What catches the market's attention in FX? What do we, as traders, need to take into account when asking ourselves “what is driving price”? The participant's focus, in FX, is driven primarily by economic news and geo-political events, which of course can be related to the short term (like the FOMC meeting this week) or medium term (like the current tensions between Greece and it's Creditors, which have been going on for months). So before even looking at charts and setups (i know, we're all chart junkies up to a certain extent), we need to find out what's going on in the World.
Where can we find out what's going on in the world? Easy.
Reuters Currencies http://www.reuters.com/finance/currencies
Reuters Markets http://www.reuters.com/finance/markets
Economic Calendar (know the market's expectations)
Bank reports - if you have access to them
Filteres newsfeeds (Oanda has a good feed and also Ransquawk has a good feed)
(I have no affiliation with any of these providers)
It's a fact that the key players in FX - Multinationals, Central Banks, Hedge Funds, Investment Banks - don't formulate their ideas off particular technical patterns (double top, 20 moving average, RSI or whatever have you). Instead, they formulate their trades by analyzing the most recent economic news and geopolitical developments. Sure, technicals are critical for timing and risk management, but they don't drive prices. This means that we actually have an advantage over those big guns: we have more flexibility and can choose whether to participate or not. Having the option to take on certain market conditions or simply sit it out until the tide changes, is where a good all round comprehension (technical & fundamental) of the price chain bears fruit. As smaller traders, we can hop on and off the momentum generated by the big guns' order flows.
2. On Time Frames
And now for a note on time frames. Themes can often take hours or even days to filter through the pipes, whilst the big guns re-adjust and juggle their books. And of course, when there's some sort of shuffling in positions going around, technicals once again lose their usefulness. How useful is a chart on a triple witching day? How useful is a chart during month-end (especially on EurGbp which in my experience tends to have decent month end flows regularly going through)? These short term flow dynamics sometimes confuse traders that only look at charts and do not stay abreast of other happenings. That's why it makes sense not to get caught up in the hour-to-hour or session-to-session view of the market, but instead take a wider view from a large 4H chart or even a Daily chart.
All this should convey the message that FX is probably the most multifaceted asset class you can choose to trade. Market dynamics demand a consistant yet varied approach, keeping one eye on charts but the other eye & both ears on the fundamentals and sentiment chatter that go around day in & day out. Here's an example taken from the past:
After the FOMC meeting from June 18th 2014, there was a “weak USD” theme going around because of Yellen's dovish remarks and the fact that monetary policy normalization was going to be pushed forward relative to what was previously discounted. So naturally, all traders were looking to do 2 things the next day: buy EurUsd (selling USD) and buy YM or S&P (because the “lower for longer” rates policy means essentially more free money that can be used to buy stocks). But let us see what happened into the end of the week:
EurUsd 1H chart of the FOMC week
Source: FXCM Marketscope
YM 1H Chart of the FOMC week
Source: FXCM Marketscope
So as you can see, the weak-USD theme continued for equities but very quickly dissipated in FX. So why would a trader choose to focus on FX if sentiment is so difficult to analyze? The rational I would like to put fourth is this: because FX is more difficult to analyze, confusion leads to more powerful, self-reinforcing price-led trends, creating a greater degree of overshooting. This is good for traders that learn how to read FX because we want trendy prices.
So the natual objection to what we've just seen is this: but big players don't care about the day-to-day flavours or price moves; the big players are focused on longer time frames. This is trus: some big money players (namely mutual funds or value seeking funds) work the higher time frames and care very little about anything that's not a Central Bank meeting or the NFP report. But market participants don't focus on just one time frame. Smart Money operates on all time frames. And while all of the chart junkies and price action junkies reading this are starting to go back to their good old 1Min charts because “all time frames are used”, please stop and consider that smart money doesn't however trade exclusively off technicals. They take advantage of the emotional peaks in the market, which are heavily biased around fundamental direction.
Also, when trying to understand the market's "sentiment" around a data print, the actual prints are often of secondary importance. Most of the activity leading into a key number and away from a key number revolves around the market's expectation. And to a large degree, the expectations embedded in the market are based on emotion. So yes, the smart money works on all time frames, but they definitely keep more then one eye on the fundamental chatter going around, so their perspective will never be focused exclusively on the sub-hourly (gambling) time frames. More often than not, it will be a large hourly perspective or a daily perspective.
3. Finding the Flavour of the Day
So let's get really practical here. How can we systematically scan the FX universe attempting to find the “flavour of the day” (if there happens to be one)?
This is where we need to look at the crosses. At the moment (June 16th 2015) the Sterling is having a good run. But before taking a position, I want to establish whether Sterling is flavor of the day/week or if something else is stealing the spotlight of late. What's the USD doing? How much weight does Euro have to throw around today? And what about the economic data and the constant stream of data which ticks across the wires ? Is it continuing to confirm one pairs dominance?
By running the ruler across Gbp, Euro, Yen, Usd against their main trading partners, we can quickly determine if any particular currency is dominant or passive across the board or displaying a pattern of unique behaviour. What we're trying to do is make sure that the strength (for example) of GBP is not an exception limited to GbpUsd. Before buying the Gbp, I'd prefer to see it strong across the board. It’s then a case of matching the strongest vs. weakest, to see if an opportunity exists.
So my first observation is the DXY: the dollar index will offer a snapshot of dollar strength vs. weakness. For example, if the USD is weak vs. the basket, we can then shift our focus to the currency which is displaying the dominant behaviour patterns. If, as has recently happened, the Gbp is the strongest looking pair vs. the dollar, then I'll go and see the Gbp crosses to verify whether it's a widespread story of Gbp strength or just an exclusive strength vs. USD.
We are always hunting for value vs. risk, in order to make our life easy. If the DXY is choppy or in a range, then it might be better to look outside the greenback for some action. We're basically looking regularly for trending candidates, without exluding anything.
Gbp vs main trading partners
Source: FXCM Marketscope
So in order to properly find the best candidates, it's a good practice if you can routinely set up your workspace with:
Eur vs. Usd, Gbp, Jpy, Chf
Gbp vs. Usd, Eur, Jpy, Chf
Jpy vs. Usd, Eur, Gbp, Chf
Chf vs. Usd, Eur, Gbp, Jpy
and for the comm-dolls, it's usually easier because once you have practiced your world-view time & time again, you will already have the strong/weak in mind and it will only take a glance at the AudUsd or NzdUsd or UsdCad to see what's up and if there's anything interesting going on. Also, sentiment reading for the comm-dolls can actually be easier due to their links with commodities and more evident drivers.
4. Finding the Flavour of the Week
In order to prepare the Weekly Game Plan (issued every Sunday), I go through the exact same procedure as just evidenced, just that I take into consideration daily & weekly views. So you can either extend your practice of the method or you can simply read the game plan!
Good Luck!
Beat the Forex Dealer - A. Silvani
Note: A previous version of this article was issued for OrderFlowTrading.com
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