Unlocking the Secrets

8/2/2019 Unlocking the Secrets

1/25

Unlocking the Secrets ofCurrency Movements

Brian Dolan Chief Currency Strategist

November 17, 2007

Forex trading involves a substantial risk of loss and is not suitable for all investors.Past results are not indicative of future results.


2/25

Disclosures

This seminar is a service offered to existing and prospective FOREX.com clients. It will discuss riskmanagement concepts and strategies and does not include the recommendation or endorsement of anyparticular security, chart pattern or investment strategy by FOREX.com.

The concepts and strategies discussed may not be suitable for all investors. It is important that investorsconsider the information presented in light of their individual circumstances and objectives, includingpersonal risk tolerances and investment goals.

Currency symbols shown herein are for illustrative purposes only. FOREX.com and/or its employees and/ordirectors may have positions in currencies referenced herein, and may, as principal or agent, buy from orsell to clients.

Please note that the price and volume data, screen samples, and chart patterns illustrated in this seminarare for illustrative purposes only. The discussions or illustrations of particular currencies herein should notbe construed as an offer to sell or a solicitation of an offer to buy any currency.

FOREX.com does not recommend the use of technical analysis as a sole means of investmentresearch. At FOREX.com we recommend that investors define their goals, risk tolerance, time horizon, andinvestment objectives in addition to researching possible investment choices through multiplechannels. Use of technical analysis may result in increased frequency of trading and, therefore,significantly higher transaction costs than a fundamental approach.

Short selling is an advanced trading strategy involving significant risks, and must be done in a marginaccount. Increasing leverage increases risk. For more information please refer to your AccountAgreement.

Forex trading carries a high level of risk and is not suitable for all investors. Placing Contingent orders (such as stop or limit) might not necessarily limit the risk of loss.



3/25

Understanding Currency Movements

Currency Pairs: EUR/USD USD/JPY GBP/USD USD/CHF

Fundamental factors behind trading behavior Price action characteristics Tailoring the use of technical approaches Tactical trading considerations



4/25


EUR/USD Fundamentals:

Liquidity--Most actively traded currency pair 27% of dailyglobal volume (source: 2007 BIS Survey of Forex Markets)

Global asset allocation--Eurozone 2nd largest economicbloc, EUR as a reserve currency

Anti-dollarPrimary foil to the US dollar

Liquidity improved by cross-currency flows (EUR/JPY,EUR/CHF, EUR/GBP)



5/25


EUR/USD Price action:

Tendency to trade tick-by-tick; price gaps are rare, usuallynews/data driven

Cross-currency flows are typically counter-trend in dollar-basedmoves

Prolonged, seemingly inconclusive tests of technical levels

Well-suited for very short-term trading around a core position



6/25

EUR/USD Price Action



7/25


EUR/USD

Technical approaches:

Deep liquidity favors use of momentum oscillators (MACD)

Longer-term studies are preferred due to plodding price action

Divergences between price and momentum are frequent; check DMI

Trendline analysis to confirm breakouts and divergences



8/25


9/25


USD/JPY

Fundamentals:

JPY is the third major currency bloc 13% of daily globalvolume (source: 2007 BIS Survey of Forex Markets)

Politically sensitive to trade, proxy for Asia

MOF routinely involved in currency markets

Massive savings/investment pool; asset managers tend tomove as a group



10/25


USD/JPY

Price action:

Prone to trends or sideways movements, then rapidadjustments

Highly directional on breakouts, minimal pullbacks orbacking-and-filling

Tends to respect technical levels with fewer false breaks

Resting orders from asset managers frequently definehighs/lows, reversals



11/25

USD/JPY respecting technical levels



12/25


USD/JPY


Trending behavior suggests trend following tools instead ofmomentum:

DMIMoving averages (21 & 55 period)Parabolic SAR

Ichimoku analysis Candlestick patterns critical to spotting reversals/breakouts Trendline analysis is very effective, channels form frequently



13/25

USD/JPY technical approaches-Candlesticks



14/25

Ichimoku-One Glance Cloud Chart




15/25


USD/JPY

Tactical trading considerations:

Trendline break-outs can be actively traded

Stop losses* can be kept tight to technical levels

Favor a 30-point reversal for stop loss on breakouts

Be aware of EUR/JPY levels and JPY-cross flows, look forsimilar tech levels

*Placing contingent orders will not necessarily limit your losses



16/25


GBP/USD

Fundamentals:

2nd largest economy in Europe, 12% of daily globalvolume (source: 2007 BIS Survey of Forex Markets)

Acts as a volatile USD-alternative, explosive reactions toUK-based data/news

Bank of England monetary policy; MPC minutes andconsumer/housing data

Higher leverage cost for margin trading



17/25


USD/CHF

Fundamentals:

Extremely illiquid only 5% of daily global volume(source: 2007 BIS Survey of Forex Markets)

Reputation for safe-haven status in times of geo-politicaltension

Highly dependent on cross-border trade with EU

SNB active in currency, mostly concerned with EUR/CHF



18/25


GBP/USD & USD/CHF

Price action:

Prices tend to be jumpy even in normal markets

One-way traffic in highly directional markets, minimalbacking and filling

False breaks of technical levels, stop loss zones arecommon

Frequently forms spike reversals of 30-40 points


GBP/USD l ili l d f l b k


19/25

GBP/USD volatility leads to false breaks



20/25


GBP/USD & USD/CHF


Trendline analysis favors using longer time frames (> hourly)

Momentum useful, but need to filter with DMI when overdone

Look for spike reversals and breaks of parabolic support and

resistance

Williams %R to identify potential reversal areas



21/25


GBP/USD & USD/CHF

Tactical trading considerations:

Reduce position size and adjust stop loss* levels due togreater volatility

Allow a greater margin of error for breakouts

Leading indicator for EUR/USD and overall dollar direction

Quick on the trigger resting stop loss* entry orders; trailingstops

*Placing contingent orders will not necessarily limit your lossesForex trading involves a substantial risk of loss and is not suitable for all investors.

Past results are not indicative of future results.

EUR/USD tends to lag in breakouts


22/25

EUR/USD tends to lag in breakouts


GBP/USD d l d h i b k


23/25

GBP/USD tends to lead the way in breakouts


C bl l d b h i t


24/25

Cable can lead by hours or minutes


EUR/USD following Cable on a breakout


25/25

EUR/USD following Cable on a breakout


Documents

Unlocking the Secrets