Forex Trading: AUD/USD and NZD/USD

NZD/USD
The Aussie and Kiwi should be interesting pairs to trade over the next couple weeks due to the increase in volatility and the current disconnect between the U.S. stock market and the U.S. Dollar. With the sequestration scheduled to come into effect tomorrow and little optimism that the Republicans and Democrats will reach a deal, it could have a positive affect for both equities and the USD.

Let's look at some charts. This is a daily chart of the NZD/USD with the 200 SMA and 200, 100, 50, & 20 EMAs. I want to draw your attention to the trendline support, which was broken slightly (which trendlines often are because muppets typically put their stop losses and sell stops below them.) Price moved right to 0.8225 (study price reaction at 00, 25, 50, 75 levels) where the 200 EMA helped provide support.  Price then rebounded to the open of the large down candle (2/26). Price often encounters new supply and demand at the opening/closing price of daily candles.

So what does this mean? The trend on the 4 hour chart is down. Trend continuation on the 4hr chart and a breakout of the channel to the downside on the daily chart is the scenario that makes the most sense to us. Remember, we've had a small break of the channel to nab the sell stops and stop losses, then a rip up to squeeze the new traders who entered with sell stops. A rip down would frustrate the most amount of traders at this point, that's why we consider it the most likely scenario.

Even though we have developed a bias, it's important to note that we are often wrong - just as all traders are. The important thing is to not get hurt badly when we're wrong and to let trades ride and make a lot of money when we're right. So what's the purpose of performing analysis when we're wrong a good deal of the time?

Dwight Eisenhower said it best, "plans are useless, but planning is everything."

If you understand the current chart and the possible scenarios, it makes it easier to adjust for the constant changes in market variables.




On to AUD/USD. We've noticed that a lot of "high profile" traders on twitter have been saying that 1.0150 is support on AUD/USD. Similarly to the situation in NZD/USD, there are probably already stop losses and sell stops accumulating below 1.0150. There will probably also be buyers at 1.0150. We think the most likely scenario is a move to 1.0150 (buyers enter), then a move lower to squeeze the buyers, trigger stop losses, and trigger sell stops. After that's done, a short move higher to squeeze the traders who entered with sell stops, and then a move lower to parity.

This is one of the most common scenarios we see played out in the market. Day after day, week after week, month after month.

Once I can pin point bids and offers on a chart and know the levels where traders should get hurt, it becomes easier for me to find entries with great risk to reward ratios.

Forex Trading: Market Update

The market was decidedly in "risk on" mode today after good economic data was released and Ben Bernanke reiterated his commitment to Quantitative Easing (QE) until the unemployment rate dropped. The uptrend in equities since March 2009 has remain intact, and bullish sentiment is still not at extreme levels. With the distance we are away from all time highs in the Dow Jones and S&P 500, we think the most likely scenario is a break to all time highs. This should trip a lot of stop limits, buy stops, and bring in more money off the sidelines. At some point there will be a correction; but unless the issue is serious enough to create the beginning of a multi-year downtrend, it will most likely be a dip, providing a good buying opportunity.

The main reason the U.S. stock market has been so well bid over the last couple of years has been QE - and Bernanke reaffirming his commitment to easing gives the bulls a green light to continuing buying. That's what matters more then the "economic realities" bears claim exist. Maybe they are right; but it doesn't matter. When it comes to the markets, price is the only reality there is.

To the FX market: there's been a notable divergence, as the U.S. Dollar Index has remained well bid in the month of February, even as equity markets have pushed higher. There are two possibilities: either the correlation between risk on/off and the U.S. Dollar is breaking down, or the break in the correlation is only temporary in which case the equity markets will soon rip down or the USD will weaken substantially. This question may be answered this Friday (March 1st) when President Obama's sequestration is scheduled to go into effect.

Sequester Update

If you're a trader who's interested in market commentary and current events, DYDD (Doing Your Due Diligence) is a website worth checking out. The following post below was written by Robert P Lehman and can be found here. You can follow bob on twitter here.

Sequester Update
Well, the days tick by and there is really little of substance to report, although the political game playing continues in SIZE. The deadline for the Sequester is March 1, 2013 and it appears that nothing will be done to avoid it. I alluded to that in the addendum to my last post on the Sequester, it appears the Republicans have concluded they can win this fight.

