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Sentiment Analysis for Forex Trading

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Forex sentiment analysis can be a useful tool to help traders understand and act on price behavior. While applying sound technical and fundamental analyses is key, having an additional feel for the market consensus can add depth to a trader’s view of forex and other markets. In this article, we outline what market sentiment is, how it relates to forex trading, and what the top sentiment indicators are.

What is Market Sentiment?

Market sentimentdefines how investors feel about a particular market or financial instrument. As traders, sentiment becomes more positive as general market consensus becomes more positive. Likewise, if market participants begin to have a negative attitude, sentiment can become negative.

As such, traders use sentiment analysis to define a market as bullish or bearish, with a bear market characterized by assets going down, and a bull market by prices going up. Traders can gauge market sentiment by using a range of tools such as sentiment indicators (see below), and by simply watching the movement of the markets, using the resulting information to make their decisions.

What is Sentiment Analysis in forex trading?

Sentiment analysis can be directly translated to currency pairs, even though it is not unique to the forex market. Contrarian investors will look for crowds to either buy or sell a specific currency pair, while waiting to take a position in the opposite direction of sentiment.

How Forex Sentiment Analysis Works

An example of how sentiment analysis can be applied in forex trading is a large single movement in GBP/USD in 2016, with negative sentiment sending GBP slumping to a 31-year low following Britain’s vote to leave the European Union. After broadly positive sentiment in the year that followed, negative sentiment then took over much of 2018 again before prices started to trend higher in 2019.

Another example of net short sentiment can be seen in the EUR/GBP chart below, with 21.9% of traders net-long with a ratio of traders short to long at 3.58 to 1. The chart shows in blue the percentage of IG traders taking a net long position, and in red the percentage taking a net short position.

Chart to show net negative sentiment alongside price action

Rising sentiment may mean there are few traders left to keep pushing the trend up. In this case, traders may want to watch for a price reversal. On the other hand, a price moving lower, showing signals that it has topped may prompt a sentiment trader to enter short. The below chart shows an example of the EUR/USD pair experiencing net positive sentiment.

Sentiment Analysis for Forex Trading

Chart to show net positive sentiment alongside price action

Using Sentiment Indicators

Sentiment indicators are numeric or graphic representations of how optimistic or pessimistic traders are about market conditions. This can refer to the percentage of trades that have taken a given position in a currency pair. For example, 70% of traders going long and 30% going short will simply mean 70% of traders are long on the currency pair.

The best sentiment indicators for forex traders include IG Client Sentiment (as seen in the charts above) and the Commitment of Traders (COT) Report.

IG Client Sentiment

IG Client Sentimentcan be a useful tool to incorporate into your trading strategy. It can give a helpful picture of the number of long and short trades occurring in a particular market, giving an impression of the turning points in sentiment. For more on this indicator and how it can assist your trading, be sure to click the link above.

Commitments of Traders Report

The Commitment of Traders (COC) Report, published weekly by the Commodity Futures Trading Commission (CFTC), is compiled from submissions from traders in the commodities markets, giving a picture of the commitment of classified trading groups. The CFTC’s report is released every Friday at 15:30 Eastern Time and can be a useful market signal.

Read more on market sentiment

For more information on market sentiment, check out our piece How to Read Risk ‘OFF’ or Risk ‘ON’ Sentiment, understand the predictions of 2019 being a ‘Risk Off’ year, and don’t forget to refer to the aforementioned IG Client Sentiment for a full, up-to-date picture of who’s long and who’s short.



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Sentiment Analysis for Forex Trading

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Forex sentiment analysis can be a useful tool to help traders understand and act on price behavior. While applying sound technical and fundamental analyses is key, having an additional feel for the market consensus can add depth to a trader’s view of forex and other markets. In this article, we outline what market sentiment is, how it relates to forex trading, and what the top sentiment indicators are.

What is Market Sentiment?

Market sentimentdefines how investors feel about a particular market or financial instrument. As traders, sentiment becomes more positive as general market consensus becomes more positive. Likewise, if market participants begin to have a negative attitude, sentiment can become negative.

As such, traders use sentiment analysis to define a market as bullish or bearish, with a bear market characterized by assets going down, and a bull market by prices going up. Traders can gauge market sentiment by using a range of tools such as sentiment indicators (see below), and by simply watching the movement of the markets, using the resulting information to make their decisions.

What is Sentiment Analysis in forex trading?

