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Having taught traders for five years, I would say that one of the most often overlooked areas of market analysis is ‘The Big Picture’. Newer traders focus too much on the small picture setup (for example, an ABC Long trade for Safety in the Market students) but place little or sometimes no emphasis on the big picture structure of the market they are trading.
On 1 February, 2012 a strong rally commenced in the US Dollar/Japanese Yen currency pair (code: FXUSJY in ProfitSource or HUBB Investor software), as illustrated in Chart 1 below: Chart 1
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On 19 March, 2012 there was an ABC Long trade setup on this currency pair, as shown in Chart 2 below. (For those who have not studied swing charting, Safety in the Market’s Smarter Starter Pack is a great place to start.) Chart 2
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As you can see, the trade failed at the 50% milestone and I received a number of comments from students who had taken this trade, only to see it fail.
I was not interested in taking this trade for a number of reasons, all of which were related to the ‘big picture’.
Let’s take a look at the weekly swing chart on this market in Chart 3 below: Chart 3
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At the time of the setup, the current weekly upswing was 817 points, which was slightly over double (200%) the swing from the October low and almost as big as the 838 point range from March, 2011. You have to go back to January, 2009 to find a range that is 900 points or greater, as shown in Chart 4 below: Chart 4
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You can see that while this swing could go a little further, statistically speaking it looks to be closer to the end of its move than the beginning. So how should swing traders assess this information?
Firstly, I would suggest it is safer to leave long trades alone at this point. This weekly swing could go a little bit further but the odds are not in your favour. Secondly, I would wait to see a higher swing bottom on the weekly swing chart to indicate this market has further upside movement in it (which I believe it does). Traders with swing charting software should always consult the weekly swing chart before taking a trade to address the question: “where is this market in the big picture?”
Be Prepared!
Mathew Barnes
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