Trading in These Directionless Times
I had an interesting conversation with a colleague recently. He used a good analogy for recent market action: imagine if you had been away from a trading screen for the last three months, you then came back and were asked where you thought EURUSD would be. What would you say?
Probably 1.1000/ 1.1800 maybe. You have seen all the negative comments and the Sovereign debt debacle spread its tentacles into Greece, then Portugal and Ireland and now maybe even Italy, so surely the euro had to decline, right? Well no, it’s higher than it was at the start of the year.
This is a good analogy for market action in recent months since it has been extremely difficult to make money. Sure there have been some trends: EURCHF, USDCHF, GBPCHF, but other crosses have simply bounced around. If you have suffered don’t think you have been alone, even major investment banks have found trading extremely difficult in recent months and second quarter earnings from trading floors are expected to be fairly weak.
So what can traders do when markets aren’t trending? The most important thing is to keep a diary. Firstly look at the markets. You need to study charts – hourly, daily, weekly and monthly are my favourites to get a good look at what the market is doing. Look at the longer time frames first and then work back towards the hourly, will help you to determine what is going on.
As an example, the long-term weekly chart for EURUSD suggests that the single currency is trading in a range, and 1.5000 seems to be forming a double top (Jan 2010 and June 2011 highs), this suggests the trend over the coming months could be lower. However, the daily chart looks like it is still in an uptrend.
Putting all of this together we can say that EURUSD may have peaked, and although the longer-term outlook is lower, it is not moving down in a straight line and is prone to bouts of strength.
Compare this with EURCHF. On a weekly, monthly and daily basis it looks like it has been falling off a cliff since peaking in 2007. The Swissie has had a storming few years and after trading above 1.6500 in 2007, it is now lingering around 1.1500 at the time of writing, and is ripe for another move lower.
So what can traders do? This is where technical indicators and pivot points in particular come in extremely useful. Let’s look at EURCHF first. My favourite indicators are moving averages, the relative-strength index (RSI) and the MACD – which is also an average of recent prices that is a good indicator of trend. On a weekly basis both the RSI and MACD look over-stretched on the downside. Indeed, the cross is below all of its major moving averages, which is another sign it could be oversold.
This makes sense since the pair is at record lows. However, on a shorter-term basis the indicators tell a different story. At the time of writing the daily indicator doesn’t look oversold, and the hourly indicator is only just turning over. Traders need to interpret these indicators carefully. If you rushed in and bought EURCHF just by looking at the monthly charts then you may expose yourself to losses. However, if you are aware that EURCHF is at record lows, yet look at the daily and hourly charts before you make your trading decision then you will be better informed that this pair may be about to enter a new epoch and EURCHF may reach 1.12, maybe even 1.10 in the coming weeks.