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The Direction of the Rational Bull

One could note an apparent disjoint between EUR/USD and Dow, but one could note as well, possible signs of a new rise which existed in certa...

30 April 2016

Beginning a Forex Trade: Time, Value and Structure

What kind of information can help initiate a trade ? There are many approaches but a starting point grounded in market action is the chart. This will show a representation of what has been happening with Forex pairs, in terms of the movement of their value over time. What can the chart show ? It depends on the kind of chart. In very short term trades a line chart can be helpful, as it cuts through detail and shows where support and resistance is, how steep a move is and its direction.

A mountain chart can illuminate larger scale structure in a chart over time. This may be more useful with Equities, or Indices, where there may be a longer term direction. It can help, for example, show what has been happening within this directional move. On longer term trades, a candlestick chart can illuminate the way an asset has been moving through support and resistance, for example have there been spikes, is there volatility evidenced in a set of candles, have there been surges in direction.

A candlestick chart can thus be helpful for multi-time frame analysis, which can provide a sense of the set of possible constraint and degrees of freedom on a pair and the way it can move and also provide data about the kind of moves which have been occurring. These moves may be consequent on both support/resistance and changes in the market from news events and other kinds of data which affect the market and its movement of value over time, including the effect of indicators on the market.

So at the very least, indicators have a utility on terms of some illumination on the complex movements a pair can evidence (i.e. perhaps it is bouncing off a moving averages). Why indicators have problem is related in part to the possibility that this cohering with expectations, may be only a temporary factor of the indicator itself, thus at some stage, the pair will simply do something entirely different.

How extensive a time frame analysis should be performed may depend on the desired length of a trade, but even for short term trades, a monthly down to 1 minute sweep can help show the significance of even short term moves, for example the presence of longer term support or resistance.

This can show pairs where action may be possible at the time or in the future, depending on the desired length of the trade, but only an indication, which may not be borne out in the future. If a pair is chosen, it can indicate the state of the market: is it likely to move directionally, is it volatile, is it very calm ? These kind of market states, may be a prelude to something different, for example, a calm market may lead into a move.

The reality is any analysis can be invalidated by the market and a short term trade may turn into a longer trade, simply to deal with retracements, until the trade is validated or proved false. Because Forex moves around a lot, any trade may be ultimately proved correct, but the time frame and retracements taken for this to happen, may prove problematic.

A further item to check, is what exactly the value of the pair is, where it is situated between or at big figures. This can help indicate the kind of pattern which might be expected. It can show why a pair may not in fact be moving in the directional way it seems to be moving in. These expectation can also be invalidated once the trade been entered, or other value influencing events may occur along the way. Like a ball the asset can be thrown off its desired course, with a strong directional force applied to it. And what happens next can be unpredictable as it bounces off support or resistance or cuts through it, sooner than might be expected.