Forex Blog

Let’s do a quick analysis of the Euro and see what we come up with. It’s obvious the Euro has been trending down ever since the overall high of 1.6038 making an incredible drop to 1.2329, that’s a 23% devaluation in roughly 4 months.

Using Fibonacci and measuring this incredible drop in price we get our retracement points to this move. Looking at how price has reacted to these levels we can see defined support and resistance created at or around these levels. In the example below (Figure 1) we have the Euro weekly and the downtrend measured. Highlighted you’ll see the points that the market has retraced to and each time was successively lower each time, most lately retesting the 38.2 Level or the (Short) level. I say the short level but the market can retrace to the 61.8 level and still remain a short market, its just if price can be maintained below these levels it remains in a short condition. In order for the downside pressure to be relived the market will have to break the 61.8% level and be maintained above that and well see a Long market once again.

Figure 1

Now if we take this one step further and we measure the amount of price that has retraced into this downtrend, we will get the support points. If these support points (from the amount of retracement we get) show support and price bounces from them, we know that price will make another attempt to break the downward momentum and try to break that Downtrend Long level. In (Figure 2) we now measure the retracement to find out if an attempt to break Long will be underway what we find is support fails and the downtrend will continue. This is telling us the Downtrend is still prevailing.

Figure 2

This is the longer term viewpoint, but not tradable for the average trader with a mini account, the stop losses are too large and the time in trade is extreme, most traders aren’t going to have the patience to hold out on a trade for 9 months anyway.

Regardless, back to the analysis... we’ll zoom in a little now and look from the Daily chart of the same pair and look at the more recent price action. The weekly and even monthly view gives you that overall feel of the market. In (Figure 4) we look at the Daily chart of these same levels drawn from the weekly chart

There isn’t much difference but now you can see a lot more of the chop in the markets and as you go to a smaller and smaller timeframe this is what you going to see, more and more chop or whip. It’s just the natural rhythm the market is making as the order flows come through.

We’ve established the overall levels price is reacting to now since were on the Daily chart and price has made such large movements we can look at some the smaller waves on the smaller timeframes.

If we take the same approach to the current movements on the Daily chart we get this view in (Figure 4), we establish the downtrend and we see price rally’s back up and is testing the resistance of this Daily wave down now. All we need now is to know the support points if price fails here and begins to move back down.

Figure 4

In (Figure 5) we now measure the amount of retracement we’ve had since its current low point in the market. With the current location of price now if we have the failure to break the resistance of the Downtrend pivot point and we begin to move back down we have 4 support points to watch. The downtrend Short level (previously resistance now support) and of course the 3 inner levels of the Retracement tool. If were going to get a bounce in price it will come around these levels we just simply watch price action or reaction as it tests each point.

Figure 5

If these 4 points fail as support, guess what? That’s right the downtrending continues. If we get a bounce in price from any one of these 4 support points price make another attempt to break the Resistance points of the Downtrend and begin to move into the Long side of the market from this timeframe. This in turn will prompt more attempts at buying dips and the success of long positions will have better chances of success.

If we go one step farther we can watch the price action from an even lower timeframe and see in better detail the price action as price reaches these points. In (Figure 5) the same Daily chart is zoomed into the 4 hour timeframe.

Figure 6

So what does this tell us and what do we do with this? Well this is developing a trading plan from an analysis. The analysis tells us that price is testing a resistance point from the downtrend and if the resistance holds, price will begin to move away from that point and begin to trade lower in value. As it trades lower, and if buyers are interested in buying into this and make another attempt at breaking resistance, they will begin to come in at the support points from the Retracement levels and if we see this in the price action we will join them and ride the backs of those that are moving the market from order flow. If the support points fail there is not enough interest in buying the Euro and the general sentiment remains short and selling the rally’s or movements up in price will still be dominant. Don’t get too zoomed into every little movement you see on the smaller timeframes, just because you see price move up for 2 or 3 days doesn’t mean anything, all it means is nothing changes unless the major support and resistance points in the market are getting broken and you would be better served to know where these points are instead of entering long because the stochastic on the 1 hour timeframe is oversold, start learning price action and support and resistance and then you’ll truly begin to gain a feel for market movements and understanding the markets better only enhances your ability to trade in them.

If you like what you’ve seen here and would like to know more keep visiting us at Bobokus .com and I can help make sense out these markets.

Thanks for reading - Jeff