The Republicans efforts around the upcoming Sequester thus far have been limited to pointing to Bob Woodward’s account that Jack Lew, current nominee to become Treasury Secretary, came up with the idea of the Sequester. The beauty of the idea, supposedly, was that a Congressional Super Committee would be “forced” to come to an agreement or face painful cuts to sacred cows of the Republicans (defense department) and the Democrats (discretionary spending). According to Woodward’s book, the White House was gleeful about the “genius” of their idea. That glee has apparently diminished and the President and his acolytes, have been treating the idea like an ugly stepchild. Meanwhile, the republicans seem to delight in reiterating that the idea was the President’s to begin with.

The White House’s recent strategy is to attack, and some might say strike fear amongst the electorate regarding the impact of Sequester. A parade of Cabinet leaders have been paraded on news shows warning of the harsh consequences of allowing the Sequester to be implemented. They paint a dire picture, but hosts have frequently countered with confusion as to how the Sequester impact can possibly be severe. Political commentators have suggested that the Administration will make cuts where they can be easiest to put on television, specifically reducing staffing in certain major airports. The thought is that doing so would increase pressure of recalcitrant Republicans, but the strategy poses risks Equity markets seem largely indifferent to the debacle.

At 11th hour, Sens P. Toomey and Inofe are looking to move a bill forward to allow President special authority to allocate cuts. No idea if this comes to fruition.

Famous Quote

“All a trader needs to know to make money is to apprise conditions. The big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend. And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this:

It never was my thinking that made the big money for me. It always was my sitting.“ - Livermore

Forex Trading: GBP/USD

The GBP has been the second weakest of the major currencies recently, only being outperformed in the race to the bottom by the Yen. We recognize that the GBP is in oversold territory (RSI below 30) and realize the possibility for a corrective move higher; but we believe that both the technical and fundamental views point to a lower GBP in the medium term.

The fundamental argument can be easily supported by browsing through the last 6 months worth of GBP economic data on Forex Factory's Calendar. Once the "Olympic Effect" wore off, the GBP numbers began to miss expectations. One of the main problems in the U.K. is the punitive tax rates. This problem has decreased general competitiveness and productivity and caused an exodus of businesses and employees in the finance and banking sectors. As Zerohedge reports here, jobs have become so scarce that it's even difficult to obtain a part-time job as a coffee barista.


Technically speaking, this is a clear breakout from the triangle pattern shown below.

The .50 fib retracement drawn here on the monthly chart had held really well until we recently broke through it.

Here's a closer shot of price action (a weekly chart) with multiple bounces off of the .50 fib

On the daily chart we have a clear break from the bottom of the range (1.5660) and a resulting 580 pip drop that occurred with very little consolidation. This suggests that there's scope for consolidation even though price has been dropping quickly so far and we feel trades to the downside still offer good risk to reward ratios.

As per our previous post on the GBP/USD we've highlighted an attractive setup that we'll look to play if the GBP begins to strengthen. The key arguments for GBP strength are:

- This is a "buy the rumor, sell the news" scenario. The rumors of a downgrade started flying when GBP/USD was trading above 1.6000 and now the UK's credit rating has just been downgraded.

- If the Euro keeps selling off, then EUR/GBP should continue its descent, giving the GBP underlying strength across the board.

- The variables we consider before taking a trade are always in motion; but right now we're looking at 1.5425 and 1.5500 as attractive resistance levels to sell into GBP strength should it run the price inefficiency beginning at 1.5315

Forex Trading: GBP/USD

GBP/USD has just spiked up as the .382 fib retracement at 1.5250 held. There's a price inefficiency from 1.5315 to 1.5415 that price may move through very quickly if it breaks above the swing high of 1.5325.

GBP/USD has come down from 1.6350 to put in a fresh yearly low at 1.5130 - a move of over 1200 pips!! It has made the move down with really no corrective move and very littler consolidation, so there's plenty of scope for a bounce at these levels.

EUR/GBP is also beginning to drop along with EUR/USD (currently down 500 pips from a high of 1.3700) due to political risk & negative growth revisions. If it continues dropping it will contribute to GBP strength as the Euro is the #2 most liquid currency in the world (think of the cross effect EUR/GBP has on GBP/USD in terms of volume traded.)

