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To the new currency trader, it would appear that the entire world of foreign exchange revolves around the US Dollar. The frequent rate cuts by the Federal Reserve have certainly produced some volatility in the equity and currency markets. However, while the US Dollar does have a large influence on currency markets, as currency traders we also have the option of trading in a large number of currency pairs that don’t involve the US Dollar.
The six major currencies in the FX market are the US Dollar, the Euro, the British Pound, the Swiss Franc, the Australian Dollar and the Canadian Dollar. Those of you who read my article on Carry Trades may remember the Australian Dollar against the Japanese Yen.
In this article, we will look at the example of the Euro against the British Pound (FXEUBP in ProfitSource).
Chart 1 below is a weekly bar chart showing that the Euro has been rallying strongly against the Pound since July 2007.
Chart 1
click chart for more detail
While many students who have completed advanced education courses can start thinking in terms of trading into and out of tops or bottoms in a market, what many of us often overlook is the simple fact that the most money is made trading with the trend.
Our swing charts are telling us that the 1, 2, and 3 day swing chart trends are all up, as is the weekly trend. This being the case, we should be looking for long trades. Picking tops and bottoms in a market is one of the advantages of trading with the techniques of WD Gann, but even Gann said that the most money was made trading with the trend.
Chart 2 below shows us that the Euro has recently broken through the January high against the Pound, and has now come back to sit on top of this old high. Remember that old resistance can become new support.
Chart 2
click chart for more detail
The market has also given us a nice ABC Long entry on the 1 day swing chart, having retraced 50% of the previous range. Chart 3 shows this setup using the Gann Retracement tool. I would encourage Safety in the Market students to visit the website and read the Discussion Forums to learn more about this tool.
Chart 3
click chart for more detail
Trading around exact tops and bottoms is something that requires some education and experience, but it is definitely achievable. Until you have studied a market in depth though, it is best to trade with the trend. That means that you are trading with the trend into a top, and if you are wrong about the top and the market keeps going up, you are still in the trade, and still trading with the trend. If the top comes in, your stop losses will take you out, and you can then start to look for opportunities to trade short based on your swing chart.
Be Prepared!
Mathew Barnes
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