. Trading “style,” as in any of the following: top/bottom picker, strictly technical, cyclical, or pattern watcher.

Jeffrey himself is (and always has been) a “trend” trader, meaning: he uses the Wave Principle as his primary tool, with a few secondary means of select technical studies. Such as: Bar Patterns. And Jeffrey counts one bar pattern in particular as his favorite: the 3-in-1.

Here’s the gist: The 3-in-1 bar pattern occurs when the price range of the fourth bar (named, the “set-up” bar) engulfs the highs and lows of the last three bars. When prices penetrate above the high — or — below the low of the set-up bar, it often signals the resumption of the larger trend. Where this breach occurs is called the “trigger bar.” On this, the following diagram offers a clear illustration:

3-in-1

Now, how about a real world example of the 3-1 formation in the recent history of a major commodity market? Well, that’s where the picture below comes in. It’s a close-up of Cotton from the February 5, 2010 Daily Futures Junctures.

3-in-1 Bar Pattern Foresaw A Fall

As you can see, a classic 3-in-1 bar pattern emerged in Cotton at the very start of the New Year. Within a few day the trigger bar closed below the low of the set-up bar, signaling the market’s return to the downside. Immediately after, cotton prices plunged in a powerful selloff to four-month lows.

February arrived, and with it the end of cotton’s decline. In the same chart you can see how Jeffrey used the Wave Principle to calculate a potential downside target for the market at 66.33. This area marked the point where Wave (5) equaled wave (1), a reliable for impulse patterns. Since then a winning streak in cotton has carried prices to new contract highs.

This example shows the power of a fully-equipped technical analysis “toolbox.” By using the Wave Principle with Bar Patterns, one has a solid, objective chance of anticipating the trend in volatile markets.

And in a 15-page report titled “How To Use Bar Patterns To Spot Trade Set-ups,” Jeffrey Kennedy identifies the top SIX Bar Patterns included in his personal repertoire. They are Double Inside Days, Arrows, Popguns, 3-in-1, Reverse 3-in-1, and Outside-Inside Reversal.

In this comprehensive collection, Jeffrey provides each pattern with a definition, illustrations of its form, lessons on its application and how to incorporate it into Elliott wave analysis, historical examples of its occurrence in major commodity markets, and ultimately — compelling proof of how it identified swift and sizable moves.

Best of all is, you can read the entire, 15-page report today at absolutely no cost. You read that right. The limited “How To Use Bar Patterns To Spot Trade Setups” is available with any free, Club EWI membership.

Nico Isaac writes for Elliott Wave International, a market forecasting and technical analysis firm.

Blaming “Market Manipulators” For Losses is a Huge Obstacle to Success

To win, you must accept the fact that losses are part of the game.

In 1984, Elliott Wave International’s founder and president Robert Prechter won the U.S. Trading Championship, setting a new all-time profit record of 444.4% in a monitored real-money options account in 4 months. In the average 4-month contest, over 75% of contestants, mostly professionals, fail to report profits.

In November 1986, in his monthly Elliott Wave Theorist Prechter published a Special Report titled, “What A Trader Really Needs To Be Successful” and gave 5 important tips to would-be market speculators. You can read them now, free (details below) — but here’s Bob’s fourth point:

4. Accept the Fact that Losses Are Part of the Game.

There are many denials of reality which automatically disqualify millions of people from joining the ranks of successful speculators. For instance, to moan that “pools,” “manipulators,” “insiders,” “they,” “the big boys” or “program trading” (known today as “high-frequency trading” — Ed.) are to blame for one’s losses is a common fault. Anyone who utters such a conviction is doomed before he starts. But my observation, after eleven years “in the business,” is that the biggest obstacle to successful speculation is the failure merely even to recognize and accept the simple fact that losses are part of the game, and that they must be accommodated.

The perfect trading system does not exist. Expecting, or even hoping for, perfection is a guarantee of failure. Speculation is akin to batting in baseball. A player hitting .300 is good. A player hitting .400 is great. But even the great player fails to hit 60% of the time! He even strikes out often. But he still earns six figures a year, because although not perfect, he has approached the best that can be achieved. You don’t have to be perfect to win in the markets, either; you “merely” have to be better than almost everybody else, and that’s hard enough.

Practically speaking, you must include an objective money management system when formulating your trading method in the first place. There are many ways to do it. Some methods use stops. If stops are impractical (such as with options), you may decide to risk only small amounts of total capital at a time. After all is said and done, learning to handle losses will be your greatest triumph.

The last on my list is [the point] I have never heard mentioned before. …

Read the rest of Prechter’s Special Report now, free! All you need is to create a free Club EWI profile. Here’s what else you’ll learn:

  • Why a trading method is a must for your success
  • What part discipline plays in your trading success
  • How to gain trading experience
  • More

Keep reading this free Special Report titled, “What A Trader Really Needs To Be Successful” now — all you need to do is create a free Club EWI profile.

Elliott Wave International (EWI) is the world’s largest market forecasting firm. EWI’s 20-plus analysts provide around-the-clock forecasts of every major market in the world via the internet and proprietary web systems like Reuters and Bloomberg. EWI’s educational services include conferences, workshops, webinars, video tapes, special reports, books and one of the internet’s richest free content programs, Club EWI.