July 8, Forex Market Recap

For Japanese yen, Tuesday (7/7/2009) was an inside day (ID) with a daily range of 75-pip. Since last Friday (7/3/2009) was a holiday, which qualify Tuesday as a narrow range day (NR7).

Yen broke Tuesday's lower boundary in Asian session, which put yen in a very bearish mood, since it's a NR7/ID breakdown. Yen formed a small range and remained below yesterday's low for the whole London session and early US session. The downside follow through happened around 11:00am, which was decisive and dropped 233-pip in two hours, that is 7.3 s.d. out of average daily range. The bears are laughing all the way to the bank. There is an instant 150-pip rally after yen hit the bottom of a downward channel on daily charts.

On daily point and figure charts, there is a double bottom breakdown at 94.00. Look at hourly PnF, there is a double bottom breakdown on July 5 at 95.50, the downward momentum continued and broke support at 95.00 and 94.00 on July 6, and July 8 individually.

So the forex strategies for narrow range and inside day is to follow which direction the market is leading and prepare for a trending day. There is no need to predict direction or put personal bias on the market.

Forex Strategies for the Advance Phase 04/23/09

In the last post I used British pound as an example to discuss the forex strategies for base building phase. On April, 23, pound made another textbook example for the second phase in a full price cycle - the advance.

In the advance phase, the market is in an uptrend, usually a buying day in The Taylor Trading Technique, in which the price action tends to make higher lows and higher highs. The five waves (wave 1 ~ 5) of elliott wave theory give a good description for an uptrend. Wave 1, 3, and 5 are impulsive waves, which is the main trend, while wave 2, and 4 are corrective waves, which is against the trend.

The 5-wave structure is labeled on hourly chart. The most tricky part is to identify wave 2 and 4, since both waves formed a downward channel. A normal trading strategy for the advance phase is to long dip bottom. If a long entry was made at the first dip bottom, it will be challenged during the formation of wave 2 and 4. If the stop is tight, long positions can be easily stopped out.

Best entry to follow the up momentum is to long at the breakout of the top of channel or add position at breakout of the horizontal resistance level. After the breakout, wave 5 surpassed former swing high and reached 50% Fibonacci retracement.

To summarize the forex strategies for the advance phase,

1. only long position is considered during the advance phase

2. entry A: long at end of wave 2

3. entry B: long at end of wave 4

Forex Strategies for Base Building Phase 04/22/09

There are four phases in a full price cycle: base building, the advance, top building, and the decline. Different phases in a forex cycle require different forex strategies. Recent price action of British pound is a textbook example for trading during base building phase.

Monday (4/20/09) was the third down day for British pound, also a WS7 (wide spread 7) day. For swing traders, it's the time to collect their pips. For day traders, it would be unwise to chase any breakdown signal to naively believe they are following the trend. It's equally unwise to fade the trend too soon.

On Tuesday (4/21/09), there are two big bearish candles(see hourly candlestick chart) which took Monday's low. Impatient bulls were threaten to close their long positions, either by stop hitting or out of scare the trend will continue. To add salt to the wound, both breakdowns were fake. In that case, reckless bears got burned too. It is proved that chasing a breakdown after the third down day (WS7) is not a rewarding strategy.

After the second fake breakdown, pound made a rally, the dip from the rally made a higher low, which offered a nice spot for long entry.

On Wednesday (4/22/09), in light of Annual Budget Release, pound was hammered down 262 pips in two hours, and took Tuesday's low. The same scenario happened again - bold bears and bulls got burned dearly.

To summarize the forex strategies for base building phase,

1. chasing a sudden breakdown signal is not a high probability strategy

2. bottom guessing usually got burned during base building

3. Better wait for market out of base to make any commitment