Hi friend! Today’s the day I empty my Inbox with answers to questions that I have already answered to the originators of those questions. I thought you would be interested in the answers. I’ve called this blog post Best Trading Advice: Q&A No. 1.
I hope that you get a lot out of it. I cover precision forex trading, why not to short an up-trending market, the real mechanics behind MACD, how to figure out what the Big Dogs are really up to, and which currency pairs are correlated. If I have missed something, let me know, and I’ll dig deeper.
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Table of Contents:
So, let’s get going with this Best Trade Expert: Q&A No. 1 session. I’ll be covering seven topics, starting with the first one on determining the daily trend for the next trading session starting at 12:01 am ET. That’s when all forex sessions start.
This question was from Dr. F., and it was in relation to determining what the daily trend was going to be for the next trading session – that being the one that commences at 12:01 am ET.
My answer was to focus on pivot points in conjunction with average daily range. To that end, I would encourage you to read the blog posts I did on those two strategies:
Working with pivot points, you get an idea as to what the expected high and low are going to be for the next trading day.
As you can see on the forex trading chart below for Jan. 3/17, the expected low was M2, the expected high M4. Price came into that session smack dab at M2, and then took off for M3. With pivot points, either the expected low or the expected high is put in on any given day – but not necessarily both. You can usually expect one to be met – in this case, it was M2.
These are the exact same pivot points used by traders in the pits in Chicago, with the exception of the mid-level M-points, which I added.
Sometimes, you will find that an M2/M4 day becomes and M1/M3 day, and vice versa. Pivot points are not accounting-perfect by any stretch of the imagination, but they are a useful guide when you are trying to get your head around what kind of a trading day it is going to be.
Trading is about probabilities. There are no guarantees that this strategy, or any other for that matter, is going to work out as hoped for or predicted.
I like to combine average daily range with pivot points, because that strategy gives you an idea as to how far price is going to ‘reach.’
Take the euro, for example. The average daily range is 70 pips, give or take. That means that the euro will put in, on average, 70 pips.
Contrast that with the Starbucks stock that put in a paltry 41 cents February 10/17. And, that’s pretty common with most stocks.
With the euro, 70 pips translates into US$700 per standard lot – each pip being worth US$10. Times ten lots, and you have US$7,000 available to you each and every trading day. You can’t achieve that trading stocks.
Now, I know it’s impossible for you to grab all of those 70 pips but, if you only get 20 of them consistently, you will end up with US$4,000 at the end of the month, which is more than most people make in their day jobs.
In the example below for the USD/CAD pair, you can see that it put in ~35 pips.
I don’t know what the average daily range for that pair is, without doing the calculation outlined in the blog post above on ADR, but ~35 pips is pretty decent compared with 41 cents for Starbucks.
That amounted to ~US$3,500 trading ten lots. You can’t achieve that in one day trading stocks. For more on that, check out this blog post (Forex Wealth Strategy #1):
It should be noted that these two strategies – pivot points and average daily range – combined together should be employed in an up-trending condition, where price is trending up on whichever chart you are trading – be it the 1 hour, 15 minute, or whatever.
The USD/CAD pair below was not trending up at the time, but you can see that, just using pivot points, the outcome was not too shabby.
Ideally, I like to see both the 50 EMA and 200 EMA trending up together, with the 50 above the 200. Regardless of the trend, these two strategies will make you a better trader, and put more money in your pocket.
(Forex Trading Chart via www.ProRealTime.com)
For more forex trading advice, click here.
And now, let’s move on to Robert’s dilemma, where he shorted the euro off the 15 minute chart at 1.0735 with a wide stop, when it was trending up, essentially bucking the trend. Please refer to the chart below.
I wasn’t sure exactly where he got in, other than the fact that it was the evening of January 23/17.
As you can see from the chart below, price and the two moving averages (50 EMA and 200 EMA) were all trending up on the 15 minute chart. You should never short a pair in such a situation. Think LONG!
The Aussie would have been a much better choice for a long trade, given it was trending up on the both the 15 minute and the 1 hour charts.
Robert held on to his credit, and luck turned in his favour, with price eventually falling below his entry point, and the 50 EMA punching down through the 200 EMA to form a Death Cross.
Assuming Robert had held on long enough, his trade would have had a happy ending three days later. You can see the outcome on the 1 hour chart two charts down. As luck would have it, the trend changed in his favour, but that was sheer luck.
A word of caution… assuming you trade the way I preach – always buying the dips in an uptrend with MACD confirmation – i.e., by punching up through its trigger line from being oversold – you should always use 30-pip stops.
Regarding shorting currency pairs, or any other tradable for that matter, I don’t believe in going short, as there are far too many good opportunities to go long.
(Forex Trading Chart via www.ProRealTime.com)
(Forex Trading Chart via www.ProRealTime.com)
For more currency trading advice, click here.
And now for the question seeking clarification about the true mechanics of how MACD works.
But first, please check out my blog post on MACD:
You should always look for MACD to go completely oversold, then turn around, and punch up through its trigger line, as shown in the chart below.
The questioner wasn’t sure which the MACD line was and which the trigger line was.
Part of his problem was he didn’t have a MACD indicator on his MT4 charts that included the signal line.
If you are in the same boat, please let me know at the Contact link, and I will send you a FREE copy too.
