A bearish Gartley pattern is forming on the EUR/GBP. The pattern itself is solid, but there is a ton of extra convergence at the sell entry. First, we have circled a previous high near the entry on the 2hr Chart. The 8hr Chart has 3 separate levels that work. We only could draw one trend line because the chart was getting crowded, but if we also started a trend line at Y1, it would also come in at the same area as the trend line that was drawn. It would be lower, but it would work. There are also two Fibonacci levels (50% of Y1Z and 127.2% of Y2Z) that occur at almost the exact entry. If this trade completes with decent time symmetry it would be a well above average trade.
We will look to sell the EUR/GBP if it rises to 0.9119 (Point D). Point D is located at the convergence of the following points:
78.6% Fibonacci retracement of XA.
127.2% Fibonacci extension of BC.
AB=CD.
Bearish trend line on 8hr Chart.
50% Fibonacci retracement of Y1Z.
127.2% Fibonacci extension of Y2Z.
Significant high near entry on the 2hr chart.
This is a fairly straightforward trade so we will jump into possible red flags that could invalidate this trade. First, we need to watch how quickly CD completes. We are looking for the CD leg slow down and enter the trade near our hypothetical entry on the 2hr Chart. If there are long bars near the completion of the CD leg, we will not take the trade. If the pair comes within 7 pips of reaching our entry, does not enter, and reaches T1 before entering, the trade is invalid. The trade is also invalid if the pair falls below 0.9005 before hitting our entry.
To recap, we will look to sell the EUR/GBP at 0.9119 with our stop placed at 0.9139. Our initial profit targets are 0.9089 (38.2% of CD) and 0.9063 (61.8% of CD).
The latest comments from Federal Reserve Chairman Ben Bernanke suggests that he is not convinced that the improvement in the labor market will last, but the price action in the currency market indicates that traders are still repositioning for an earlier unwind of the Fed's ultra easy monetary policy measures. As the Federal Reserve inches closer to raising interest rates, we we thought it would be interesting to examine how the dollar trades before and after Fed tightening. In order to gather this data, we looked at the Fed’s tightening cycle only after a prolonged period of easing or steady monetary policy.
We examined 8 periods of tightening over the past 3 decades and compared how the EUR/USD and USD/JPY traded before and after the Federal Reserve began to raise interest rates. To help understand these tables, in 2004 for example, 3 months before the Fed began to tighten, the EUR/USD was trading 2 percent lower. In other words, it appreciated 2 percent ahead of the rate hike. Three months after the Fed actually tightened, the EUR/USD was trading 1 percent higher which means that after the rate hike, the euro actually strengthened against the dollar.
Based upon our analysis, the only discernable trend is that contrary to the popular belief that a rate hike in the U.S. should be positive for the dollar, the greenback tends to weaken against the Japanese Yen after the Federal Reserve begins to raise interest rates. Aside from 2003, we see a very consistent pattern of dollar weakness once the tightening cycle begins. The primary explanation is that the Fed would only raise interest rates if growth is strong and stronger growth in the U.S. tends to benefit trading patterns like Japan who see their exports expand exponentially. For the EUR/USD, the only trend that we can identify is the bias for dollar strength, euro weakness in the 3 months after the Fed begins to raise interest rates - the EUR/USD either remains virtually unchanged or weakens. We also see a mild bias for dollar strength in the 3 months going into the rate decision. It remains to be seen whether this pattern will be repeated in this tightening cycle, but it certainly helps to know how the U.S. dollar has performed in the past.
I often hear beginning traders speak as if they know what the markets will do next. In reality, experienced traders usually speak in probabilities and typically have some form of analysis to back up their opinion. No one can say that a particular currency pair (or other financial instrument) will move to an exact point with absolute certainty. In fact, I feel it is naive to think that anyone can predict the direction of a currency pair with absolute certainty over a given period of time. Sure, sometimes you could be correct if you boldly predict that a pair will move to X level with absolute certainty. However, there will be other times when the market doesn't go your way. That is why we must deal with probabilities, because no one knows for sure what will happen next in a given currency pair.
The reason we can never know where a currency pair with absolutely certainty is that the markets move based on the will of every market participant. Let's suppose that someone stated "the EUR/USD will definitely rise to point X, before falling down to point Y". They are saying that know exactly what every market participant (or trader) is thinking, how each of these participants plans to act, and how each participant will respond to the actions of every other participant. Needless to say, no one could ever have that information.
However, it isn't uncommon to see bold predictions that definitively state which direction a currency will pair and exactly where the move will begin and end. No one can know these types of moves for certain. Even worse, it isn't hard to find predictions that say something like "buy the USD/JPY at X or you'll be sorry." This gived virtually no useful information because we don't have any idea how long of a trade this would be or where the exits (stop and limit(s)) are. Without being too harsh, just beware of anyone who claims they know for certain where a currency pair is headed. Of course everyone can be entitled to their opinion, but that doesn't mean they "know" what will happen next.
Even if an insider were to know about an interest rate change ahead of its release, that doesn't mean they can predict exactly how the market can act. What if the interest rate briefly rises the pair into massive stop-sell orders that actually moves the market down for the day? What if enough market participants felt the rate would move higher, so the pair moves lower? There are endless scenarios, but it is virtually impossible to predict how every market participant will act within a constantly changing market.
Therefore, we must think in probabilities. No matter how sensational your analysis is, sometimes you will simply be on the wrong side of the market. Whether you are looking at fundamental news announcements, a combination of of technical tools, or a simple moving average, what traders are looking for are patterns that put the probabilities in their favor so they will profit in the long run. In other words, they are looking for how the market has reacted in the past to certain conditions, and speculating how likely the market will react in the future to similar conditions.
Regardless of the tools you use to analyze the market, you are still working with probabilities. If you find a system that is profitable over a long period of time, that system is likely putting the probabilities on your side. These systems come in a variety of shapes and sizes. Some traders (like the famous Turtles), lost far more trades than they won. However, when they won, they usually won big. Some traders try to win the vast majority of their trades while risking a lot, but gaining little. Of course there are all sorts of variations and methods besides those two examples.
For the purpose of easy math, we will assume that only T1 is used on the system I use on FX360.com. This system requires 40% of trades to reach T1 in order to break even. The reason for this is because the risk:reward ratio is generally 1:1.5. Therefore, if I win only 50% of my trades, I would be extremely profitable over time. Even winning 45% of my trades would lead to great returns. Anything above 50% wins would be outstanding. Therefore, it is plain to see that it is not necessary to know where the market will go on each individual trade. Instead, it is important to have a system that puts the odds in your favor over a large sample size of trades.
Based on these simple statistics, it is pretty easy to see why I don't get very excited when a trade wins or very upset when a trade loses. As long as the probabilities continue to hold over a long period of time, the individual results for each trade are almost meaningless. I lose trades all the time and so does every other trader. The key is to manage those losses correctly so that the long term track record is profitable. The bottom line is that thinking of trading in terms of probabilities is a key step to becoming a successful trader.
