Forex Blog

It was a very volatile week where we saw the Euro climb continue its upward press to the tune of 1290 pips only to top out and then fall 895 pips; all inside of 1 week! It's not very many times where you will see the Euro outpace the GBP in range. GBP made an early run in the week climbing a little over 800 pips, only to later lose all the ground gained by falling 910 pips. Those of you who have been trading for a few years may remember the Euro being good for 70-100 pips on a good volatile day; now we're getting that much in a 1 hour candle. This just goes to show you the changes in the market conditions you’ll have to face and be able to adjust to in your trading career.

 

Those new to trading this year will consider this type movement from the Euro as normal, when in fact it is a result of the economic turmoil throughout the world. At some point the Euro will return to much smaller range days. You’ll now have new trading system developers that have made their automated trading system based on the conditions we have seen this year because this is all they know of the market . Once conditions change they will be at a loss to why the system they developed a few months ago, which was maybe even profitable, no longer works and is actually losing more than it makes now. More on the pitfalls of automated trading systems at a later time, but this is why the most simple of methods will continue to work and stand the test of time. By teaching simple and logical methods through our Forex Education, we are training traders that will be profitable in the market for as long as they choose.

If we look closer at the events that unfolded this week with the Euro, it had many guessing as to where it would finally top out. I myself was very surprised that it met little resistance in the incredible push up this week. When we have these major movements it helps to track price from both a Support and Resistance viewpoint as well as from our longer term Fibonacci levels. In these first 2 examples we look at the overall downtrend that the Euro has been following after its yearly high of 1.6038 to the low of 1.2329; a loss in value of a shade over 23%. These first two examples are from the perspective of longer term Fibonacci. The first chart is the view of a weekly chart (figure 1), the second is the same view but from the 4 hour chart (figure 2) and we can see where price finally met enough resistance to top out at.

Figure 1


Figure 2


We find this move was a 61.8% retracement of the overall current down trend. The 4 hour perspective just gives a more zoomed in view of what we see happening on the longer term time-frames.

Looking at where price is now from a natural support and resistance view, we simply look back to the previous ranging periods in history. Where we are now is in the 1.3850 to 1.4950 trading range from around late 2007 and a few points established early in 2008 and then again later in 2008. If the Euro remains above 1.3850 we can expect it to trade in this range. Figure 3 is a representation of this from a Daily chart

Figure 3


Now If the Euro cannot be maintained in this range we will see it drop back into the range established just below the one in Figure 3. The next example is the trading range we can expect the Euro to trade in if it looses some of the value its gained from the push up in this most recent week. Figure 4 is the trading range just below where price is currently.

Figure 4


So as you can see the Euro has reached a pivotal point where it will decide its next direction. In the following week we should see it establish which range we will see it trade in during the next week or weeks.

Once price decides on the range it will establish itself in, we can go into the next week with an idea of what kind of trading range we’ll be looking for and be better prepared as we enter trades. Now that we’ve looked at the resistance levels price is respecting, we also want to look for the support levels to be aware of. With a combination of Fibonacci and the trading range we found from the Daily chart (from natural support and resistance points that are below the current price) the support picture looks like the chart in Figure 5.

Figure 5


The lesson in this is not to forget the bigger picture, since this is where you establish the expected trading ranges ahead of price. It’s the most simple of things that will work the best in the long run, they always have and they always will. Our human nature causes us to over-complicate things and we are often our own worst enemy in this respect. So don’t forget simplicity.