Forex Market Analysis Studies
FX has become the rave. Whether I am walking along the streets in Tokyo or Amsterdam every single hour I happen to spot someone on the phone reaching out to a platform on a mobile platform and undertaking a trade. On what basis people can think they can get away with it and consistently make money i'm left scratching my head. Day trading is not for the individual that does not prepare with dedication. Yet, I am constantly seeing people on the streets or in trains deliberating in their minds to make a trade. The worse thing is that we cannot stop this. The regulators are so far behind technology that there is nothing illegal about an internet platform visible in the USA but being hosted in say, Cyprus, for example.
Most day traders depend on 5 min charts and tend to move with momentum with the hope of surfing a 100 pip wave. They tend to watch the beginning of the euro or new York cut, or ride the wave of an important data release. however, I am now going to point out tomy readers that trading off 5 minute charts can be fraught with hidden perils.
OK so now the Euro markets right now are opening and let's see whats going on?
Here we go as a very very quick example:
Ok EUR/ USD is now trading at 1.111880 and already drifting down from the Asian session. here is a chart from 30mins ago:
Ok very very quickly i can spot some errors in terms of pure candlestick charting interpretation of price action so i am going to number them as follows on the same chart:
1. The green hammer after 5 red bars down in sequence did not hammer out a bottom which more or less breaks the rule of trend reversal. The downward price action resumed after a key reversal signal if we were talking about pure candlesticks. Market should have gone up but it went down.
2. The red shooting star should have signaled a failure to ignite a bullish sequence of candles and should have resulted in 5 candles downward trajectory of price action. Instead an upward price action occurred as one would have expected from a green shooting star which is bullish in nature. Market should have gone down but it went up instead.
Both trades would have resulted in losses because the candles broke their rules.
Now let's put this morning's price action into context of a day chart on the EUR/USD and take a more detailed perspective of how candlestick charts can work in your favor in the long run.
Looking at the day chart below we can go back the last 30 plus days for price data:
In the last 30 days you will notice 3 major signals out of which only one broke due to the extraordinary event of the Brexit and that is a very very rare occurrence and so 2/3 isn't bad at all for a positive outcome.
1. Represents a bearish engulfing pattern which symbolizes the beginning of a downward trend in prices. A position trader could have taken advantage of a 100 pip move in the next 3 candles down. Market should have gone down and it did indeed go down.
2. The green shooting star was bullish the night of the Brexit but as the vote count turned sour by 2am when Japanese markets opened the panic became a desperate and dramatic short. This is a very rare event and by the time the Euro trader woke up with a long over 1.14 he could have seen himself or herself down 400 pips with the EUR/USD trading at the 1.10. Market should have gone up but it went dramatically down.
BUT
3. What goes down usually retraces along Fibonacci lines; so 5 green candles followed in the week ahead to recover lost ground in the EUR/USD to 1.1100 which would have been anticipated by a position trader. This was then followed by our point #3 which was a bearish engulfing pattern which saw prices drift down again by 4 sucessive candles. Market should have gone down and it did indeed go down.
Conclusion: Day trading using 5 minute candle charts does not truly reflect the full market psychology behind the current price action. Position trading in the forex markets is better suited with candlestick charts as the trader more or less can work with the sum of all fears and expectations and a higher degree of probability of proven candlestick interpretation.
The trend is your friend and day candlestick charts work better than 5 minute candlestick charts. Hanging out for 100 pip moves in the day can lead to your own unraveling if you were a trader using candlestick charts as a foundation for your ideas.
Most day traders depend on 5 min charts and tend to move with momentum with the hope of surfing a 100 pip wave. They tend to watch the beginning of the euro or new York cut, or ride the wave of an important data release. however, I am now going to point out tomy readers that trading off 5 minute charts can be fraught with hidden perils.
OK so now the Euro markets right now are opening and let's see whats going on?
Here we go as a very very quick example:
Ok EUR/ USD is now trading at 1.111880 and already drifting down from the Asian session. here is a chart from 30mins ago:
Ok very very quickly i can spot some errors in terms of pure candlestick charting interpretation of price action so i am going to number them as follows on the same chart:
1. The green hammer after 5 red bars down in sequence did not hammer out a bottom which more or less breaks the rule of trend reversal. The downward price action resumed after a key reversal signal if we were talking about pure candlesticks. Market should have gone up but it went down.
2. The red shooting star should have signaled a failure to ignite a bullish sequence of candles and should have resulted in 5 candles downward trajectory of price action. Instead an upward price action occurred as one would have expected from a green shooting star which is bullish in nature. Market should have gone down but it went up instead.
Both trades would have resulted in losses because the candles broke their rules.
Now let's put this morning's price action into context of a day chart on the EUR/USD and take a more detailed perspective of how candlestick charts can work in your favor in the long run.
Looking at the day chart below we can go back the last 30 plus days for price data:
In the last 30 days you will notice 3 major signals out of which only one broke due to the extraordinary event of the Brexit and that is a very very rare occurrence and so 2/3 isn't bad at all for a positive outcome.
1. Represents a bearish engulfing pattern which symbolizes the beginning of a downward trend in prices. A position trader could have taken advantage of a 100 pip move in the next 3 candles down. Market should have gone down and it did indeed go down.
2. The green shooting star was bullish the night of the Brexit but as the vote count turned sour by 2am when Japanese markets opened the panic became a desperate and dramatic short. This is a very rare event and by the time the Euro trader woke up with a long over 1.14 he could have seen himself or herself down 400 pips with the EUR/USD trading at the 1.10. Market should have gone up but it went dramatically down.
BUT
3. What goes down usually retraces along Fibonacci lines; so 5 green candles followed in the week ahead to recover lost ground in the EUR/USD to 1.1100 which would have been anticipated by a position trader. This was then followed by our point #3 which was a bearish engulfing pattern which saw prices drift down again by 4 sucessive candles. Market should have gone down and it did indeed go down.
Conclusion: Day trading using 5 minute candle charts does not truly reflect the full market psychology behind the current price action. Position trading in the forex markets is better suited with candlestick charts as the trader more or less can work with the sum of all fears and expectations and a higher degree of probability of proven candlestick interpretation.
The trend is your friend and day candlestick charts work better than 5 minute candlestick charts. Hanging out for 100 pip moves in the day can lead to your own unraveling if you were a trader using candlestick charts as a foundation for your ideas.
Pieter Bergli - Trader X16
A non-profit service for free education on in the forex markets
Disclaimer - U.S. Government Required Disclaimer - Commodity Futures Trading Commission
Futures and Options trading involves risks of losses. No representation is being made that any reader and account will or is likely to achieve profits or losses similar to those that are being discussed on this blog http://forexeducationperspective.blogspot.com/. The past performance of any trading system or methodology discussed is not necessarily indicative of future results.
CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
All trades, patterns, charts, systems, etc., discussed in this blog http://forexeducationperspective.blogspot.com/ are for educative and illustrative purposes only and not to be construed as specific advisory recommendations for actual trades. Disclaimer - http://forexeducationperspective.blogspot.com/ bears no responsibility for the trading actions of its readers.
* European Union laws require European Union visitors to this blog to know that cookies are used by Blogger and Google, including use of Google Analytics and AdSense cookies and in reading material from this blog do consent to the use of such cookies