Sentiment analysis can be directly translated to currency pairs, even though it is not unique to the forex market. Contrarian investors will look for crowds to either buy or sell a specific currency pair, while waiting to take a position in the opposite direction of sentiment.

How Forex Sentiment Analysis Works

An example of how sentiment analysis can be applied in forex trading is a large single movement in GBP/USD in 2016, with negative sentiment sending GBP slumping to a 31-year low following Britain’s vote to leave the European Union. After broadly positive sentiment in the year that followed, negative sentiment then took over much of 2018 again before prices started to trend higher in 2019.

Another example of net short sentiment can be seen in the EUR/GBP chart below, with 21.9% of traders net-long with a ratio of traders short to long at 3.58 to 1. The chart shows in blue the percentage of IG traders taking a net long position, and in red the percentage taking a net short position.

Chart to show net negative sentiment alongside price action

Rising sentiment may mean there are few traders left to keep pushing the trend up. In this case, traders may want to watch for a price reversal. On the other hand, a price moving lower, showing signals that it has topped may prompt a sentiment trader to enter short. The below chart shows an example of the EUR/USD pair experiencing net positive sentiment.

Sentiment Analysis for Forex Trading

Chart to show net positive sentiment alongside price action

Using Sentiment Indicators

Sentiment indicators are numeric or graphic representations of how optimistic or pessimistic traders are about market conditions. This can refer to the percentage of trades that have taken a given position in a currency pair. For example, 70% of traders going long and 30% going short will simply mean 70% of traders are long on the currency pair.

The best sentiment indicators for forex traders include IG Client Sentiment (as seen in the charts above) and the Commitment of Traders (COT) Report.

IG Client Sentiment

IG Client Sentimentcan be a useful tool to incorporate into your trading strategy. It can give a helpful picture of the number of long and short trades occurring in a particular market, giving an impression of the turning points in sentiment. For more on this indicator and how it can assist your trading, be sure to click the link above.

Commitments of Traders Report

The Commitment of Traders (COC) Report, published weekly by the Commodity Futures Trading Commission (CFTC), is compiled from submissions from traders in the commodities markets, giving a picture of the commitment of classified trading groups. The CFTC’s report is released every Friday at 15:30 Eastern Time and can be a useful market signal.

Read more on market sentiment

For more information on market sentiment, check out our piece How to Read Risk ‘OFF’ or Risk ‘ON’ Sentiment, understand the predictions of 2019 being a ‘Risk Off’ year, and don’t forget to refer to the aforementioned IG Client Sentiment for a full, up-to-date picture of who’s long and who’s short.



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How Monetary and Fiscal Policy Can Amplify or Stave Off Crises

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Why financial market traders must monitor both monetary and fiscal policy:

  • When trading financial markets, especially when there are concerns about a global economic slowdown, it’s essential to monitor both government fiscal policy and central bank monetary policy.
  • When they are working together, the chances of a slowdown turning into a full-blown recession are substantially reduced.
  • When they are not, an economic meltdown is far more likely.

Importance of monetary and fiscal policy when trading in an economic downturn

Trading the financial markets when economic conditions are poor, it is more important than ever to monitor both government fiscal policy and central bank monetary policy. It’s even more crucial when there are concerns that a slowdown could lead to a full-blown recession

That’s because the proper policy adjustments can avert a true crisis and prompt recovery, while the wrong strategy can potentially hasten and/or exacerbate the collapse.

What is the difference between monetary and fiscal policy?

Put simply, fiscal policy means a government’s tax and spending plans while monetary policy refers to a central bank’s decisions on interest rates and whether to push more money into the financial system or withdraw it. They are most effective when they are working together and least effective when they are pulling in opposite directions.

Monetary and fiscal policy coordination

While a coordinated, complementary response to the threat of a crisis is ideal, a problem in many countries – such as the US, the UK and the Eurozone – is that their central banks are independent and therefore resistant to political pressures to act one way or another. Tax cuts are positive for economic growth, for example, but their impact can be reduced by a central bank that refuses to loosen monetary policy for fear, for instance, of stoking inflation.

Eurozone Debt Crisis: How to Trade Future Disasters

In other countries, the wall between the government and the central bank is less solid. In Japan, the Ministry of Finance lost much of its authority over the Bank of Japan in 1997. However, it is still prone to political interference as was made clear when Japanese Prime Minister Shinzo Abe implemented a “three arrows” policy consisting of monetary policy, fiscal policy and economic growth strategies to boost private investment. The government, in turn, has been accused of being influenced strongly by big business, leading to the term “Japan Inc.”

