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It seems that just about every day in the currency markets there is an important announcement coming out. Inflation figures, interest rates, non-farm payroll – the list is endless. Every move that happens is attributed by the media to one piece of news or another, and traders all around the globe are glued to their news screens, fingers on the trigger, waiting to act as soon as the economic data is released.
We can’t possibly stay on top of every piece of fundamental news that comes out, especially given the fact that the currency markets are active 24 hours a day, from Monday morning to Saturday morning, Sydney time. Even if we didn’t have to sleep, we would struggle to assess every piece of data that was available to us.
But do we really need to? More often than not, the market will give us some sort of warning that a change in trend is coming. We just have to be alert, so that we can act when the signal is given to us.
Chart 1 below shows the recent price action on the British Pound (BP-SpotV in ProfitSource). Pay attention to the three price bars that have been circled.
Chart 1
click chart for more detail
You can see that on two of these price bars, the market has opened up and started to move in the direction of the trend. However, during the day, it has turned around and gone the other way, starting a new move. This is what we would call an “outside reversal day”, where both the high and the low of the previous day have been taken out. This is just one of many “signals” the market can give us around tops or bottoms. By simply watching the open, the close, and the market action during the day, we can often receive an early warning that the trend has changed, allowing us to either change with it, or at least lock in our profits.
However, this is not a stand alone indicator. You will notice a third outside reversal day circled in the middle of the chart that didn’t produce any results. Signal days work best when they are combined with a time and price setup, especially when looking for yearly tops and bottoms.
Chart 2 below shows a recent setup on the Euro.
Chart 2
click chart for more detail
Let’s assume that we were watching 26 November as a major pressure date, and we were expecting the high of the year to come in. We would watch the market action and price resistance levels leading into this date. The market was strong early in the week, but on Friday 23 November, we saw the market open, run up and hit an important price resistance level, then turn around and come back down, closing below the close of the previous day. This is the signal that tells us the turn may have come.
When you are watching a time pressure date and a cluster of price pressure points all come together, the final piece in the puzzle is generally a signal from the market that the tide has turned. There are many different types of signal tops and bottoms, and these are discussed in more depth at the Safety in the Market Interactive Trading Workshops. However I would encourage all students to review the markets they study, and revisit old tops and bottoms, to see what the price action was telling them at the time.
Be Prepared!
Mathew Barnes
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