The focus of this article is a new study by Caporale and Plastun. They suggest that there’s an edge to be had in forex markets by trading gaps. However, they could not find an edge in other assets.
Following are some of the findings from the research paper and then some concerns we have about their results: Read more »
With the fear and uncertainty of a possible Brexit, GBP/USD has been one of the worst performing currency pairs this year, falling as low as 1.38 in late February.
However, recent weeks has seen the currency stage a comeback, taking the market back to the important 1.4600 level as traders bet the pessimism was overdone. Read more »
As I predicted on Monday, the Federal Reserve kept interest rates on hold yesterday and this saw the US dollar drop against most of its major trading partners. The central bank cited low inflation and uncertainty abroad as the main reason to keep rates on hold and this has pushed market expectations for the first rate hike out to 2016. Read more »
USDX is the US Dollar index that is used as an indicator by traders who wish to deal in gold currencies, futures, commodities and bonds. It’s one of several indicators which help Forex traders to assess the relative strength or weakness of the US dollar against another currency. Read more »
As I mentioned in a previous post, I do not classify day trading as an easy route to riches. However, if you were to ask me what my favourite approach would be, I would say pivot points. In this post I will illustrate how to use pivot points in trading stocks and forex.
How to use pivot points in trading
Pivot points can be calculated on most charting packages now but it’s still handy to know the exact formula so you can calculate them yourself, so here it is:
Pivot (P) = (High + Low + Close) / 3
R1 = P + (P − Low)
S1 = P − (High − P)
R2 = P + (High − Low)
S2 = P − (High − Low)
R3 = High + 2 × (P − Low)
S3 = Low − 2 × (High − P)
In essence, I think pivot points work quite well because they are always adapting to recent price action. They are also watched by lots of professional traders and because of that I think it gives them more significance.
Traders can use pivot points in different ways. Personally, I find them most useful as profit targets because when a market hits a pivot level it nearly always holds up there for at least a short period of time.
I tend to be bearish on a market so long as the price is below the pivot and bullish so long as the price is above the pivot. I also like to combine pivots with other indicators and to watch the news.
For example, if the market drops through the pivot on some significant piece of news I will often short the market and look to buy it back on one of the support levels. Depending on the momentum of the market, I might take all the position off at the second resistance/support or I might take half the position off. Indeed, I might hold out for the third level if price action is really moving.
Rarely, if volatility is dead, I will take a position off at S1 or R1.
Watching momentum is therefore very important when using pivot points and it’s also a good idea to watch the ATR. That way you can see what is happening to volatility. If volatility and momentum are tapering off it’s a sign to exit your trade more quickly.
In order to illustrate how to use pivot points in trading I thought it would be a good idea to show some examples from last week. These charts are all taken from the same period. You’ll notice from these charts that pivot points do get hit a lot of the time.
As can be seen in the next chart, pivot points often produce uncanny levels in which to enter or exit a market.
On the 29th July, the pivot, or just below it, would have been an excellent place to sell and the third support (S3) would have been a great place to close the trade, making around 30 pips.
On the 30th, the market declined and bounced off the second support and on the 31st the market stayed around the pivot for most of the day.
On the 1st August, the currency pair pushed through the pivot in the morning and moved right up to the third resistance, giving a trader 40-50 pips if long.
During the same period, the pivot also acted as a strong level for GBP USD.
On July 29th, the market dropped 60 pips from the pivot to the third support and on the 30th the currency moved up to the pivot before falling back to the second support.
On the 31st, GBP USD hit the pivot in the morning then moved down to the first support where it consolidated.
And on the 1st August, the currency touched the pivot in the morning then moved lower throughout the session, closing right on the second support. The second support (S2) was a great place to take profits.
As you can see from the next chart, a similar story unfolded for the Kiwi US dollar pair.
On most days, the key pivot levels provided great places to enter buy and sell orders and take profits.
On the 29th, the currency fell through the pivot all the way to the second then third support.
On the 31st, the currency turned back off the first resistance to the pivot and on the 1st August the currency moved between the first support and first resistance.
As can be seen, pivot points can work in volatile as well as trending conditions.
People often want to know whether forex trading is profitable. They see a strategy online promising 1000% returns and millions of dollars in profits and wonder whether they too can become successful forex traders.
On the flip side, though, they will also have heard the stories of those traders who have lost money and in the back of their minds they will wonder if forex trading is no different to gambling.
Read more »
It looks like it will be another busy week for traders this week, with plenty of economic releases and central bank announcements. Traders will be watching the Bank of Japan this week as well as inflation data out of the UK and central bank minutes from the BOE, RBA and Fed. Traders will also be alert to UK GDP and manufacturing data out of China.
Read more »
In a new section for this blog, I have decided to start a series of posts called ‘Friday’s finance links’. Every Friday, I post some of the best links to finance websites and articles that I have found for the previous week.
Friday’s finance links:
Super rich: The greed game – Excellent video from BBC’s Robert Peston about the financial crisis and the super rich.
Newtraderu.com – Operated by experienced trader Steve Burns, this site is updated frequently and has lots of good tips. I particularly like the round-up of tweets from live traders.
Time to hedge? – Interesting article on Seeking Alpha, is it time to hedge?
Value stock screener – Awesome stock screening tool from Old School Value. Net Net Working Capital stocks doing very well.
Volatile stocks – This week’s most volatile stocks on Finviz. Check out $LCUT and $ATV
20k Project – Shout out to spokey, making money in the Australian stock market
10 best gold miners – Larry Edelson always has something interesting to say on the Money and Markets site. This time it’s gold miners.
Currency markets saw some sharp moves on Wednesday as FX traders responded to a plethora of economic releases and statements by selling the US dollar and buying the Euro, Japanese yen and British pound. This has seen EURUSD enter an overbought condition that could lead to some short term downward pressure for the pair.
Traders would have anticipated the monthly Federal Reserve policy meeting to be the main item on the agenda on Wednesday, but in the end, Fed officials kept in line with expectations and were ultimately upstaged by a lacklustre GDP print.
US GDP came in at just 0.1% versus the 1.2% expected and was a real disappointment. This saw EURUSD rally around 80 pips on the day to close around 1.3870. Meanwhile, GBPUSD hit a four and a half year high, soaring by around 70 pips, and USDJPY dropped through all three support levels to 102.2.
Overbought condition for EURUSD
Looking at the chart, EURUSD appears to be entering an overbought condition here and this is confirmed by both the CCI (commodity channel index) and Williams percent range indicators, on the daily chart. For now though, RSI and Bollinger Bands are still not yet showing the market as overbought, though they are on shorter timeframes.
Source: IG Index
More importantly, however, an analysis of open position data reveals that the market is now in a significantly one-sided position.
Open position data from large forex broker Oanda (below) shows that only 23.15% of current open positions are long positions and this makes EURUSD the most one-sided market of all the major forex pairs. Significant one-sided ratios, those below 25% often indicate that a reversal is around the corner because the market has become imbalanced. The only way to address that balance is if the market corrects, so short term traders should turn bearish on EURUSD for the next week or so.
Source: Oanda FX