Trading Regularities in the Forex Market

Trading Regularities in the Forex Market

What kinds of ways to trade the market are there ?

It is possible to trade with a set of rules. The disadvantage of this is that the market may not conform to these rules. The advantage is that it mechanises the process of trading, so real time decisions making is reduced, if not removed altogether.

Another way is to trade on the market, aiming to get the market to give indications of what to do. This still involves rules and expectations, but lighter more situational ones. The issue with making decisions about when to trade, to change a trade or to exit, is the issue of uncertainty.

It is hard to make decisions, because those decisions are hard, courtesy of the uncertainty in the market. Lots of things can happens, different from the expected outcome, including getting the expected outcome after strong reverses against a position, stopping out a position, for example. So indeed, agility is perhaps to some extent required by the market.

If a set of rules are used, then those rules carry an expectation that past behavior is to be repeated. But this is the issue, it tends not to be in this market.

However, even if the market is tracked closely, even on 1 minute charts, decisions can still be hard, because the uncertainty makes for complex moves, something to be borne in mind for any short term trading, including news trading. To some extent though the uncertainty can be seen in action, perhaps as patterns playing out. Once a pattern is seen, there becomes a way to try and read the market.

Whilst it may be the case that 1 minute is prone to uncertainty, a feature of Forex, is that 1 minute contains patterns, which play out within larger moves. There may be a point in deciphering the market on short term time frames, as it can be seen whether a larger move is going to reverse or turn up or level out, by looking for signs of increased momentum, and sensitivity to the potential for support or resistance. To give an example, a pair may be at resistance, visible on higher time frames. Will it break out ?

It may be that one might expect it to reverse down on 1 minute, especially if supported by RSI being oversold. However, one has to bear in mind the force pushing it above the resistance, powerful enough to be an issue on higher time frames. So the reverse down, may be shortened, even on 1 minute.

When a reverse is shortened like this, scalping issues come into play, even if one is not intending to scalp. That is, the price of the pair becomes an issue. The potential for this to happen may change with the number of attempts made to break the resistance. This has a bearing on breakouts to be traded on higher time frames.

What other ways are there to trade ?

One more advanced way for trading is to trade on markets opening and closing. The idea here is that some of the uncertainty may be reduced, by some set of variables being removed. For example, time and an expected set of circumstances to do with liquidity, for example, what happens when a market closes. Liquidity changes can be expected to have an effect on the market.

An example is Frankfurt close (4pm GMT) and then London market close (5pm GMT). Certain patterns may be expected in the run up to it, at it and after it. However, it may be the case that these patterns while they may occur may not be repeated with any kind of useful predictability. So one gets very complex rules trying to cover special conditions, which may simply break down as a useful rule set.

What kinds of patterns may happen at and around market close ?

For example, there may be a trend in the run up to close, which holds for a few minutes after close, then falls back, triggered by liquidity changes as the market closes. But, and here is issue: there may not be and similar seeming events in the next close, because it happens again 24 hours later, may result in different outcomes.

What is the significance of market conditions ?

The uncertainty in the market needs to be considered, as this can potentially change the situation radically. Instead of doing this with indicators, another approach would be to work out the state of the market and get some feel for the restraints on and potential in a pair.

For example, one could examine the market immediately on entry, perhaps around a 30 minute time frame. This will give a sense of how the pair may be moving, for example noting support and resistance, whether it is trending or ranging and how much volatility is in the market.

Volatility can be noted by the presence of equal and opposite candles and to an extent spiking. But spiking is not necessarily an indication of volatility. It can be caused by immediate reactions to news events.

Volatility in Forex is not necessarily a good thing, as it can result in moves back and forth, which may not be tradable. Indeed lower volatility but stronger momentum can be easier to trade. However volatility can be used still as a gauge of the potential for moves to happen, but it needs to be borne in mind that the Forex market can change.

One can then look at a longer time frame, daily for example, to get a sense of overall market conditions. Then, one can move back to 5 minute, noting market conditions here, then move to 1 minute. 1 minute will give the state of the market for entry.