Elsewhere, the central banks in countries such as India and Turkey are under strong pressure to bring their policies more into line with their governments’ fiscal policies. In China, perhaps surprisingly, the People’s Bank of China (PBOC) has some limited independence despite being ultimately controlled by the country’s Communist rulers. Some other Asian countries coordinate monetary and fiscal policy openly.

Hawkish vs Dovish: How Monetary Policy Affects FX Trading

In the US, President Donald Trump has repeatedly criticized the Federal Reserve and pressed it to cut interest rates – something it has so far refused to do, although reductions are on the cards before the end of 2019.

In a Twitter post in May 2019, Trump argued that “China will be pumping money into their system and probably reducing interest rates, as always, in order to make up for the business they are, and will be, losing. If the Federal Reserve ever did a match it would be game over, we win!

The response to his tweet was broadly negative but, as one commentator said at the time – and as explained above – this is exactly what Japan and China are doing, and Europe would too if it wasn’t worried about losing sovereignty at the country level. Another noted that “The Fed and the PBOC are more alike than you might think”.

Trading markets when central banks run out of options

From a trading perspective, it is the central banks that influence prices more directly. When they decide to raise or lower interest rates, hint that rate changes are on the way, inject money into an economy or drain it out, or devise ever more complex ways to influence the supply of money, prices react immediately.

Why Central Bank Monetary Policy May Fail to Avert Another Market Swoon

There is less response to government announcements of tax changes, austerity programs, infrastructure spending and the like – partly because their influence is longer term and partly because they can be offset by the central bankers if they decide, for example, that fiscal largesse is likely to boost inflation.

It is important to note, though, that when central banks run out of options, government policy becomes more important for markets. At the time of writing, official interest rates are negative in both Japan and Switzerland, and at zero in the Eurozone. Around the world, creative policies with ever more complex acronyms and various success rates have been introduced to bolster economies when rates can be reduced no further and conventional monetary policy seems to have reached its limit. Here are some of them:

  • The Troubled Asset Relief Program (TARP) was introduced by the US in 2008 as a response to the subprime mortgage crisis and involved the buying of toxic assets and equity from financial institutions.
  • The Term Asset-Backed Securities Loan Facility (TALF) was also created in 2008, by the Federal Reserve, to boost the economy – a good example of the government and the Fed pulling in the same direction. By contrast, some economists have argued that at present the government and the Fed are pulling in opposite direction, with fiscal policy loose at a time when interest rates remain high in comparison with many other major economies.
  • Quantitative Easing (QE) has now become commonplace and describes central bank purchasing of government and other securities from the markets to boost the money supply and encourage spending.
  • Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control is a variant introduced by the Bank of Japan in 2016 when QE proved insufficient to boost inflation.
  • Targeted Longer-Term Refinancing Operations (TLTROs) were designed by the European Central Bank to offer long-term funding at attractive conditions to banks in order to ease privatesector credit conditions and stimulate bank lending to the real economy.

The importance of such measures can be seen in the following chart, which shows how the announcement of the first series of TLTROs by the ECB in June 2014 led to a prolonged slide in EURUSD.

EURUSD Price Chart, Weekly Timeframe (November 11, 2013 – June 27, 2019)

Latest EURUSD price chart.

Chart by IG (You can click on it for a larger image)

How Central Banks Impact the Forex Market

The lesson for traders is therefore clear: central banks and governments both influence markets. Policy announcements therefore need to be monitored closely – and never more so than when there are fears of a downturn turning into a global recession.

Resources to help you trade the forex markets:

Whether you are a new or an experienced trader, at DailyFX we have many resources to help you:

— Written by Martin Essex, Analyst and Editor

Feel free to contact me via the comments section below, via email at martin.essex@ig.com or on Twitter @MartinSEssex

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The Head and Shoulders Pattern: A Trader’s Guide

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Often considered the most steadfast of all major reversal patterns, the Head and Shoulders chart pattern is employed by novice and experience traders alike to speculate on both forex and stock markets. The benefit of this chart pattern is defined areas to set risk levels and profit targets.

The inverse pattern is equally useful in any trader’s arsenal and adopts the same approach as the traditional Head and Shoulders pattern. The head and shoulders stock and forex analysis process will exercise the same logic making it a great tool to include in a trader’s repertoire.

