Monday’s Trading of the EURUSD – Attention to the Trend

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Monday’s Trading of the EUR/USD – Attention to the Trend

Having consideration for the trend is a large part of trading successfully. Ideally, all “newbie” traders should adhere to the idea of not necessarily trading with the trend, but rather not trading against it. It’s the best way to at least ensure some degree of avoiding poor trade results, in that you’re not stacking a very important factor against you. As I’ve stated in previous articles, trend trading is the one form that has stood the test of time as a profitable trading venture. It’s really something that’s been helping financial market traders earn profits for over a hundred years at this point. And ideally, it should be used in some form or another in trading in which profits are derived from investing into the belief that the market will be going in one direction or the other.

Indeed, taking trades against the trend can be perfectly viable in some circumstances, but it should probably wait until you’re a bit further in your trading career. Even then, these types of set-ups should naturally be taken more sparingly than those that coincide with the direction of the trend. Or in overall neutral markets, where price doesn’t have a predilection for one direction or the other.

I did write a post a few weeks ago from the time of this writing regarding how to effectively trade against a trend. It can be found here.

Monday’s Trading of the EUR/USD

1. First off, I know the white line in the images in this post might seem strange given there is no obvious reference as to what it pertains to based on the candle arrangements representing the price history. It is simply the 1.33961 price level that came into play during Friday’s trading. It could easily have been something to delete, but I was still curious as to how price might act around it so I kept it on the chart. I hope it doesn’t serve to cause any confusion when looking at some the images in this article. But as fate would have it, I did use this price level for my first trade.

2. The support 1 level of 1.33944 was the first thing in play today. It did act as support at its first touch at 2:30AM EST, but there wasn’t a clear rejection of this level or any hint that buyers wanted to move this market higher, as the price only moved back up a couple pips.

When it came down to 1.33944 a second time, there was a false break, nearly a five-pip wick on the 2:45 candle, which is large considering the time of day. Another attempted close below support 1 occurred on the following candle, but the buyers once again pushed it back up.

Based on my understanding of market dynamics, usually when price falsely breaks a level (i.e., moves down briefly only to come back up to the support or resistance level), it tells me that the direction of the false break is likely to prevail in time. In this case, the buyers were able to preserve their desire to keep the market around support 1 and near the 1.3400 whole number; the sellers were likely bound to win out eventually given the surge they were able to create. The buyers’ wish to keep the market that high is artificial in a way, and the sellers are demonstrating that their ability to push the market lower is genuine and that any up movement is likely to be merely temporary and hanging on by a thread.

3. When price finally broke support 1 on the 3:00 candle, support 2 became the next area of interest as an area for call options. While a call option trade did set up the way I normally want it to based on price action around the predetermined price level (which serves as the entry point), I passed on it due to the downtrend at the moment.

To me, it felt entirely conceivable that price could continue going down. Trends often do breakout within an hour of the European market open. The trade would have worked out, but I felt fine passing on it. I would later do the same thing at support 2 about an hour later.

4. On the way back up to support 1 (1.33944), I was interested in put options at this area. But given that price had also formed a congestion area above support 1 recently, I decided to wait a bit and see if it would return back to up to the top of that. In terms of a price level, it roughly coincided with where the white line is located – 1.33961.

Support 1 wouldn’t have been a bad trade. There was a touch and rejection and a subsequent re-touch, but I believed some movement back up to the top of the previous congestion (again, where the white line is situated roughly) could be likely, at least possibly in the form of wicks. This did occur and once I saw rejection on the white line and price seemingly hitting a ceiling here, I decided to get into a touch of 1.33961 on the 3:30 candle.

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This trade had some time to develop, which I liked. All four of the five-minute candles that encompassed the price movement during this trade were red, and I had a three-pip winner by expiration.

5. Once support 2 was broken, I began considering that level for put options. The trend was clearly down, so support 2 (1.33890) could reasonably serve as a good area for that.

Price did get up to 1.33890 on the 4:50 candle, but there was a close above the level. Given that it did not set up to my liking there I waited for perhaps another opportunity. This came into clearer view just before 6AM EST. The market got up to 1.33890 on the 5:45 candle, but there was a decent charge up to this level so I waited. There was a break and close right at the level on the 5:55, followed by a nice long wick down on the 6:00. This told me that selling was still in play so I got into the re-touch of 1.33890 on the 6:05.

This trade was a bit of a rollercoaster at first. It initially broke against me by a couple pips before closing back below at the ten-minutes-to-go mark. Then the next candle stayed in the money for a little while before closing out of it by a little bit over a pip. The closing candle made a slight comeback but I still ended up losing by around half-a-pip.

Overall, 1/2 ITM today, but still running at about 70% ITM for the summer overall.

Keep It Simple and Trade With the Trend

As a trader, you have probably heard the old adage that it is best to “trade with the trend.” The trend, say all the pundits, is your friend. This is sage advice as long as you know and can accept that the trend can end. And then the trend is not your friend.

So how can we determine the direction of the trend? We believe in the KISS rule, which says, “keep it simple, stupid!” Here is a method of determining the trend, and a simple method of anticipating the end of the trend.