I have yet to see a situation where waiting for MACD to do its thing – going way oversold before issuing its buy signal – didn’t have a successful outcome. And, this applies to any trend – up, down, or sideways.
Check it out for yourself. You will be amazed. Just maybe this becomes your trading strategy of choice.
(Forex Trading Chart via www.ProRealTime.com)
Here’s one about how to interpret COT (Commitments of Traders) data – one of my favourite things to talk about.
Please refer to the graphs and chart below for copper.
In the top left graph, you can see that the institutional investors (a.k.a. the Big Dogs) are extremely short copper (orange line at the bottom), whereas the hedge funds (green line at the top) are extremely long. Just look to the right of that graph to see what I mean.
This is the kind of extreme divergence I look for in calling a top in a market.
This is further substantiated by the graph over to the right, where you can see the green line at the bottom and the gray bars way down below the 0 line – both representing the Big Dogs.
This graph is just a different representation of the same data used to plot the one over to the left.
Below those two graphs, you can see the futures chart for copper, where I have identified the negative divergence between MACD and price – price forming a double top.
With this divergence and the Big Dogs’ sentiment, price has only one way to go. Watch out below!
Still don’t believe me? Let’s take a look at another example. We are all mesmerized by oil. Is it going up, or is it going down? The pundits are having a field day with their prognostications.
The answer is quite simple to me… just have a look at what the Big Dogs are doing as of February 10/17. Easy peasy! Why complicate matters.
Same drill… in the two COT graphs below, you can clearly see that the Big Dogs are extremely short light sweet crude oil.
And in the monthly chart for oil below those two graphs, you can see that we have a Tom DeMark resistance or supply or distribution trendline in place.
Translation: the price of oil isn’t going up – bad news for the good folks (and real estate) in Alberta, who depend on oil for their livelihoods.
Real estate there is in the dumps, and not likely to recover any time soon. A good buying opp.?
For more futures trading advice, click here.
I hope you are well?
Is it possible that you can give me a list of currency pairs that are correlated in the forex world, as well as the COT?
For an example… in the COT, if there is extreme divergence in the U.S. Dollar COT chart, what other pair or pairs should I be looking for that correlate with the US Dollar?
I know that gold is correlated with sliver, but that’s all I Know?
Hoping you can help me there.
Hi George… I hope the info. below satisfies your questions – if not, or if you need further clarification, please let me know. Peter
EUR/USD and USD/CHF move in the opposite direction.
EUR/USD and GBP/USD tend to move together – i.e., EUR/USD is positively correlated with GBP/USD.
EUR/USD is negatively correlated with USD/CHF and USD/JPY.
Regarding your second question George, if the Big Dogs (institutional investors) are extremely long the USD, versus the hedge funds being extremely short, that means that you can expect any pair, where the USD is the first currency in the pair, to rise.
Conversely, if the Big Dogs (institutional investors) are extremely long the USD, versus the hedge funds being extremely short, that means that you can expect any pair, where the USD is the second currency in the pair, to fall.
Their sentiment can take a while to sink in – i.e., to have an effect on price action. It usually doesn’t kick in instantaneously. They are long-term thinkers, with a view to where a currency (or any other asset class for that matter) is going to be headed sooner or later.
Take for example the GBP/USD pair. As at Friday, February 10/17, the Big Dogs were long the pound and short the USD. This should translate into upward price action for that pair.
Ever since the flash crash October 6/16, when we had that huge hammer formation, the pound (GBP/USD) has been struggling to take flight. It is still above the low of 1.1476 on that date, but not by much.
That said, the Big Dogs are hanging in there with their long positions on the pound.
For more on the flash crash, go to https://www.tradingsmarts.com/macd-divergence/.
To be more precise in my answer George, I don’t know that you can say there is a correlation between the USD and the other currencies with respect to the Big Dog positions in COT, other than what I have iterated above.
I hope this helps George.
Have a great day and week ahead.
PS: Here is a screen shot of the GBPUSD daily forex chart that is pretty self-explanatory. It looks to me like we might be in the midst of an ‘Uptrend Continuation Pattern’ with this pair.
Khandakar wanted a COT example for a currency.
The screen shot below is fairly self-explanatory. The Big Dogs are still relatively long the pound (see the circles). You can see the net effect in the futures chart at the bottom (positive divergence on MACD to price). Given the forex pairing of the pound (GBP first in the GBPUSD pair), that pair will move in tandem with futures price action.
That’s it for this Best Trading Advice: Q&A No. 1 session. There will be more, so get your comments and/or questions in. I would also like to hear any suggestions you may have for topics for my blog posts. After all, they are written with you in mind. Here’s how you can reach me: at the Contact link.
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A good support and resistance MT4 indicator can be had at the Contact link. You can also ask for my favourite pivot point calculator at the same link.
If you want a pip value calculator, check this one out: http://ca.investing.com/tools/forex-pip-calculator
ProRealTime.com offers a wide variety of forex trading indicators, including a forex support and resistance indicator for forex pivot points.
My favourite book on trendline analysis is hands down Tom DeMark’s ‘New Science of Technical Analysis.’
I hope you have enjoyed this Best Trading Advice: Q&A No. 1 session. There will be more to come like this one. Just be sure to get your questions in ahead of time.
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About Peter R. Bain
Peter R. Bain
I am a speaker, trader, writer, aviator, car nut, Harley enthusiast but, above all else, I am here for you at TradingSmarts, which I founded some 15 years ago.
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