Head and Shoulders Chart Pattern: Main Talking Points

  • What is a Head and Shoulders pattern?
  • What is the Inverse Head and Shoulders pattern?
  • How to identify Head and Shoulders patterns on forex and stock charts
  • Advantages and limitations of the Head and Shoulders pattern

What is the Head and Shoulders Pattern?

The Head and Shoulders chart pattern is a price reversal pattern that helps traders identify when a reversal may be underway after a trend has exhausted itself. This reversal signals the end of an uptrend. The Head and Shoulders pattern has a distinctive appearance resembling its namesake which includes a distinct ‘left shoulder’, ‘head’, ‘right shoulder’ and ‘neckline’ formation (see image below).

What is the Inverse Head and Shoulders Pattern?

The Inverse Head and Shoulders pattern reflects the same structure as the standard version but reversed, making it observable in a downtrend (see image below). The Inverse Head and Shoulders indicates a reversal of a downtrend as higher lows are created.

inverse head and shoulders chart pattern

How to identify Head and Shoulders Patterns on Forex & Stock Charts

Recognizing the Head and Shoulders pattern on both forex and stock charts entail the exact same actions; making it a versatile tool to include in any trading strategy. The following list gives a simple breakdown of the key action points when identifying this pattern:

  1. Identify the overall market trend using price action and technical indicators (preceding uptrend)
  2. Isolate the Head and Shoulders chart construction
  3. The distance between the ‘Head’ and ‘Shoulders’ should be as close to equidistant as possible
  4. Delineate the neckline at the low point between both ‘shoulders’ – preferably horizontal but not obligatory

How to Trade the Head and Shoulders Pattern

Once a trader knows how to identify the standard and inverse head and shoulders patterns, it’s relatively easy to apply it to technical analysis in both forex and equity markets.

Trading stocks with the Head and Shoulders pattern

trading the head and shoulders pattern

The chart above shows a Head and Shoulders pattern on the Germany 30 (DAX 30) stock index. The formation of the pattern is clear with the neckline highlighted by the dashed blue horizontal line. Traders will look to enter a short trade after a confirmation close below the neckline as seen by the ‘ENTRY’ label on the chart or the pip movement below the neckline. Some traders employ the ‘two-day’ close rule which necessitates a second confirmation candle closing below the neckline before opening the short trade. Trading on the pip break below the neckline allows traders to benefit from the full move down however, this tactic is riskier in that the breakout below the neckline has not been confirmed by a candle close.

There is a general rule of thumb to designate stop and limit levels. Taking the high point off the ‘right shoulder’ will specify the stop level whilst the vertical distance between the neckline and high of the ‘head’ will approximate the limit distance – 1832.8 pips in this case. The risk-reward ratio on this trade is roughly 1:1.2 which is still within the DailyFX recommended risk management parameters.

Trading forex with the Inverse Head and Shoulders pattern

trading the inverse head and shoulders pattern

The Inverse Head and Shoulder pattern on the USD/ZAR forex pair above shows an asymmetrical structure which is quite common in most formations. The neckline is slightly skewed however, still maintaining the integrity of the pattern.

The long entry level is highlighted by the neckline break or the price candle close above the neckline. The stop distance is taken from the low from the ‘right shoulder’ whilst the limit distance is calculated by measuring the distance from the ‘head’ low to the neckline.

Advantages and Limitations of the Head and Shoulders Pattern

Advantages

Limitations

Easy to identify for more experienced traders

Difficult to identify for novice traders

Defined risk and take profit levels

Confirmation candle may close far below neckline resulting in large stop loss distances which may need to be reviewed

Potential to exploit big market movements

Price can pullback and retest the neckline often confusing beginner traders

Useful in all markets

Risk-reward ratios are not always favourable

Further Reading on Forex Trading Patterns

  • Reading a candlestick chart is an important foundation to have before analyzing more complex techniques.
  • Doji candlesticks are another common pattern all traders should be able to identify in order to apply effective technical analysis to their trades.
  • Technical traders have different styles and forex trading strategies. Explore these thoroughly to find out if this type of analysis suits your personality.
  • If you are just starting out on your trading journey it is essential to understand the basics of forex trading in our New to Forex guide.



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Technical Indicators Defined and Explained for Forex Traders

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Technical indicators are chart analysis tools thatcan help forex traders better understand and act on price movement. There is a huge range of technical analysis tools available that analyze trends, provide price averages, measure volatility and more.

In this piece, we explore the types of technical indicators available, from RSI to Bollinger Bands, explain how to respond to technical signals, and reveal the top tips to making the tools an effective part of your trading journey.

