Forex Trading : FX Trading

The forex trading week began on a risk-aversion downslope, with an old-fashioned run on U.S. mortgage bank IndyMac and fears for mortgage financiers Fannie Mae and Freddie Mac. However, when the U.S. financial system survived and 2Q2008 earnings for the industry sector were not as gory as expected, the price of crude oil slumped over 10% and global equities indices ticked higher. The current reported tally for the subprime crisis is US $436Bn in losses and writedowns for global banks and securities firms.

Although July’s RBA minutes noted consumer demand moderating, surging export commodities prices, particularly coal and iron ore, continue to fuel Australia’s terms of trade and could injure the sustainability of that demand slowdown. After trading between 0.9500 and 0.9750 for the better part of three weeks, AUD/USD rose to 0.9848 before falling back within its established range on Wednesday and closing the week at 0.9702. AUD/CAD made yet another unfruitful attempt on the 0.9840 resistance level before sliding into the bottom half of its seven-month regression channel. AUD/NZD spiked to 1.2779, and AUD/JPY continued to serve as risk-aversion monitor for the carry trade, closing up for the week at 103.73.

U.S. retail sales rose marginally in June by 0.1% m/m. CPI printed headline at 5.0% y/y and core, excluding food and energy, at 2.4% y/y; the PPI printed headline at 9.2% and core at 3.0%. With oil prices slumping below US $130 per barrel, USD cautiously rose from severe lows, and further earnings to be reported this coming week include Bank of America, Wachovia, Ford, General Motors, and Yahoo, all major enough to influence currency movements.

The German ZEW business expectations survey fell to lows not seen since 1991 and Eurozone PMI manufacturing and service readings slipped below the 50 level in June. The Ifo index and July PMIs are due out Thursday 24 July, and lower readings could lead to a sharp reaction from the Euro. EUR/USD spiked to a new record at 1.6038 on Tuesday 15 July but slid back beneath long-term resistance at 1.5905 on Wednesday and channelled for the remainder of the week with neither volume nor momentum building.

The U.K. budget deficit sparked rumours of an impending governmental borrowing spree which sent GBP lower against 15 of the 16 most actively traded currencies. U.K. 2Q2008 real GDP prints Friday 25 July and is widely expected to contract below 1Q2008’s reading of 0.3% although there seems to be no expectation of red ink at this point. EUR/GBP continues to channel between resistance at 0.8032 and a price line rising off early May’s low of 0.7765, with pressure building to the upside, best seen on daily charts. GBP/USD spiked sharply above the psychological 2.0000 level on Tuesday but faded after to close at 1.9979.

As widely expected, the BoC remained in neutral stance and left rates on hold at 3.00%. Strong Canadian terms of trades reports, including manufacturing shipments up 2.7% and wholesale sales up 1.6% in May, pushed CAD higher against 11 of the 16 most actively traded currencies, including that of its major trading partner. CAD/USD edged briefly below 1.0000 but closed the week at 1.0055, still within its established trading range of +/− three cents of parity.

The RBNZ meets Thursday 24 July; although an immediate rate cut is possible it’s more likely to wait until September with CPI in 2Q2008 reaching 1.6%, 4.0% y/y. May retail sales fell 1.2% and second-quarter GDP may also print red. NZD/USD also spiked on Tuesday, to 0.7759, and closed slightly up for the week at 0.7609.

The accelerator oscillator, introduced by trader Bill M. Williams in his book Trading Chaos (Marketplace Books by John Wiley & Sons, 1995) measures the acceleration or deceleration of momentum—the rate of change in the “current driving force”—in the price action of a currency pair. For the mathematically inclined, the equation in two parts is:

AO = SMA(median price, 5) − SMA(median price, 34)
AC = AO − SMA(AO, 5)

where SMA = a simple moving average, and AO = the technical indicator known as the Awesome Oscillator, which is used as an input for the accelerator oscillator.

The accelerator oscillator displays its reading as a histogram, in a similar manner to the MACD, in a separate indicator window below the actual chart. In appearance it’s a series of red and green bars of various heights, rising above and falling beneath a naught level in waves, as shown below on the 15-minute chart of the AUD/JPY:

This is an excellent indicator for use with a moving average crossover trading system, as discussed in previous entries here and as shown on the chart above. Because it measures changes in the momentum of the price action, it’s a real-time indicator of what’s going on in the forex trading market, and it serves as a “distant early warning” of changes before they’re reflected in the price itself. This can be a considerable advantage for forex traders who know how to utilize it.

As a trading signal, the accelerator oscillator is largely intuitive; however, it’s more important to watch the colour and height of the histogram bars rather than their position relative to the naught line. In the more detailed example below, note how the histogram bars reflect the “health” of the current trend and not its direction. In this manner it complements the moving average crossover signals, adding an indication of strength to the directional information they supply.

In this downtrend, whenever the price finds a support level, it pauses and retraces slightly. In the window below, the histogram bars turn green, indicating the downtrend’s strength is waning, at least for a while—not that it’s ending.

The traditional forex trading rules of thumb for using this indicator are:

• two or more green bars of increasing height above the naught line are an alert to enter the market long;
• three or more green bars of decreasing height below the naught line are an alert to enter the market long;
• two or more red bars of increasing height below the naught line are an alert to enter the market short; and
• three or more red bars of decreasing height above the naught line are an alert to enter the market short.

However, these are alerts, not entry signals, and the usual warning applies: like all technical indicators in the forex trading market, the accelerator oscillator is not meant to stand alone, but rather is designed to indicate certain market parameters. It is up to the forex trader to build a body of evidence to support a potential market position and to determine if the risk-reward ratio is acceptable prior to entering the market. The accelerator oscillator has much to contribute within that scenario