Below, a picture perfect example of a price inefficiency.

Update: Moodys downgraded the U.K.'s credit rating on Friday after the U.S. equity markets closed causing the GBP to drop sharply against its peers and gap lower 100 pips on Sunday's open. It just goes to show you that good setups are never guaranteed to work. We all have losing trades; but managing risk is what sets the successful traders apart from everyone else.

It still remains an attractive setup that we'll look to play if price makes its way back up to 1.5315

New Zealand Dollar - Time for Intervention

Moments ago Royal Bank of New Zealand's Wheeler said the Kiwi was overvalued and that the RBNZ stood ready to intervene in the currency if necessary. The RBNZ members have long since been annoyed by what they consider to be an extremely high exchange rate due to speculation; but this is the first time they've mentioned the possibility that they may intervene in the FX market.

The Kiwi pairs have been trading at high levels recently and this announcement has surprised the market. There's plenty of room to the downside, and it seems probable that NZD/USD will come under significant selling pressure during the upcoming European and US sessions.

The important thing to know about NZD/USD is that it isn't as liquid of a currency pair compared to USD/CAD or AUD/USD. If this pair starts moving down and picks up momentum, the lack of liquidity could cause a sharp move down if carry trades begin to be unwound. The lack of liquidity can make it costly to unwind large trades, and this kind of comment could cause traders to start unwinding their trades now to avoid getting stuck in a nasty situation later on if NZD/USD dumps.

Biases

The Day Trader's List of Common Mistakes

I like to write lists. Not only do I find the process therapeutic; but it often results in the realization of things not previously considered. So here's a list of the common mistakes that I make.



Having an emotional reaction to a news event. (The unexpected comments out of the G-20 and G-7 meetings recently have been annoying.)
 *Solution: I'm a day trader and usually don't hold positions overnight. When something unexpected happens that causes price to violently react, I find it's best more often then not to sit on my hands. I will go immediately flat if I believe my positions are in danger, and have found (the hard way) that it's best not to trade unless I see a highly attractive setup, and then to only play it with 1/2 or 1/4 of my normal position size. When price is more volatile then usual, I find myself eager to "get some action." Resisting and literally sitting on my hands has been the best solution for my P&L.


Not cutting losers fast enough. Everyone who trades has probably heard the "cut your losers short" phrase, and mostly thought to themselves that it was good advice but utterly failed when trying to implement it.
 *Solution: I don't struggle with this issue very much anymore, simply because I've gone to an intraday-only policy for holding positions on my main account. By forcing myself to go flat at the end of the day, I now ask myself, "What do I expect to get out of this position before I'm forced to cut it at the EOD?" If the answer is less than what I could get for right now, I simply cut it. Using time in conjunction with a TP is how I make it easy for myself to cut my losers short.


Chasing a move.
*Solutions: There are plenty of ways to skin a cat. I occasionally play breakouts myself. However, I've found it's risky to play breakouts when I'm strictly trading intraday. I always like to sell into strength and buy into weakness while playing in the direction of the trend. Look at any chart and you'll see a lot of candles closing in either direction. If there's that much volatility, then chances of getting a good entry are higher if you buy on the "x"th bear candle and sell on the "x"th bull candle. There's a plethora of more variables to consider; but I've found that adopting this mentality has been a big help for my trading. It also typically yields better risk to reward setups.


Overtrading.
*Solution: Go play golf. If I'm not feeling patient enough to wait for my setups, I leave the computer before I do damage to my account. Being patient and maintaining discipline is literally 90% of what it takes to be successful at playing this game. That's your answer for why so many people fail. It's so hard to be perfect in these categories and it only takes one slip to kill an account.



Not taking profit fast enough.
*Solution: It happens, we all get greedy. My general rule of thumb is that it's better to take profit too soon and be extra careful when trading a counter-trend setup and let winning positions run a little if they are with the trend. The key is to get all of your levels mapped out (horizontal S&R.)


Over-leveraging.
*Solution: Don't do it. It's the hardest thing NOT to do. Ultimately we are all trading to try and make money, and the allure of a quick return is powerful. All I can tell you is that every trader I've seen who hasn't had a solid risk management system has been wheeled out of the trading floor on a stretcher sooner or later. The best advice that I've gotten is to repeat in my head that if I over-leverage, my account is as good as blown up. The WORSE thing that can happen to a trader is to over-leverage and make money. That provides positive reinforcement to a potentially fatal habit.