Types of Technical Indicators

There are four main types of technical indicators: Trend Following, Oscillators, Volatility and Support/Resistance. They are grouped based on their function, which ranges from revealing the average price of a currency pair over time, to providing a clearer picture of support and resistance levels.

List of Technical Indicators

1. Trend Indicators

Trend following indicators were created to help traders trade currency pairs that are trending up or trending down. We have all heard the phrase ‘the trend is your friend’ – these indicators can help point out the direction of the trend and can tell us if a trend actually exists.

Moving Average Indicator

A Moving Average (MA) is a technical tool that averages a currency pair’s price over a period of time. The smoothing effect this has on the chart helps give a clearer indication on what direction the pair is moving – either up, down, or sideways. There are a variety of moving averages to choose from, with Simple Moving Averages and Exponential Moving Averages the most popular.

Ichimoku Indicator

Ichimoku is a complicated looking trend assistant that is simpler than it appears. This Japanese indicator was created to be a standalone indicator that shows current trends, displays support/resistance levels, and indicates when a trend has likely reversed. For more, check out our Definitive Guide to Trading Trends with Ichimoku Cloud.

ADX Indictor

The Average Direction Index won’t tell you whether price is trending up or down, but it will tell you if price is trending or is ranging. This makes it the perfect filter for either a range or trend strategy by making sure you are trading based on current market conditions. For more, see our article How to Use ADX to Identify Forex Trends.

2. Oscillator Indicators

Oscillators give traders an idea of how momentum is developing on a specific currency pair. When price treks higher, oscillators will move higher. When price drops lower, oscillators will move lower. Whenever oscillators reach an extreme level, it might be time to look for price to turn back around to the mean.

However, just because an oscillator reaches ‘Overbought’ or ‘Oversold’ levels doesn’t mean we should try to call a top or a bottom. Oscillators can stay at extreme levels for a long time, so we need to wait for a valid sign before trading.

RSI Indicator

The Relative Strength Index is arguably the most popular oscillator to use. A big component of its formula is the ratio between the average gain and average loss over the last 14 periods. The RSI is bound between 0 – 100 and is considered overbought above 70 and oversold when below 30. Traders generally look to sell when 70 is crossed from above and look to buy when 30 is crossed from below. Click here to learn about A Better Way to Use RSI to Signal When to Take a Forex Trade.

Stochastics Indicator

Stochastics offer traders a different approach to calculate price oscillations by tracking how far the current price is from the lowest low of the last X number of periods. This distance is then divided by the difference between the high and low price during the same number of periods. The line created, %K, is then used to create a moving average, %D, that is placed directly on top of the %K. For more, check out our article How to Trade With Stochastic Oscillator.

CCI Indicator

The Commodity Channel Index is different than many oscillators in that there is no limit to how high or how low it can go. It uses 0 as a centerline with overbought and oversold levels starting at +100 and -100. Traders look to sell breaks below +100 and buy breaks above -100. To see some real examples of the CCI in action, take a look at how to Trade Forex with the CCI Indicator.

MACD Indicator

The Moving Average Convergence/Divergence tracks the difference between two EMA lines, the 12 EMA and 26 EMA. The difference between the two EMAs is then drawn on a sub-chart (called the MACD line) with a 9 EMA drawn directly on top of it (called the Signal line). Traders then look to buy when the MACD line crosses above the signal line and look to sell when the MACD line crosses below the signal line as seen here. There are also opportunities to trade divergence between the MACD and price.

3. Volatility Indicators

Volatility measures how large the upswings and downswings are for a particular currency pair. When a currency’s price fluctuates wildly up and down it is said to have high volatility. Whereas a currency pair that does not fluctuate as much is said to have low volatility. It’s important to note how volatile a currency pair is before opening a trade, so we can take that into consideration with picking our trade size and stop and limit levels. Read our article on the Top 10 Most Volatile Currency Pairs for more.

Bollinger Bands® Indicator

Bollinger Bands print three lines directly on top of the price chart. The middle ‘band’ is a 20-period simple moving average with an upper and low ‘band’ that are drawn two standard deviations above and below the 20 MA. This means the more volatile the pair is, the wider the outer bands will become, giving the Bollinger Bands the ability to be used universally across currency pairs no matter how they behave.

Bollinger Bands® is a registered trademark of John Bollinger.