Before we get started, we want to mention the importance of time frames in determining the trend. Usually, when we are analyzing long-term investments, the long-term time frame dominates the shorter time frames. However, for intraday purposes, the shorter time frame could be of greater value. Trades can be divided into three classes of trading styles or segments: the intra-day, the swing, and the position trade.

Large commercial traders, such as those companies setting up production in a foreign country, might be interested in the fate of the currency over a long period of such as months or years. But for speculators, a weekly chart can be accepted as the “long-term.”

Averages Moving in Pairs

With a weekly chart as the initial reference, we can then go about determining the long-term trend for a speculative trader. To do this we will resort to two very useful tools that will help us determine the trend. These two tools are the simple moving average and the exponential moving average.

Chart 1: May 2006-July 2008

In the weekly chart above, you can see that for the period of May 2006 until July 2008 the blue 20 interval period exponential moving average is above the red 55 simple moving average and both are sloping upward. This indicates the trend is showing a rise of the euro and therefore a weakening dollar.

In August 2008, the short-term moving average (blue) on the chart below turned down, indicating a potential change in trend although the long-term average (red) had not yet done so.

Finding the Change in Trend

In October, the 20-day moving average crossed over the 55-day moving average. Both were then sloping downward. At this point, the trend has changed to the downside and short positions against the euro would be successful.

Chart 2: October Short-Term Moving Average

Still looking at Chart 2, we notice that the short-term moving average goes relatively flat in December 2008 and starts to turn up, now indicating a potential change in trend to the upside. But a closer look at the 55-day moving average, as of December 2008, shows that the long-term moving average has remained downward sloping.

By checking Chart 2, we can see that the first arrow from the left indicates that the long-term moving average has turned down, indicating that the weekly or longer term trend for the EUR/USD has now gone down. The second arrow indicates where a new short position could have been successfully taken once the price had traded back to the down sloping moving average.

The goal here is to determine the trend direction, not when to enter or exit a trade. Of course, this is not to say that there were no trading opportunities in the shorter time frames such as the daily and hourly charts. But for those traders who want to trade with the trend, rather than trading the correction, one could wait for the trend to resume and again trade in the direction of the trend.

Euro, US Dollar Focus in the Forex Markets This Week

– This week brings a number of drivers to the FX market, with heavy emphasis on European inflation and a batch of US-related items to be released throughout the week. Out of the US, attention will be on new Fed Chair, Jerome Powell, for his first Humphrey Hawkins testimony on Capitol Hill. When Mr. Powell delivers the Semiannual Monetary Report to Congress, he will begin with prepared remarks after which the floor is open for questions. And those questions can be wide-ranging.

– The US Dollar is holding on to gains from what was a surprisingly strong week. In the week before, the Greenback perched-down to fresh three-year lows; but after a bullish engulfing candlestick formed on that Friday, strength continued for most of last week. As we open this week, there is both a bullish and a bearish case behind USD.

– Are you looking to improve your trading approach? Check out Traits of Successful Traders . And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide .

If you’re looking for longer-term analysis on US Stocks, the Euro or the U.S. Dollar, click here for our Trading Guides .

This Week’s Calendar is Full of Drivers with Heavy Europe, US Focus

This week’s economic calendar opens up a bit as we have a number of high-impact releases on the docket. Of particular interest will be a batch of Euro prints on Tuesday and Wednesday along with a series of US Dollar related-items spattered throughout the week. Out of the US, the big item is Mr. Jerome Powell’s Humphrey Hawkins testimony, or the ‘semiannual monetary report to Congress.’ This will take place on Wednesday and Thursday, and we’ll see Mr. Powell deliver some prepared remarks before taking questions from both sides of Congress (the House is on Wednesday, the Senate on Thursday).

The high-impact events on this week’s economic calendar are listed below, all times in Eastern.

DailyFX Economic Calendar – Week of February 26, 2020

Chart prepared by James Stanley

US Dollar – Bullish Continuation or Return of the Bears?

The big Forex item from last week was strength in the US Dollar . The Friday before last week saw a bullish engulfing candlestick form off of fresh three-year lows; and that strength continued for most of last week. On Friday, we looked at the initial stages of congestion after DXY tried to take out the 90.00 level, and this led to a bull pennant formation on the hourly chart.

After gapping higher and then testing the 90.00 level shortly after this week’s open, the Dollar trickled-below support to help produce fresh short-term lows. But, a bit of strength has started to show ahead of the US open, and prices are now pushing back towards prior points of short-term resistance.

US Dollar Hourly Chart: Pennant Starting to Give Way as Volatility Builds Around USD

Chart prepared by James Stanley

The Bearish Side of USD

The bearish argument behind the US Dollar as we open this week would be looking for continuation of the trend that’s been in place for a year now, looking at last week as a blip in the radar that can allow for short-side positioning driven by the expectation for that trend to keep going.

Last week’s rip-higher ran into a bearish trend-line projection, and last week’s swing high can help with strategizing short-side plays. Last week’s swing-high around 90.24 can be used for stop placement, while potential resistance levels inside of that can be used to look for entry.