Forex Trading: Market Update

New Zealand Retail Sales q/q just came in: Actual: 2.1%, Exp: 1.3% and previous -0.4%. The Core retail sales came in slightly lower; but still above the consensus estimate: Actual: 1.5%, Exp: 1.4%, Previous -0.3%.

The Kiwi ripped on the news, which was to be expected because there was evidence of strong short interest entering just prior to the news. (Check the 1m candles - did not correlate with risk appetite across the board.) The economic data releases out of New Zealand has been so bad over the last quarter, that the sentiment of short term forex traders was decidedly negative. As we know, when sentiment becomes this lopsided, there's attractive risk and reward to be found in fading it. Especially when fading it means trading with the trend!

From a technical view, we are in an uptrend on the daily and 1hr chart and are now breaking out of an ascending triangle on the weekly chart. Graphs are located here.

It's important to note that at some point, the equity markets around the world will probably capitulate, and commodity currencies will sell off hard against safe haven currencies (primarily the USD.) It's also important to note that THIS HASN'T HAPPENED YET. It can be deadly to base a trade on a theory of what might happen, without seeing evidence of that already beginning to occur. I heard a lot of people on CNBC shorting the market last fall and telling the world the stock market was going to sell off due to fiscal cliff concerns. Guess what, it didn't happen. When the carnage does finally begin to occur, I have a feeling everyone will KNOW the bloodbath has begun. If it's really that apparent, it should be easy to identify and jump on. Until then, I'm going to remain patient and play the price action that I see in front of me.

When in doubt of what to do, I usually refer to the popular saying on Wall Street, "If you're early, then you're wrong."

Note: I would not be surprised if this is a false breakout on NZD/USD and we run up to 86.00 or 87.00, causing the shorts to cover and new longs to enter the market before a sharp reversal. It seems like that course of action would cause the most pain to market participants as a group, so it seems logical that it would happen.

Forex Trading: Market Update

EUR/USD continues to drop since yesterday's comment out of the ECB that it's "worried Euro strength will hurt recovery in the crisis states." This comment caused the 1.3500 figure to hold and the Euro currently trades underneath the 1.3400 figure. The German finance minister Schaeuble and central banker Weidmann came out with comments of their own in an attempt to support the Euro; but to no avail. The Germans would like a weaker Euro as it would be better for their exports; but they realize the consequences of the Euro weakening - that equities will most likely follow suit causing the crisis in the periphery countries to reemerge.

Although USD/JPY dropped substantially on comments from the G-20, risk appetite didn't decrease, and the US 10 yr came under selling pressure yesterday. USD/JPY has since rebounded and if it starts to take off again, there is little resistance until the 95.00 figure - a key psychological number.

Know the Signs of the Coming Capitulation

Since the recent move in USD/JPY driven by comments out of the G-7, I've been noticing several divergences in the equity, bond, and FX markets.

First, it's important to realize that one of the main drivers powering equity indices up around the globe over the last couple of months has been the weakening yen. Since Nov. 14th, USD/JPY and the other yen pairs have ripped up (EUR/JPY has been the most bid.) This has in turn caused Japanese stocks to rip higher (a weaker yen is good for exports.) In turn, the rise in Japanese stocks has bled over into other equity markets, and particularly the rise in EUR/JPY has lifted EUR/USD which has a strong correlation with the E-mini S&P. (Again, look at EUR/USD starting Nov. 14th)

So from this chain of events, you can infer that when the yen pairs begin to strengthen it will cause equity markets around the world to start selling off. As some equity indices are currently trading at recent record highs, once the selling starts it should lead to sharp moves down with significant follow through. The key currency pairs to watch are USD/JPY (I'm guessing we'll need to see 400-500 pips of downside before equities really unravel) and EUR/USD. In the bond market, it's important to watch the U.S. 10 year treasury note. The yield change on the US 10 yr is fairly well correlated with movements in USD/JPY. When the yield increases, (more demand for US bonds) USD/JPY goes up. (money flows out of JGB 10 yrs and flowing into US 10 yrs.) The stock market you want to watch is the Japanese market. If it's down big in the Asia session, and that carries over into other Asian equity indexes, look for follow through in the European and US sessions.