It may be that the market seems to be trending on 5 minute, but on 1 minute it may be seen that the pair is hitting resistance or support. This may mean that the 5 minute trend can continue, but it also can mean that its trend may be ending or at least entering some kind of retracement. Whether this is potentially the case, may be seen from the market conditions noted before, that is, is the market on 30 minute close to support or resistance.

What can be done to tackle issues with rules in trading ?

One can have a more complex rule set, but it may be that even this will break down on the uncertainty. That is, not only will the rule set become unwieldy, it may not even work as an unwieldy rule set. So it comes back to trying to trade real time on the market, with agility.

This may tend to need a focus on 1 minute, as well as knowing what is happening on higher time frames, and understanding patterns which can play out, but not using them as a rule set, rather as a way of understanding what may be happening; creating a roadmap in effect. The 1 minute focus enables (and indeed requires) agility, the roadmap enables a way to determine what may be reasonable decisions to make in the market.

Give a possible way of trying to trade on the market ?

Well, one could assume the market will deform around a set of rules rather than conform to them. So events or patterns can be looked for which may point to this deformation. Please note, this use of 'may', these patterns may not happen at all (the uncertainty) or the result may not be possible to trade. These deformations may result in trends or ranges.

An attractive trade would be following a trend, then following it as it reverses. But even if a trend is collapsed by some market event, it may not move back in the opposite direction. At its top, it may enter a volatile series of moves, which is a typical response to a trend end.

This is an issue with trends, when they end, they can become the opposite of what they were, relatively easy to trade and become extremely difficult to trade. Signs of a trend end to look for, are the presence of volatility, spikes, and a tendency to reverse down, but keep off the low of the move down.

So the potential for a trend end to become a reversal in the opposite direction, becomes a volatile trap. Trend ends also end, but there may be other patterns before another trend happens. But a range may happen before the next significant directional move.

A range pattern may tend to turn in the opposite direction, and these can be seen in Forex. But the issue is this: why is the pair ranging, and will it turn one of its peaks or troughs into a move continuing in that direction, breaking the range. Ranges in Forex can be seen as moves with some power in them, and that power can express itself in a directional move, at some stage.

What is a sign of a trend end on 1 minute ?

When a trend ends it may have a final spurt before it ends. This spurt looks like momentum is increasing, and the pair will continue to go up or down. But it does seem to be a frequent harbinger of the end of the trend (when the pair may typically move in hard to trade a volatile range).

One can consider if this asymmetrical, that is does it tend to happen more going down than up. It may be that it has different appearances up or down, down may be more an intense spurt, up more a set of strong candles.

So this final spurt, may look like a spike later on the candles. Nonetheless the fact that it could also be exactly what it seems, for example increasing downwards momentum to go through support, needs to be considered. The similarity between the two outcomes, until the outcome itself, is perhaps an indication itself of the uncertainty in Forex.

What is the significance of big figure changes ?

In most pairs, like EUR/USD, two places to the right of the decimal point is where the big figure changes. From example 1.1299 changes to 1.1300, here 1.12 to 1.13 (effectively 2 to 3). In the case of USD/JPY and currency pairs containing 'JPY', the big figure is to the left of the decimal point.

So looking at USD/JPY again, with the example here of 118 - 117, the move from 118.00 to 117.99 is the point where the big figure changes, here from 118 to 117 (effectively 8 to 7).

The pair can bounce here when it hits the round number (i.e. 118.00) or it can bounce before it or it can move through. If it moves through, it may reverse and come back. There is a possibility that it completely flatlines on or near the round number, but the market moves, and in this case it would probably move around it. Also, big figure changes tend to be involved in making the market move.

Values to look out for which may affect the way the pair moves, in my opinion, include .0095 and .0085 and .0070 or .95 and .85 and .70 going down or .0002 and .0012 and .0030 or .02 and .12 and .30 going up.

What is the significance of a .50 value level ?

