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Trader's Tip
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Traders cannot make the market do what they want, but the market is very good at making traders do what it wants -- if traders want to participate.
- Darrell Jobman |
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Today's Featured Article
A month ago I wrote a Fast Break article about the U.S. dollar and the attention it was getting while trying to stay above a previous low and perhaps positioning itself for a rally. It says a lot about the dollar and the times that the article could almost be repeated this month.
The U.S. Dollar Index (USDX) futures contract continues to move lower, falling below 77.00 instead of the 78.00 level mentioned in the previous article -- a drip-drip-drip decline that may not be as agonizing as water torture, but is almost as frustrating to traders as the attempt for gold to sustain a rally above the $1,000 an ounce level or U.S. stock indexes to make a significant move in either direction.
The problem is traders cannot make the market do what they want, but the market is very good at making traders do what it wants -- if traders want to participate.
Not much has changed on the economic recession front although the Fed's latest Beige Book did note some gradual improvement in conditions and the number of U.S. jobs lost each month is getting smaller. But the economy still needs more jobs, housing and commercial property demand is still weak and it appears recovery will be a long, drawn-out process.
Meanwhile, the dollar's image and its value continue to fade as China chooses gold for some of its reserve funds, and global discussion increases about finding another currency or some other instrument that can be used instead of the dollar for reserve funds or even for pricing a global commodity such as oil -- a movement that is not likely to go away soon. As the dollar slips, the Japanese yen is rising, but none of the world's paper currencies seem capable of assuming the dollar's role.
So how can a trader approach Forex trading in the current environment? The previous article talked about being prepared for breakouts and short-term swing trades with profit targets. But that assumes there are swings to trade, and a number of markets have been rather static lately.
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 If you cannot view the USDX Chart, go here.
The six-month USDX chart from
VantagePoint Intermarket Analysis Software shows some tradable waves last spring and then a nice downtrend from late April into June. Since then,
VantagePoint's predicted medium-term moving average (blue line) has generally waffled back and forth over the actual medium-term moving average (black line). The progressively lower lows indicated by the red horizontal lines illustrate the weakening nature of the dollar, and the current slide (red circle) suggests the downtrend may not be over.
 If you cannot view the Euro Chart,
go here.
The big picture of the euro, which some have called the "anti-dollar," is a mirror image of the U.S. dollar. Point 1 marks the collapse of Lehman Brothers in September 2008, the one-year anniversary of which is now getting a lot of media attention, and the unprecedented credit crisis that prompted the U.S. government to pour billions of dollars into the financial system. That led to the slide in the euro and, conversely, to the peak in the U.S. dollar.
Point 2 denotes the Fed decision to drop short-term interest rates to 0.25%, which led to another slide in the euro and rally in the dollar.
Elliott Wave analysts note that the recent decline in the dollar and spurt in the euro that has taken the euro to the vicinity of those previous highs also marks a 61.8% retracement (red dashed line) of the euro decline from the high around 160 to the low around 123 (blue lines). That suggests resistance that could keep the euro and dollar tracking sideways and in relatively tight ranges.
Previously, in its more volatile days, the euro moved about 200 points a day and maintained a move for several days, lending itself to a short-term swing trading strategy. The average daily range of euro futures has dropped to 135 points in the last month, still adequate for short-term trading but without the little trends lasting several days that worked best with a short-term breakout strategy using
VantagePoint's predicted next day highs and lows as the breakout points. This article will look at these same indicators applied to an intraday trading tactic.
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 If you cannot view the USDX Chart, go here.
The basic strategy fades
VantagePoint's predicted high or low by 10 points, going short on a limit order 10 points below the predicted high and then exiting on a limit order 10 points above the predicted low or on the close if the market does not drop toward the predicted low. The reverse is true for an intraday long position. In either case, you have protective stops 10 points outside the predicted range to exit a losing trade.
Whether you a looking for a long or short position is determined by two other VantagePoint indicators, the Predicted Neural Index and the Predicted Moving Average Differences in the bottom panel.
If we were starting with candle 1, we would be trying to set up a short position because the Predicted Neural Index is at 0.00 and the predicted differences point sideways or down, both bearish clues. The predicted high for candle 2 is 78.53 so the limit sell order would be at 78.43. A limit buy order would then be placed 10 points above the predicted low of 77.91 or 78.01, which was reached for a profit of 42 points (78.43 - 78.01).
The indicators start to shift but still suggest a short entry for Candle 3. Without going to an intraday chart, it would be hard to tell when prices came within 10 points of the predicted high, but prices did not drop to within 10 points of the predicted low and the position of the close suggests a small losing trade for candle 3.
VantagePoint
indicators pointed to a long position for candle 4. The predicted low was 78.33, putting the long entry at 78.43. But the market did not advance and fell below the protective sell stop at 78.23 for a loss of 20 points.
The indicators for candle 5 indicated a sale but did not reach the selling point until the close or too late in the day to take any intraday position.
The indicators for candle 6 also pointed to a short position. The predicted high was 78.59, putting the limit sell order at 78.49. The predicted low was 78.00, putting the limit buy order to exit at 78.10 for a gain of 39 points (78.49 - 78.10).
The indicators for candle 7 called for a long position. The predicted low was 77.87, putting the limit buy order at 77.97, the low price of the day. The market advanced to within 10 points of the predicted high at 78.45, producing a profit of 38 points (78.35 - 77.97), but then kept on going higher after getting out of the long trade.
You get an idea from the chart how this strategy might have worked. Candle 11 would have produced a loss with this strategy, but one possibility would be to combine this intraday strategy with the breakout strategy described in the previous article to reverse an initial long position and go short on a stop order on the downside breakout.
Keep in mind there are several issues with this style of intraday trading: (1) What is a trading "day"? Does it begin at 5 p.m. the previous day? (2) The type and timing of the data feed. Cash and futures Forex bids/asks may vary. (3) Did the high or low come first, which you cannot tell from this daily chart? You would need to apply the VantagePoint
signals on an intraday chart. (4) You need to watch the markets closely to catch moves or have multiple one-cancels-other orders in place.
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About the Author
| Darrell Jobman
has been writing about financial markets for more than 35 years, covering all aspects of the trading industry. A decorated Vietnam War veteran; he was a newspaper farm editor and editor of several agricultural publications before becoming an editor of Futures Magazine for more than 15 years. He has written and/or edited more than a dozen books on trading including The Handbook for Technical Analysis. His passion is helping others succeed by learning the "dos and don'ts" of trading. |
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Special Message from Our Author
Nearly 80% Accurate* Market Forecasts
With VantagePoint Intermarket Analysis Software you'll have:
- Trend forecasts that are nearly 80%* accurate for 1, 2 and 3 days ahead
- Tomorrow's forecasted trading range
- Five predictive technical indicators
- Market analysis from a big picture perspective
- The ability to quickly and easily identify potential trading opportunities in 600+ markets
Go here for complimentary forecasts! |
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