Now, you'll notice that I specifically said "when" the yen pairs begin to strengthen. This 100+ pip move lower in USD/JPY may be it - or it may not be. We'll have to wait for confirmation. The trick to profiting from big moves net-net is to not LOSE money playing them BEFORE they happen. Instead, know exactly what to look for so you don't jump on a false break and can quickly jump on the real move when you see it.

Current Divergences
We need to wait for confirmation that this move down in the Yen will be sustained. The yield change on the U.S. 10 year has not confirmed this yet. EUR/USD has not confirmed this yet. Equity markets have not confirmed this yet. The move down in USD/JPY is showing significant divergence from correlations that have held well in recent history. The question is, will the other factors begin to catch up or will the USD/JPY snap back?

"90% of Forex Traders Lose Money"

"90% of Forex Traders lose money" is an often quoted statistic in our industry. No one knows the exact number; but I would guess that less than 2.0% of all Forex traders can consistently pull money out of the market over a time horizon of 5+ years.

Why do traders fail? Retail forex trading is different than trading stocks. The reason is that you're buying and selling contracts. Include the spread and/or commission you pay on every trade and you have a zero-minus game. You need to average a 50% win rate + the spread + 1 unit in order to book a profit. Contrast that to trading or investing in equities. Stock prices increase in valve over a long time horizon due to growth and inflation. You need not look farther than historical charts of the Nasdaq, Dow Jones, and S&P 500 indices. Equity traders/investors on the buy side have the scales slightly tipped in their favor.

The reality is that 100% of forex traders fail at some point or another. What separates the successful traders from the rest of the crowd is their tenacity to wade through their initial failures and develop a profitable methodology and to finally be able to control their emotions.


Control
The first question you should ask yourself is, "if almost all forex traders fail, what difference(s) define me as a superior trader?" Most forex traders start out thinking that they can be "better" then other traders and are really just kidding themselves. A lot of forex traders are competitive individuals who have previously been successful at some kind of activity, be it business ventures, sports, chess, poker, etc. So be honest with yourself, what makes you think you'll be able to succeed where people more competitive and intelligent than yourself have failed? What's your superior edge?

While it's true that we trade against competitors (other market participants,) most traders fail to realize that trading is primarily an internal struggle. Trading successfully ultimately depends on whether or not you can control yourself. Think about prominent people in the news like CEOs and politicians who get embroiled in scandals due to a single moment of weakness after exhibiting a lifetime of discipline and control. It only takes one deviation from controlled behavior to severely damage or destroy your trading account. Patience and control are the two essential virtues that differentiate the majority of traders who fail between the 2.0% that succeed. Possessing these virtues is your edge.

Your Methodology
Successful traders have a system or a methodology. That is to say their approach to the market is consistent. The best traders use systematic approaches, going through mental and/or physical checklists before executing a trade. A profitable trading system or methodology is defined by an individual trader knowing that if they use good risk management techniques and maintain control of themselves, then that method of trading will make money. A trademark of unsuccessful traders is that they don't have an exact methodology, they don't know exactly what they're looking for. 


Click here for details on private mentoring for forex traders.

The market is poised for a major change. Are you ready for it?

Courtesy of Darkstar at www.orderflowtrading.com

Article link


Darkstar posted on January 20, 2013 12:55

We've all heard the age old wisdom about markets changing over time and the need to test a system in multiple environments. If you started your trading career in the last 3 or 4 years, you've probably assumed that those market sages were referring to the day to day oscillation between ranging and trending markets. However, those of us who have been at this for a long time know better... and today I would like to explain what the wise traders of old really meant.

In a previous article I discussed my expectations for the pending congressional debt ceiling fight, and while it remains to be seen how that will all play out, there is one thing I'm absolutely sure of; when it's over, there will be a dramatic shift in the factors that drive market activity.

Why? Well, the economy is poised to transition to the next phase of the business cycle, and markets behave differently depending on which phase the economy is in.