When a pair is moving through a big figure, then at some stage it will approach .50 (or .0050). This may have the effect of altering the movement of the pair, for example, it may stall the pair, or even reverse it, at least for a while. Unlike the big figure itself, .50 itself has more uncertainty associated with it, in that it is not a momentum driven target in the way the big figure is but it has significance, especially in terms of the move within the big figure.

What is the significance of oscillations in news trading ?

When a market moving piece of news is released, the market can react or not react. However if it reacts, then a strong directional move may be seen. But what may tend to be more likely, is an oscillation (a move up and down, with wide swings).

Even a move which is strongly directional for a while, may be in fact an oscillation. Why does this matter. It matters because the move may bounce. It becomes a volatile move in effect. What this means is that the move needs to be exited, before it bounces back in the opposite direction.

The problem is, a stall in a strongly directional move may look like a strong oscillation about to turn back. However, the oscillation turn may have more bounce to it. If a strongly directional move does happen just after release, it may stall after a strong move upwards or downwards, at a point of past resistance or support.

What can happen in a powerful directional news reaction ?

A number of outcomes can happen. There can be a strong move, which then stalls at a past support or resistance level, after cutting though others, but then continues strongly onward. But other outcomes can happen as well.

When intense power happens, for example when the data indicates that an interest rate change may in fact be more possible than it was before, i.e. there is a significant change in certainty of a major directional event, then the market can move with stunning speed very quickly. However because it has moved so fast, it may be in fact then simply run out of steam.

What could happen around market close ?

These observations were based around London close (5pm GMT), Frankfurt close (4pm GMT) and New York close (10pm GMT). What may be seen is this: a trend which happens on short term time frames in the half hour or so before close. Then this continues till a few minutes after close, then fades in the opposite direction. However it is also very possible that the trend will actually continue.

Frankfurt could be seen as the time when the changes begin, but either London or Frankfurt close could evidence changes in direction, but perhaps Frankfurt more for the run up to and London more for after close. In terms of New York the close has been at least affected by the earlier close of the US stock market and the market can be particularly hard to read (plus Chicago is still going till 6pm GMT).

What could happen around market open ?

This is based on New York open (1pm GMT). From around 11:30am GMT to 1pm GMT, there may be trends forming, with volatility possible as 1pm GMT approaches. In terms of Tokyo open (midnight GMT), similar things may happen. But here, if there has been a strong move in the New York session, especially one powered by news events, then there may be a reappearance of it, happening around the Tokyo session, after a quiet period between. Or there may not, of course.

What might happen during the Friday trading session ?

Friday is itself a big market market close. So based on observations of it, from 3pm to 6pm or 7pm GMT may see some action, for example sustained, structured trends forming, but with the potential for volatility to affect the trend. After this time, in the evening (or afternoon in New York), the market may tend to display increasing volatility as Friday close approaches. This means sudden strong quick moves, which reverse, taking out any real directionality.

When may be a good time to trade ?

Even very quiet times, for example in the period after New York close (10pm GMT) may have potential. Here, there may be small but strong trends forming as the market gets quiet, after calming down. The key may some event before or after which will accentuate any moves.

As Tokyo open approaches (midnight GMT) and after Tokyo opens, the market tends to get much more active. Similar events can be seen around all major market open and closes (especially London and New York). But the thing to note is that market opens are not necessarily easy to trade as powerful moves make take place, interlaced with volatility.

In the case of New York, the US stock market opens at 2:30pm GMT. This seems to have an effect on the Forex market. The effect though may be to absorb it to an extent into the funding action of the stock market. So the Forex market may change in the run up to and especially after the US stock market opens. Trends may appear in pairs like EUR/USD and USD/JPY during the session, which are based on strong moves in the stock market.

That is to say, it may be hard to read the Forex market while the US stock market is open. Even so, if a trend is happening it is well worth looking at what the value of a pair actually is, to see what .50 or .0050, for example may do to it.

So the run up to market opens can be a good time to trade but it is good to be aware of the changes which may take place as and after these markets open.

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