Fundamental Analysis Dilemma

Experience traders usually rely heavily on the fundamental analysis more than technical in their daily trading. This is because they have already study for so many years about the behavior of market movement affected by each of the economic data. Despite of their overall success there are certain times they still at least incur some losses. And their only solution to cut that losses is by putting a stop loss limit so that the market will not slide away too far of the expectation.

As for the beginner forex traders please don't mess up with the economic data if you totally have no idea how it works. However I would suggest take your time to make a thorough study in order to build your own experience on the market behavior for each of the economic data such as interest rates, non farm payrolls, Gross Domestic Product (GDP), Consumer Price Index (CPI), etc. These are the unexplainable facts that you cannot find in any forex books written by any experts because they don't know the effect on the market either. This is where you have to be your own experts in forex trading.

The very problem of fundamental factors is because they are so unpredictable especially its immediate effect which can drive you crazy. Take for example during non-farm payrolls data release, some traders consider it as profitable and some others see it dangerous time of trade. The fact is no one really knows and when it happens they either could be wrong or right. No matter what figures comes out whether it is as expected or not the market still can go crazy moving at any directions i.e. ups, downs, or up and downs defying all the technical rules. As a result some traders will make huge profits in matter of seconds i.e. 200 pips or more and others may suffer great losses. Some can even profit in both direction to double their pips earning.

Now in this topic I will discuss how can we use technical advantage to solve the problems of fundamental factors dilemma. And for that reason I am not going to discuss how to make profits in both directions or straight win on the first setup but rather to identify the point of overbought/oversold positions. Furthermore I will not guarantee you will make profits because the market will be very fast moving and the likelihood for you to miss the boat is very high. In this case if you miss it just let it go.

In order to make discussion easier to understand i am going to use 4 hourly time frames which is one of the most difficult for the market to break its resistance without solid support. During non-farm payrolls data or significant economic data the market may shake vigorously without any direction. The quicker it moves the weaker the foundation of the movement. Most often it will pass the resistance level in this case 4 hourly time frames and create overbought/oversold positions. You can see this on the Bollinger Bands indicator. So this is chance for you to setup your position, but don't do it too quickly when it is still moving underway and let it go slide further away from the resistance level to create super overbought/oversold position. As it is reside far outside the B. Bands resistance lines then just setup your position.

At this point even the most powerful trader with most money including those brokers traders use to call "bucket shop" will not dare to try any further move because it is already too far from the moving average.

The market will eventually make corrections to normalize the overbought/oversold situation to the ideal position where the market supposed to be. Or in fact you may get lucky if the market make total reversal you will make good profit for the day.

I am sorry for unable to provide visual image of the non-farm payroll data because it happens less regularly at this point of time. Therefore i am unable to get the recent chart. You will find out yourself someday and check economic calender here at forexfactory

Candlestick count post analysis

On the 13th of May i have made a prediction analysis on GBP-JPY (See the post here....) by using the common sense of candlestick counting. And at that time i was expecting the pair to make two white candles formation going up. Today we can see the results on monthly time frame 2 white candles have been formed exactly near the month almost ended.

This is one of the advantage if you are very familiar with the candlestick counting. Using that advantage you can figure out the direction of the market from the larger time frame perspective. See the chart before and after.

Before on the 13th of May 2008

After on the 29th of May

Now that we have predicted GBP-JPY correctly let's prove this again by looking at EUR-USD. After two black candlestick downwards for two months we will expect the next candle to be white and going up for the next month of June until it ended. Let's see what happen next?

Chart on 30th of May 2008

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Indicators Setting

Many of us traders especially beginners have a little idea of how the settings of indicators affect our trading. This misconception or lack of understanding will result in them to find the best setting of all from other fellow traders. In their effort to do so they constantly fail along the way as confusion loom when one setting after another failed to deliver good results.

The fundamental idea of the settings actually lies on the mathematic of moving average. For example if you average numbers with smaller gap for example 1 and 2 will give you more volatile picture on the chart whereas 1 and 10 average is much more smoother. If you think about it again they are actually coming from the same source the only difference is the gap of average. Therefore it is doesn't really matter whatever settings you are using it will still be same. The most important thing is how to relate the movement of the chart with the indicators.

Try to get yourself sometimes to study the chart with a single setting for the indicators. You will better this way and able to understand more about the chart movement relationship with the indicators.

If you have really have no idea what setting you use try this one;

Stochastich: FastK: 5 SlowK: 5 SlowD: 3
Bollinger Bands: Period: 20 Multiple: 2.2
Moving Average Convergence Divergence (MACD): Fast EMA: 12 Slow EMA: 26 MACD SMA: 9

Counting Candlesticks

As daily trader or scalper you maybe very familiar with the use of candlestick charting especially the formation patterns for example morning star, evening star, hanging man, etc to predict the future movement. However today I am going to discuss about something unusual that not many traders maybe practicing that is counting the candlestick. The idea pop in my mind when I was observing the candlestick chart movement for quite sometimes as I discovered that there are common numbers of candlesticks count that goes with the technical indicators of MACD and slow stochastic behavior

For example in my observation there 2 candlesticks will be formed when only slow stochastic go against the MACD and 5 candlesticks if both of the indicators move in the same direction. See on the chart below…

Notice the above chart when MACD and Stochastic move in the same direction at least 5 or more candlesticks are formed either direction. And if stochastic move in the opposite only 2 candlesticks are created.