ATR Indicator

The Average True Range tells us the average distance between the high and low price over the last set number of bars (typically 14). This indicator is presented in pips where the higher the ATR gets, the more volatile the pair, and vice versa. This makes it a perfect tool to measure volatility. For more, see How to Use ATR in a Forex Strategy.

4. Support/Resistance Indicators

Support and resistance is key to technical analysis. The concept refers to the price levels on charts that form barriers to an asset price being pushed in a given direction. For more, see our article on Identifying Support and Resistance and make sure you consider the indicators below.

Pivot Points

Pivot Points are one of the most widely used in all markets including equities, commodities, and Forex. They are created using a formula composed of high, low and close prices for the previous period. Traders use these lines as potential support and resistance levels, levels that price might have a difficult time breaking through.

Donchian Channels

Price channels or Donchian Channels are lines above and below recent price action that show the high and low prices over an extended period of time. These lines can then act as support or resistance if price comes into contact with them again. For a deeper look at using this tool successfully, read Breakout Trades and the Power of Price Channels.

Technical Indicators: A Summary

Each of the technical indicators above can help you to advance your technical analysis and better understand price action, but it’s important to remember not to get bogged down and to choose only the indicators that work for you.

Overly complicating your approach with too many indicators can force traders to process too much information, resulting in ‘paralysis by analysis’. As a result, it’s best to keep it simple and only use a handful in accordance with the goals set out in your trading plan.

Become a Better Trader With our Trading Tips

For more information on the indicators you should know, check out the more condensed 4 Effective Trading Indicators Every Trader Should Know.

For those wanting to take their indicator trading to new levels, we offer in-depth free trading guides on topics like Ichimoku.



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Samantha LaDuc on Intermarket Analysis

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Key points covered in this podcast

– Why intermarket analysis can be worthwhile for traders

– The market opportunities to look out for this year

– How to avoid the range of mistakes traders make

Samantha LaDuc is a prominent Macro-to-Micro analyst, active trader, and proponent of intermarket analysis, who teaches other traders how to ‘catch’ the good trades at LaDuc Trading.

Aside from her popular Macro-to-Micro Newsletter, she also hosts a live trading room, provides forecasts and helps narrow the focus of traders around equities and options for tactical trade ideas.

In this edition of our podcast Trading Global Markets Decoded, our host Tyler Yell talks to Samantha about intermarket analysis, the cognitive, behavioral, and risk-management mistakes traders make, and the markets that should provide opportunities for the rest of the year. Benefit from our discussion with intermarket analysis expert Samantha LaDuc and listen to the podcast by clicking on the link.

FOLLOW OUR PODCASTS ON A PLATFORM THAT SUITS YOU

iTunes: https://itunes.apple.com/us/podcast/trading-global-markets-decoded/id1440995971

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Soundcloud: https://soundcloud.com/user-943631370

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After Samantha started, grew and sold a small technology company, she turned her attention to trading in 2008. Today, she has a unique perspective on scanning and synthesizing what markets will move, why they are moving, and how to trade them with risk-defined options, and specializes in outliers with velocity–on any timeframe.

How does she maintain such a comprehensive grasp of market developments? Her answer is unequivocal: ‘My children have left home!

‘I’m totally underutilized now. My children were my passion, but now this is too. I have the time and the brainpower to do what I want and this is what I love to do.’

Samantha looks to start with understanding macro matters and then drills down into whether the case for bullish or bearish is stronger. ‘How can the market realize there’s a lot of risk that’s not priced in?’ she says. She then looks at the individual components in more granularity; for example, the US dollar. ‘I firmly believe the US dollar makes the weather and the rate of change determines the severity. So I watch the dollar first and foremost.

Next is looking at potential triggers of risk within that asset. ‘I’m interested in the macro economic releases, such as Nonfarm Payrolls for example, these are things that will move the market.

‘I want to have a mindset going into these events so I’ll know better how to react. It’s about how to position and how to react.’

The importance of intermarket analysis

Samantha is also an advocate and practitioner of intermarket analysis, seeking and analyzing more than one related asset class to determine the strength of markets being considered. ‘It’s a combination of divergences and then that underlying asset,’ she says.

‘I’m putting together a story of divergences and I’m waiting for that inflection point where they all converge at the same time. That makes for very powerful moves in the underlying asset.’

Listen to the podcast for more on Samantha’s process, preferable chart patterns, markets, and unique volatility focus, as well as how she runs the gamut of providing insight through a macro, value, sentiment, intermarket and technical analysis.