For those who don't know, the business cycle is defined as the recurring and fluctuating levels of economic activity that an economy experiences over a long period of time. The five stages of the business cycle are growth (expansion), peak, recession (contraction), trough and recovery. We can plot a representation of this cycle as follows:


If you were to ask an American "Average Joe", you would find he is of the opinion that the united states has been in a perpetual state of recession since the housing crisis of 2008.

However, according to the National Bureau of Economic Research - which is the official arbiter of when a recession begins and ends - the US recession ended in June of 2009. Since that time we have been in a period of recovery.

Of course, by definition, the recovery can only last until the economy eclipses the previous peak in Gross Domestic Product (GDP). At that point the business cycle transitions to the expansion phase and continues on until the development of a new peak.

This is important to understand because the previous GDP peak was eclipsed back in mid 2012. So technically the economy is already in the expansion phase of the cycle. And as soon as these lingering political issues like the fiscal cliff and debt ceiling are wrapped up, the market will be joining the party.
So what is it that will change?

In a nutshell, the big change will be in the relevance of data and interest rates.

For the last several years, markets have been dominated by the dynamic known as "Risk-On/Risk-Off" or RORO.

Unless you've been banging around trading with indicators, or hiding under a rock, you already know that RORO was the movement of capital in and out of risk assets based on the likelihood that some systemic risk would bring about the end of the world.

From the Housing crisis, to the banking crisis, to the sovereign debt crisis, it seemed like we were always moving from one potential catastrophe to another. As information came out about each of those crises, the end would look more or less likely.

All one had to do to make money was follow the news related to the crisis of the day. When things looked good, buy risk assets like AUD, Equities, or Junk Bonds. When things looked bad, you could sell those assets or buy USD, Treasuries, or Utility Stocks for some quick profits.

For many of us it was a fun time, but sadly it's all coming to an end. With Europe and the banking system stabilized, the housing market returned to life, and global GDP expanding, were quickly running out of potential crises to worry about.

And in case you haven't noticed, the RORO correlations have completely broken down.

Since at least the beginning of the year, economic data has returned as the primary market driver, and that dynamic is likely to become far more apparent after the debt ceiling issue is resolved. Although, it may not be in the way you would assume...

At the moment, the data is being interpreted through the prism of the recovery phase. Good data prints for employment, inflation, and capacity utilization are all seen as moving us farther away from recession. As such, this good data is providing a huge boost to equities, commodities, and other growth assets. However, this isn't likely to last either.

One thing you need to understand is that the expansion phase is marked by sustained GDP growth. With that sustained growth expected in the system, the natural inclination for market participants will be to spend every spare dollar they have on growth assets. As a result, growth assets should be poised to enter a state of perpetual price appreciation.

The only problem is; interest rates. When interest rates rise, it has a dampening effect on economic activity. So anything that shows an increase in the probability of a rate hike will be seen as a negative for growth assets.

This sets up a dynamic where asset prices will rise every day, unless something happens that has the potential to increase interest rates. And that "something" will be the strength of economic data.

The first of many examples of this new dynamic will likely come in the form of good employment numbers tanking the US equity market.

From an economics perspective, this makes no sense because higher employment means more people with money to spend. More money to spend means better corporate earnings and a virtuous circle of growth. That should INCREASE the value of stocks.

It's not going to happen though. The stock market is actually going to drop, because good employment will mean a hastened end to the Federal Reserve's Quantitative Easing program, or QE as it's commonly known.

See the Fed told us in their last policy statement that they would begin unwinding QE when the unemployment rate reaches ~6.5%. So the closer we get to that number, the more the market will worry about the end of QE.

As most of you know, QE was implemented because the Fed had already lowered interest rates to 0%. The lowering of interest rates typically has a simulative effect on growth, but the economy was in such bad shape, that even at 0% things weren't getting any better. QE allowed the Fed to effectively lower interest rates below 0% in order to increase the simulative effect.

So if the point of QE was to stimulate growth, it only stands to reason that when it ends, growth will suffer.

How much it will suffer is open to debate, but the one thing we can all be sure of is that growth won't be as good without it. That will lower the implied value of stock market assets and lower the price people are willing to pay for them.

Now I'm not sure exactly when this is going to occur, so don't just go shorting good employment numbers willy-nilly. That's a recipe for disaster. No, the point I'm trying to get at is that you need to keep an eye out for this transition of focus. When you see the above happen, you'll know that we have entered an environment dominated by the Feds interest rate cycle and that its time to adjust your trading behavior accordingly.

