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Well the Federal Reserve cut rates by a quarter percentage instead of the full point everyone was expecting which resulted in the USD gaining momentum to the upside. I would consider this gain as temporary as we were due to a pull back on a majority of currencies as they were running pretty hot and profit taken took part.
In that case, it is good news as a majority of pairs have now moved back into the dynamic area of resistance (area between the 30 and 50 simple moving averages) which may result in a spring board like effect to the direction of the SMAs.
Here are a 3 potential setups on the 4-hour chart that I am currently eying and may likely break within the next couple of hours.
EUR/USD:
USD/CHF:
USD/JPY:
I also stumbled upon this great article written by the fine folks over at DailyFX.com regarding the Top 5 Most Market Moving Indicators for the U.S. Dollar and may help the newbie trader determine what news exactly impacts the US Dollar and is also a good primer for those who’ve been in the game for a while as well.
What a spectacular Friday we had last week with the announcement of a pending Fed bail out of the 5th largest American investment banking company, Bear Stearns, which subsequently allowed another American bank, JP Morgan & Chase, to purchase the company for a fire sale price of $2/share ~ $236 million. Even more hilarious was that the buyout was brokered by none other than the Federal Reserve at this stunning low price as many analysts predicted that the company was still worth a good $30/share.
So how does this relate to the Forex world?
Massive risk in the market signified by the Dow Jones Industrial Average Volitility Index (^VXD) spiking to the 28.62 area caused traders/investors/speculators to bail out of their positions which was financed by the carry trade leading to appreciation in the Yen and Swiss Franc pairs. Such drops of 1,000 pips were noticed on a majority of these carry trade crosses stemming on Friday until Sunday night. Meanwhile, the U.S. Dollar continues its free fall into oblivion as seen by the US Dollar Index (^DX-Y) approaching a critical 70.000 support level shortly. Next week the market will follow the Bear story and will then quickly turn its focus to the FOMC rate decision on Tuesday. Most analysis were looking for a 50bp cut, but with Friday’s news now affecting trade, expectations have ratcheted to 75bp or even an unprecedented 100bp cut.
So how can I capitalize off this?
I’d be looking to exploit further USD weakness especially pertaining to the commodity pairs such as the Canadian, Australian and New Zealand dollars simply due to the fact that Gold is approaching the critical $1,000/oz tag and Oil trading at record highs on an almost daily basis currently at $120/barrell. The risks on any carry trade based pairs are simply too risky at this moment in time and I shall be staying far away from those.
Well well, nothing going on lately with regards to high probability trades so I decided to experiment on a demo account regarding HectorTrader’s dynamic resistance area.
If you don’t know what the area is, it basically consistutes the area between the 30 and 50 SMA where most positions reverse to the direction of the trend. In this instance, I basically took trades early that were in the reisistance area at the first sign of a bar into the direction of the trend.
Example #1:
I took this trade based on the 4-hour chart on the AUD/CHF pairing while the pair traded at the dynamic resistance area where it breached the previous weeks support. At the time of this post, this pair is up +120 pips and has reached the second resistance area at the bottom blue line.
Example #2:
My second experimental trade was similar to the above trade as in taking the position early into the trade when the pair is trading within the resistance area. The results were again positive with +120 pips at its peak and the pair traded all the way to the previous resistance area before pulling back and now looks like a head and shoulders pattern which may be heading back to the dynamic resistance area.
Conclusion:
More experimental trades to come as the dynamic resistance area so far proves to be a good indicator of a momentum change.
March’s edition is jam packed with information and for those who haven’t heard of this magazine, it is the premier magazine dedicated to the currency market and contains tons of information pertaining to whats new in the industry. You can kindly download a free copy of March’s edition or if you missed last month’s edition, you can find it here.
Status of Open Trades:
My prior EUR/USD position is still open and is currently up +60 pips and has been seesawing within a narrow band between 1.5300-1.5400 and I have already set stop loss to break even so no harm done. My target still remains to be 1.5450.
Potential New Trade Opportunity:
Another possible position may present itself at the moment is the GBP/CHF pair on the 4-hour time frame to the downside. It has been trading for the last two weeks in a consolidated range and has finally broke out towards the trend of the 3 simple moving averages. I will look to exploit this downside upon the breakout and pull back configuration. Here’s what is showing up on my screen at the moment:
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