Even though there are times that it may not be same number of candlesticks but in general it does follow my observation experience. You can try to observe them to confirm my discovery.

As a result of this observation I have come to one conclusion that sometimes I will use the 2 to 5 candlesticks counting standard to set my target profits. The reverse also can be true when you think about setup place after 2 or 5 candlesticks has been completed. Remember that there is relationship between the parallel movement of MACD and Slow stochastic in order to get the right number of counts.

Let us experiment with the GBP-JPY chart let in the monthly time frame. Notice that MACD is still going down and Slow Stochastic is moving upwards direction so we are expecting 2 white candlesticks to represent the correction by slow stochastic after the month of May ended. The second candlestick is now still have black body due to retracement but we are expecting it to turn white until the end of May. Let's see ;)

Hedging Strategy

Hedging is one strategy that every trader should learn in forex trading. This trading method will be able to reduce your losses in case of break-out and also enable trader to trade at any moment without waiting. Therefore you don't have to wait to open position and regardless whether you are opening position on the right place or not.

How hedging work?

The idea of hedging is derived from the mathematics of correlations between the currency pairs where each of the currency pairs will affect each other whenever it moves. For some pairs I.e. EUR-USD and GBP-USD usually fluctuate in identical manner which means that when one of the pair moves the other pair will move in the same direction and vice versa. This is called positively correlated pairs.

Other pairs such as USD-CHF and EUR-USD move fluctuate in the opposite direction for example if the USD-CHF move up then EUR-USD will move down and vice versa. This is called negatively correlated pairs. See correlation table at Mataf.net

Traders utilize these correlations by playing almost like a zero sum game where it cancel profit and of course at the same cancelling losses as well. For example if you buy/long EUR-USD and sell/short GBP-USD and both of the pairs is going up, so you will make profits from the EUR-USD and losses on GBP-USD. This will cancel each other so you will end up zero profit.

The same theory applies when you buy/long both EUR-USD and USD-CHF. As these pairs are negatively correlated so EUR-USD will go up and USD-CHF will go down. Therefore you are profiting from the EUR-USD and losing on the USD-CHF resulting in zero profit.

The explanation about zero profit/losses is only a theoretical assumptions considering if only the pair always perfectly moving in the same amount of volumes and constantly in its correlated direction. However this is not the case in real life trading as there are times that one of pair will move in different volumes to its correlated pairs. And certain occasion there are times that the correlated pairs may switch direction for example EUR-USD move up and GBP-USD move down (negatively correlated) or EUR-USD move up and USD-CHF also move up (positively correlated). It is because of these factors that make profit for traders.

The above candlestick charts show that USD-CHF and EUR-USD move in different amount of volume. Therefore if you are buying/long for both pairs you will end up profiting from the excess pips on the EUR-USD and losing some from the USD-CHF.

Trading Strategy

In order to make the best setup, it would be better if the trade execution is using automated trading software. You can find this only from those who are good in Meta trader programming languages as they used to create automated indicators and trading execution templates. The idea of using automated trading software is to make automatic execution that will simultaneously open position for two pairs at the same time. This will avoid wider gap of discrepancies between the two pairs when executed. As if you are using manual execution you might get wider gaps of pips differences which can result in losses.

Secondly you need to find identify pairs which are smaller pips spread such as EUR-USD and GBP-USD or USD-CHF and EUR-USD or EUR-USD and EUR-GBP. This will help you to avoid wider gaps of pips difference that can make substantial losses.

Advantages of Hedging

1. You don't have to find any strategic place to open position. As long as you can execute simultaneously at any place for two pairs at the same time just leave the market alone decide. Even thought in the first place you make losses eventually there will be times when it will make profit.
   
2. Losses are reduced as the correlation works.
   
3. You don't to sit down and wait for your profits as you can leave the system work itself and eventually at certain time it will make profit
   
4. You don't have to analyze the market thoroughly including fundamentals or technical whatsoever.
   

Disadvantages of Hedging

1. Profits are relatively small due to the cancellation process from the correlation pairs as one profits will be cancel out by another losses.
   
2. There are still possible losses even though it is small.
   

In conclusion many professional traders have made successful trading from hedging especially those who play big money and fear substantial amount of losses. They hedge the market to harvest small profits consistently without fear of big losses. This is one of the most important strategies in forex, as in case you are getting tired of analyzing the market with all the complexities of technical and fundamental involve. Therefore hedging is one solution to save your day in trading. Try it on demo account for example buy/long both EUR-USD and USD-CHF and see later you will make profit at least 2 or 5 pips lol ;). There is no question about it that this system work very well.

More about currency correlation: by Kathy Lien Chief Strategist at FXCM Using Currency Correlations To Your Advantage