Forex TA: EUR/USD
March 3, 2016
A few trading friends on Instagram have been commenting or messaging me to get into forex trading. Forex, or FX, is currency trading. My friends have commented that there are no trading fees, with market makers making money on the spreads, and my $500 trading challenge would go further.
I’ve been research FX trading for a few days now and have found my technical analysis (TA) to be relevant. What follows is a EUR/USD pair TA, or simply chart analysis. I’m using the Forex Signals Lite MissingStep (the free one for now) app for charting.
The chart analysis mix I will use will be overlay Bollinger Bands and indicators Volume, CCI, MACD, and ADX/DMI. This article is not about what these overlays and indicators tell an analyzer but how to use to predict pps trends. However, I will provide some basics to provide context. I use this chart overlay/indicator mix for a reason, and it has suited me well in predicting pps trends.
1-Day (5 minutes)
The 1-day (D1) chart, with 5-minutes (M5) intervals, shows the FX day trader perspective. We can see peak trading occurs 0800–1030. This will be more important in longer time period charts, but still relevant to the day trader this period is when the pps moves the most. I’ve used colored boxes to annotate the buy (green), yellow (hold or volatility), and red (sell) points. Also annotated are the main pip (change in currency pricing) ranges during pps trend changes.
The 1-day chart is showing three distinct patterns the past 24 hours: fall, flat, and recovery. As the peak trading time ramps up, seen by volume increase, the CCI, MACD, and ADX/DMI indicators start to signal sell. The pps candles begin to push above and outside the Bollinger Bands overlay indicating overbuying is occurring. The pps falls 42 pips for the best gain of the day if a trader sold EUR/USD short. Next is the recovery. Though a green arrow wasn’t placed the chart shows the pps recovery to the pps area where the fall previously started. Another 42 pip opportunity. Trading goes flat within an 8 pip range before falling for 20 pips. The third big gain opportunity for the day. The pps bounces 20 pips for the fourth gain opportunity.
Seeing all of this unfold AFTER THE FACT makes for great historical analysis. How does a trader predict the pps trend before it happens? The 1-day chart analysis offers some clues for pps trend prediction. Keep in mind that chart indicators and overlays always lags the pps movement. This means a trader can’t get perfect buy and sell point predictions but rather good ones.
The Bollinger Bands are an overlay of moving average ranges. PPS candle touches below or above bands tells an analyzer that oversold (too much selling) and overbought (too much buying) conditions exist and to look for a possible trend change. These extremes are a first predictor.
CCI is generally used as a strength of trend (momentum) indicator. CCI blue zones are indication of overbought and red zones are oversold. A collection of these colored peaks can give insight into a trend continuation, but that is not what the indicators purpose is. CCI often times predicts a trend correction before other indicators in my experience, but on a 1-day chart it can be tough to distinguish trend change versus a trend direction with CCI alone. I use CCI to understand current momentum and if it’s fading to possibly look at other indicators for trend change prediction. One final point on CCI is that many traders but when CCI goes above 100 and sell when it’s below -100. I feel this strategy works well for non-day trading. I look for the point when CCI is falling below 100 after being above 100 as my sell indicator as a swing trader.
The ADX/DMI is a two in one indicator. The ADX component tells an analyzer how strong the trend is. Above 25 is a strong trend while below is weak. The +DM and -DM tell the analyzer the bullish or bearish trend of price. A rising +DM indicates a bullish trend, whereas a rising -DM indicates bearish. The analyzer looks for the +DM to be above -DM for bullish confirmation, and the reverse for bearish. This indicator is great at predicting trend strength and what direction the price is following. Day trading off the ADX/DMI solely requires looking for blatant +DM/-DM rises and falls. Using it solely for day trading isn’t always 100%, so more confirmation can be sought from other indicators.
The MACD with threshold indicator gives insights into the strength of a trend while convergences from certain paths in its moving average (MA) lines can at times predict trend changes. The two MA lines movement above the 0 threshold line is a bullish indicator. The MACD line falling below the MA line can signal trend change.
Volume is an indicator and was discussed in the intro.
Putting this all together for the day analysis
How can we predict pps trend changes and know when to enter and exit for a gain?
The 1-day chart analysis attached annotates major events for the day.
The green boxes show the bullish period with trend change indication at CCI rising above -100 from an oversold period to staying above +100 for a period, the +DM rising quickly and staying above the -DM line with ADX trending upward above 25, and MACD rising above the 0 threshold with MACD above the MA line.
The yellow boxes show a hold period with momentum and trend decision points undecided. CCI jumps between -100 and 100 for a awhile. ADX/DMI oscillates up and down with +DM and -DM fighting for lead. MACD lines go horizontal.
The red boxes show the bearish period with trend change indication at CCI falling below 100 from an overbought period to staying below -100 for a period, the -DM rising quickly and staying above the +DM line with ADX trending above 25, and MACD falling below the 0 threshold with MACD below the MA line.
Even a day trader needs to look at more than just the 1-day chart for the overall direction a FX pair is headed. The next few charts can give a day trader insights to the day’s possible overall trend or where the pps is headed when current indicator/overlay mix is undecided. The longer period charts also assist swing traders and investors.
5-day (15 minutes)
The 5-day, 15 minute intervals, chart shows a downward price channel pattern mainly. Volume spikes are noted somewhat around the same time each day. Take note of the recent pps candles break from the downward price channel for a possible breakout indication (not annotated).
The next few days are a volatile downward price channel. Not every signal has been highlighted but the green boxes annotated show one of three distinct pps corrections that occurred in this pattern. Pps candles touch below the lower Bollinger Band signaling oversold, and a correction is highly probably. Volume is generally at its lowest points during pps rises. CCI rises quickly above 100 from -100 and has two peaks above 100. +DM rises quickly above -DM and takes the lead with a downtrending ADX below 25 signaling a weak trend (the downward price channel will probably continue).
We can see a similar but signal appear in the chart analysis mix on 3/2/16. Pps candles rise above the red annotated resistance line signaling a bullish trend. The trading the rest of the chart shows rises above the resistance line signaling a possible breakout is coming.
1-month (1 hour)
The 1-month, I hour intervals, chart shows a 500 pip downtrend that dominates most of the chart. Major sell signals are annotated with red vertical lines so all overlays and indicators are lined up for the chart analyzer to see for a given point. Notice the CCI drops from 100 and then trends into -100 peaks. -DM rises quickly and leads +DM for awhile with various ADX trend strength indications. MACD falls sharply to below the threshold and trends below the threshold for most of the downtrend.
Looking at the historical trends the past month we can see the overall sentiment has been bearish. The -DM rising sharply and MACD falling quickly have indicated major pps drops.
A bear trap is set 2/24–2/26/16 with some bullish price action. What results after is a huge price drop that usually results after a bear trap. What’s on this analyzer’s mind is if another bear trap is being set currently. Notice the MACD risking to the threshold 3/3/16. +DM/-DM are currently undecided.
The 6-month, daily intervals, chart depicts smoother overlay and indicator movements. Major bearish sentiment is annotated with red boxes. Volatile ‘hold’ periods are noted with yellow boxes. The green arrows point to a very bullish uptrend indication.
Overall, it appears a possible short-term breakout is possible.
Not every FX pair follows the same patterns. I’m encouraged to research each traded in-depth as has been done for EUR/USD. Also, fundamental analysis must be explored to understand why the larger trends occurred in specific periods and point in time.
There are many FX charting apps available. I use NetDanian, MetaTrader 4, and the Forex Signals by MissingStep.