Forex Trading Australia : Learn FX Trading

With international credit markets non-functional and awaiting U.S. government intervention, the forex trading market paused for much of the week as if taking a deep breath. Fundamental announcements that would normally send currencies reeling were ignored, and many major currency pairs traded sharply higher during the early part of the week then moved sideways within narrow ranges for the remainder. Traders are warned this pattern could continue until the U.S. bailout is finalised.

The RBA’s monetary tightening has successfully reduced demand for autos and homes, with August new motor vehicle sales trending lower for the seventh consecutive month, down −1.4% m/m and −4.8% y/y, and July new home sales dropping −7.2% m/m. AUD/USD rose sharply in the early part of the week then traded within a 200-pip range between 0.8250 and 0.8450, treating its 200-period moving average as a resistance level on four-hour charts.

U.S. 2Q2008 GDP was revised down to 2.8%. The credit crunch is impacting businesses and consumers, with August new home sales falling −11.5% m/m, existing home sales down −2.2%, and durable goods orders down −4.5%, much more than market expectations. Washington Mutual became the largest bank to collapse in U.S. history after depositors withdrew US$16.7bn in the past fortnight; it was subsequently purchased by JP Morgan for US$1.9bn, a bargain price.

The ECB meets Thursday 2 October and is expected to leave rates on hold at 4.25%, with a change in the announcement’s emphasis from inflation concerns to growth. Eurozone PMI readings dropped to 45.3 for manufacturing and 48.2 for services, while industrial new orders rose only 1.0% m/m. The German Ifo index fell dramatically to recessionary levels and HSBC Holdings, Europe’s biggest bank by market value, laid off 1,100 employees in its international investment banking services. EUR/USD gained 600 pips Monday and Tuesday as investors worried over the financial implications of the bailout for the U.S. Treasury, then trended slightly down to close at 1.4612.

U.K. home prices fell −1.0% m/m in September for the fourth consecutive decline and are down −3.3% y/y, while the BBC reports Bradford & Bingley will be nationalised and merger discussions continue between HBOS and Lloyd’s. GBP traded nearly flat, rising 0.4% against USD and falling −0.4% against EUR.

Canadian CPI rose to 4.5% y/y in August while July retail sales rose merely 0.1% m/m, hindered by declines in new car sales. CAD/USD fell beneath its established support level at 1.0420 on Monday and settled into possibly bearish consolidation above its older support level at 1.0300 for the remainder of the week. After bouncing from resistance near 0.8800, AUD/CAD trended gently down and closed the week at 0.8574.

New Zealand posted its second consecutive quarter of negative GDP growth with −0.2% q/q in 2Q2008, as expected; however, the consumer confidence reading for 3Q2008 rebounded sharply, mainly on lower interest rates and petrol prices. NZD/USD consolidated with very low volume, and NZD/AUD rolled between 1.2000 and 1.2300.

The Japanese yen benefited from risk aversion but not hugely, gaining 0.9% against AUD and 1.3% against USD, and USD/JPY shows signs of bearish consolidation on four-hour charts. Similarly, the Swiss franc gained modestly against USD and EUR.

No market trends like the forex trading market, and simply riding a trend can be the quickest path to profits. Unfortunately, inexperienced traders are too often content to glance at a chart, note that the currency pair is higher on the right side than the left, and assume that means the pair has embarked upon an upward trend. Sometimes that glance is sufficient; however, the situation can be more complicated than it originally appears. Here are a few tips toward analysing the trend.

1) Look at the long-term charts. The daily and weekly charts offer forex traders the best view of a currency pair in context, and sometimes only with such a view does it become clear whether the recent slant upwards in price is the beginning of a new trend or merely the next up-run within a range. If on the daily chart, the price remains higher on the right than the left, then the trend has more credibility than if the same situation existed on hourly or thirty-minute charts.

2) Check the indicators. There are several which help forex traders determine if a currency pair is trending, as opposed to consolidating or trading within a range. One is the average directional index (ADX), created by the legendary trader J. Welles Wilder. The ADX is a measurement of the strength of a trend, on most trading platforms displayed as a line graph in an indicator window beneath the chart itself, with readings above 35 indicating a strong trending bias. Note that the ADX does not differentiate between a bearish or bullish bias, as it is presumed the forex trader can determine which way is up.

Another commonly utilized indicator is a series of moving averages over 10, 20, and 50 time periods (truly conservative traders throw in the 200-period MA, as well). If the moving averages line up in order from lowest to highest, top to bottom, then chances are good the uptrend has “legs” and will continue to climb; the opposite, of course, holds for downtrends.

Below is an illustration of these two indicators in action. The yellow line nearest the heikin ashi price bars is the MA-10, the blue line is the MA-20, the green is MA-50, and the grey is MA-200. This is the four-hour chart of USD/MXN not long ago in a clear uptrend:

If the ADX reading had continued pushing above the 35 level (the horizontal dotted line in the middle of the indicator window) then a trend with such strength would have been an ideal market to buy on dips and ride the price higher with a trailing stop to lock in profits. However, note how the main line of the ADX (light green at the bottom of the chart) indicates the uptrend is weakening even as the price rises to successively higher highs. This bearish divergence became reality a few candles later as another round in the subprime mortgage crisis slammed the forex trading market, breaking most currency pairs’ trends and sending the greater percentage of them into sideways motion.

The trend is your friend, until it hits your trailing stop and ends.