US Dollar Four-Hour Chart: Lower-Highs

Chart prepared by James Stanley

USD/CHF for USD-Weakness Scenarios

The pair that we’ve been following for short-side USD scenarios has been USD/CHF . Prices set a fresh two-year low just a couple of weeks ago, and last week brought a retracement that produced a lower-high. For those looking at bearish continuation in USD this week, the short-side of USD/CHF can remain as attractive.

USD/CHF Four-Hour Chart: Lower-Lows, Highs

Chart prepared by James Stanley

The Bullish Case for the US Dollar

Given the bearish break of the bull pennant on the hourly combined with the above four-hour chart, it might be difficult to muster a bullish view behind the Greenback. But – in markets, it’s those outlier possibilities that deserve focus and the fact that the Dollar remained bid last week is still a fact that traders need to contend with. Longer-term oversold conditions in the US Dollar can keep the short-side vulnerable to squeeze scenarios, particularly in areas as we’re in now where most signs seem to be pointing-lower on the charts.

Also – if we combine the above with the types of drivers out of the US this week, and we have to add an additional amount of uncertainty. Wednesday and Thursday bring the first real ‘getting to know you’ items around new Fed Chair, Jerome Powell. This is something markets haven’t seen yet, or even heard and anytime there’s something new in the environment you have to open to the possibility of something new taking place in price action. While this is far from a certainty, it’s at least worthy of mention.

On the below two-hour chart, we’ve added a Fibonacci retracement to last week’s bullish move in the effort of finding jump-off points for continuation. The 38.2% and the 50% retracements both come-in around interesting areas of prior inflections; and support showing here can open the door for top-side strategies in USD.

US Dollar Hourly Chart: Bullish Continuation Support Potential

Chart prepared by James Stanley

For USD-Strength Scenarios, Check out AUD/USD

While the net of USD’s price action for this month has been a lot of back-and-forth, AUD/USD has started to show tendencies of a bearish turn . This started in late-January after the pair had failed after setting fresh yearly-highs; and when bears came-back, they came back with a vengeance.

On the four-hour chart below, we’re looking at a symmetrical wedge after the early-February sell-off in the pair; and notice how the 23.6% and 38.2% retracement have helped to mark a series of recent lower-highs in the pair.

AUD/USD Four-Hour Chart: Digesting Early-February Sell-Off

Chart prepared by James Stanley

The Euro

There is an X-Factor for this week across FX markets, and that’s the Euro. The Euro sees a couple of vital prints with inflation being released out of Germany on Tuesday and the Euro-Zone as a whole on Wednesday. Given that DXY is more than 57% denominated in the Euro, there is the distinct possibility that this week’s FX trends are driven by the single currency with the US Dollar just going along for the ride.

The chart itself, at least at this point, is devoid of any significant fireworks. A prior support zone is help to set short-term resistance while the ‘s2’ level that we’ve been following helped to set the lows in the overnight session. These are the same group of levels that we’ve been following for most of February , and the fact that this is the case indicates that the Euro could be somewhat of a sleeping giant of volatility should markets get the proper motivation from this week’s inflation prints.

EUR/USD Four-Hour Chart: Short-Term Support, Resistance Still Holding

Chart prepared by James Stanley

Euro Strategy Away from USD

Given that both the Euro and US Dollar are in the spotlight this week, combined with the fact that both are going through longer-term stories of strength (Euro) and weakness (USD); and traders may want to look at Euro-positioning away from the US Dollar in the effort of isolating variables.

For those looking at Euro-weakness, EUR/JPY can be attractive. The pair just set a fresh five month low on Friday, and this was a breach of a big support zone that had previously seen multiple inflections in the pair. Prices have tip-toed higher in the early portion of this week, but if we do see Euro-weakness around those inflation prints, this could lead to an extended downside move given that that big zone of support has started to give way.

EUR/JPY Daily Chart: Bounce From Friday’s Fresh Five Month Lows

Chart prepared by James Stanley

For Euro-Strength, Check out EUR/AUD

EUR/AUD has spent most of February trying to break-out to fresh two-year highs. It’s been a futile effort so far, as any trip above the prior high at 1.5773 has been thwarted by sellers.

EUR/AUD Daily Chart: Persistent Attempts to Break Out to Fresh Two-Year Highs

Chart prepared by James Stanley

EUR/AUD Range Near Resistance

On a short-term term basis, that persistent attempt to take out those highs has produced a near-term range. The range itself doesn’t have great distance, so this may be unattractive from a pure perspective; but traders can trade the range with a prior trend-side or breakout-expectation type of bias, looking to accumulate near support with relatively tight stops; and then looking to adjust those stops on revisits to resistance with the potential for a bullish breakout to show-up.

EUR/AUD Hourly: Range-Bound Near Two-Year Highs

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on the Euro, the British Pound or the U.S. Dollar? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on our EUR/USD , GBP/USD , USD/JPY , AUD/USD and U.S. Dollar pages . Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator .

— Written by James Stanley , Strategist for DailyFX.com

To receive James Stanley’s analysis directly via email, please SIGN UP HERE

Contact and follow James on Twitter: @JStanleyFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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