Check out Samantha’s platforms

Follow Samantha on Twitter using the handle @LaDucTrading & @SamanthaLaDuc, and also her site at LaDuc Trading.



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Becoming a Better Trader – Identifying High Quality Trade Set-ups

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There are countless ways to approach the market to find opportunities, and as such this means there aren’t any truly right or wrong ways to analyze and trade. With that said, though, the process used to identify good trade set-ups tends to be similar regardless of the disciplines a trader adopts. There is some form of ‘case-building’ process used to determine why (or why not) a trade should be made.

Whether you are a new trader building a foundation or an experienced trader struggling (happens to the best), here are 4 ideas to help you Build Confidence in Trading

When using a case-building process you are basically asking yourself; what criteria point to a good set-up and is the market validating them? Most of the time the answer is “no”, because more often than not trade set-ups don’t mature to the point of being worth executing. But when the answer is “yes”, there are strong supportive arguments for why you should place a trade and in simple form your logic will look something like this: Criteria 1 + Criteria 2 + Criteria 3 = TRADE

What are the criteria I am referring to? They could be a whole host of tools and methodologies. One of the biggest keys to focus on here is that there is confluence. For example, a market tending higher that pulls back to price and trend-line support arriving at the same price, would offer a confluence between varying degrees of support as well as a trend that is conducive for support holding. In a simple formula it would look like this: Uptrend + Price Support + Trend-line Support = Quality Set-up

If no case can be built, then of course the proper thing to do is nothing at all. One of the single biggest problems traders have is over-trading, but by always being mindful of whether good criteria are met or not it will help eliminate many trades that shouldn’t be taken.

The Becoming a Better Trader series in one location, check it out.

Sample list of criteria to consider (from webinar slide)

*The criteria on the left are my own, while the blue are other common factors traders use. Again, your list is likely to be different.

Below is a sample watchlist we looked at in the webinar. The bolded criteria have already been met, while the (???) indicates pending criteria that are needed to be met before the scenario has enough factors to support a trade. You can simply walk through the steps on a piece of paper or in an electronic format (i.e. Excel, Word, etc.); it doesn’t matter how just that there is a pattern of adding up the criteria to make a case to trade.

Once you get to a certain point this process should become a natural part of your thinking and you don’t necessarily have to ‘put it on paper’, but it can be a good process to do nevertheless; especially if you have a lot of slow-developing set-ups you are tracking.

Sample Watch-list

Becoming a Better Trader – Identifying High Quality Trade Set-ups

Rules of Thumb:

We also discussed a few good ‘rules of thumb’. These can be extremely helpful for keeping you trading in-line with your general trading plan, and as a result helpful for creating consistency. You might think of these as cliché, but clichés are around for a reason – because they are usually true. It’s important to read your rules of thumb over and over until they sink far enough into your head that they become an extension of your automatic thinking; from conscious to subconscious.

Here is a sample of ‘rules of thumb’

Becoming a Better Trader – Identifying High Quality Trade Set-ups

To conclude: Trading isn’t an easy endeavor and even when you have a good process and set of rules in place, at times you will still deviate off the proper path. We’re human. What we are trying to do here is create a structure that helps significantly reduce the number of mistakes and ill-advised trades we make, and of course ensure that none of our mistakes completely take us out of the game.

For the full conversation, please check out the video above…

—Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at @PaulRobinsonFX

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How to Trade Shooting Star Candlestick Patterns 

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Trading with Shooting Star Candlesticks: Main Talking Points

Japanese candlesticks are a popular charting technique used by many traders, and the shooting star candle is no exception. This article will cover the shooting star reversal pattern in depth and how to use it to trade forex.

Main talking points:

• What is a shooting star candlestick pattern? 

• Advantages of using the shooting star in technical analysis   

• Trading the shooting star pattern  

• Further reading on how to trade with Candlesticks  

What is a shooting star candlestick pattern?

A shooting star formation is a bearish reversal pattern that consists of just one candle. It is formed when the price is pushed higher and immediately rejected lower so that it leaves behind a long wick to the upside. The long wick should take up at least half of the total length of the shooting star candle – see image below.

shooting star candlestick pattern

Additionally, the closing price should be near the low of the candle. As you can see, this creates an overall bearish structure because prices were unable to sustain their higher trade.

A similar structure is observed with the Inverted Hammer pattern however, the Inverted Hammer relates to a bullish reversal signal as opposed to a bearish reversal signal. This candlestick pattern is often revealed at the bottom of a downtrend, support level or pullback.