For order flow traders, this transition isn't likely to cause much consternation. After all, we just follow the flow of orders and no matter which way they flow, were happy to go along for the ride. However, traders of the technical and fundamental variety are likely to see serious losses over the next several months while they figure out how and why the world has changed.

And that's ultimately what those old market sages were trying to warn us against.

Forex Trading: AUD/USD

AUD/USD
The RBA kept rates on hold yesterday; but left the door open for a future rate cut, saying: "The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand." As historically, the RBA has never cut interest rates past 3.00% before, and interest rates are currently at 3.00%, I wonder if they are even considering a rate cut. I think the more plausible likelihood is that they've watched in complete shock as Japanese government officials have effectively depreciated their currency simply by jawboning. Could it be that the RBA is finally realizing that communication tools are an effective path to lower what they have long deemed a "high exchange rate?"

The rate statement, combined with retail sales: Actual: -0.2%, Est: 0.3%, Previous -0.1% (revised to -0.2%) has pushed the AUD/USD to test the recent swing low at 1.0360 where it currently trades. If this currently downward momentum breaks the swing low from December at 1.0345 then a lower low has been put into place, which is a significant bearish signal. The first real range of support below current levels is the 200 SMA converging with a 0.618 fib retracement at 1.0315 with the big figure below it. A close on the daily chart below a previous spike low at 1.0287 should open the door for a further move to the downside.

AUD/USD Range of Support: 1.0315 - 1.0290

Forex Trading: GBP/USD

The GBP/USD rebounded from support during the European session and now appears to be consolidating. The pair has been propped up by the EUR/GBP cross rate, due to weakness in the Euro and European equities across the board. GBP/USD has come down from the 1.6300 area while EUR/GBP has gone straight up, so a consolidation in the GBP/USD over the next couple of days seems plausible. Also, the GBP has depreciated substantially against the commodity currencies recently (GBP/AUD: 714pips, GBP/NZD: 1325pips, GBP/CAD: 582pips.) If the U.S. equity markets start unwinding (down around 1.0% atm), then the commodity currencies should start depreciating against the GBP - giving GBP/USD support.

There's a small price inefficiency that has not been filled yet from 1.5750 - 1.5810. If this price inefficiency is not filled, and price moves below the .618 fib retracement at 1.5675 serving as support, it would be a clear break of the consolidation and opens the door for a move down to 1.5500.

Forex Trading: NZD/USD

This is a weekly chart of NZD/USD where an ascending triangle is clearly visible. Ascending triangles usually break higher, rather then lower, because the offers holding price action down eventually get overwhelmed after being tested several times. Here's an example - when price gets rejected for the 2nd time at a level and pushed down, offers begin to build up at that level. When price is trading at say, .8200, and there are very few sellers below .8450-.8475 (where offers are clustered), there's no point in selling at the current level for a longer term trade because price isn't likely to go lower since most of the large traders who want to sell have their offers 250 pips higher then where price currently is. The lack of sellers causes the price to be bid up, until price arrives back at the horizontal line of the ascending triangle and meets the offers (resistance).

(Note: if the price is going up, it's unwise to assume it's due to increased buying power. It may just be a lack of sellers. I know it sounds like a technicality, but it's important to recognize the difference.)

Here we have a Daily chart, where I have outlined a series of higher lows, which signify an uptrend. Note that this triangle on the weekly chart has been compressed into a very small range. A breakout of the triangle is imminent. A breakout to the upside is likely; but we believe there's a chance this could be a false break due to the overbought conditions of equity markets around the world. False breaks typically look like normal breakouts, but they typically just serve to flush out the stops of everyone who was short the pair and to get a lot of "buy stop" orders triggered. Once that is accomplished, price usually rips in the other direction. The key to trading a breakout without getting hurt by false breaks is to get long entries in good places and to get a stop-loss in front of that entry as soon as reasonably possible.

Below is the 60 minute chart with some notations. This is a particularly strong uptrend on the hourly chart driven by fundamental news flow. Absent some highly compelling fundamental reasons to short this pair, the dips should be bought and played for a break of the ascending triangle on the weekly chart.