It is often questioned about the difference between a shooting star formation on a forex pair, stock or commodity. There is no variance between the different financial market types. A shooting star candlestick pattern will offer the same signal/s regardless of the instrument.

Advantages of using the shooting star in technical analysis

The shooting star pattern is a great tool for novice technical traders due to its simplicity. Spotting a potential shooting star candle is straight forward if traders adhere to the pattern description as explained above.

The candle pattern by itself will sometimes be flawed. However, if the pattern appears near a resistance level or trend line, then the shooting star can add confirmation to the new bearish bias. This is because a single candle is not extremely crucial in the overall trend or market movement.

Risk management is important to incorporate when using this candlestick pattern. This provides the trader with a ‘safety net’ should the market move negatively.

Benefits of the Shooting Star candlestick pattern:

• Easy to identify

• Reasonably reliable if all criteria are met

• Suitable for but not limited to novice traders

Limitations of the Shooting Star candlestick pattern:

• Shooting Star candle does not dependably define a short trade

• Confirmation is needed – further technical/fundamental justification

Trading the shooting star  pattern

EUR/USD Shooting Star Candlestick Pattern:

EUR/USD shooting star pattern

Trading this reversal pattern is fairly simple. First, the implication is for lower prices therefore we want to look for entries to short. Since the prices were previously rejected at the high of the shooting star, we will look to establish the stop loss at the recent swing high (red horizontal line on the chart).

A trader could simply enter on the open of the next candle or, if the trader was more conservative and wanted to capture a better risk-to-reward ratio, trade the retest of the wick (black dashed line). Retests of the wick tend to occur when the wick is longer than normal. Often prices will come back and retrace upward a portion of the long wick. A trader recognizing this might wait to enter around the middle of the wick rather than enter immediately after the shooting star candle forms. This means the trader is entering a short trade at a higher price and with a tighter stop loss reducing risk.

Regardless of the entry mechanism, the stop loss will remain the same.

Regarding profit targets (blue line), DailyFX communicates taking profit at least twice the distance of the stop loss. So, if the stop loss is 90 pips away from the opening level, then look for at least 180 pips of profit potential. This commonly refers to a 1:2 risk-to-reward ratio which falls in line with the Traits of Successful Traders research.

Further reading on how to trade with Candlesticks



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Quantitative Trading Strategies with Mathew Verdouw

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Key points covered in this podcast

– What being a ‘quant’ really means in today’s trading scene

– How trading education has ramped up the quantitative focus

– The techniques to apply to your own quantitative analysis

Mathew Verdouw is a charted market technician, founder and CEO of trading software company Optuma, and 22-year veteran of technical analysis. Originally a computer systems engineer, he wrote his own technical analysis platform that is now used worldwide by a range of customers, from private traders to major US firms.

In this edition of our podcast Trading Global Markets Decoded, our host Tyler Yell talks to Mathew about the quantitative trading strategies to consider for your own trading experience. Benefit from the quantitative trading strategies with Mathew Verdouw and listen to the podcast by clicking on the link.

Follow our podcasts on a platform that suits you

iTunes: https://itunes.apple.com/us/podcast/trading-global-markets-decoded/id1440995971

Stitcher: https://www.stitcher.com/podcast/trading-global-markets-decoded-with-dailyfx

Soundcloud: https://soundcloud.com/user-943631370

Google Play: https://play.google.com/music/listen?u=0#/ps/Iuoq7v7xqjefyqthmypwp3x5aoi

Mathew’s trading journey began a year out of University, having started his own software engineering consulting company. In between contracts he met a man who needed a trading idea. ‘I told him I’d never worked in the markets and grew up in a family where markets were considered evil, but the strategies and ideas we spoke about really resonated with me.

‘My initial motivation was to sell as much software as I could so I could open a trading account and end up on a remote island somewhere.’

Teaching the CMT

Aside from running Optuma, Mathew teaches the latest curriculum of all three levels of the Chartered Market Technician Program (CMT), which champions the use of technical analysis. He praises the credentialing body CMTA in its move to make the program more quantitative in nature.

‘When I did my CMT six years ago, there was a huge focus on some discretionary, difficult concepts on all three levels and the CMTA has looked at this and decided to change it.

‘That means there’s a whole new generation of technicians coming through the program and learning to be more quantitative – and it’s wonderful for technical analysis in the future.’

Mathew says he does not want to teach something that’s solely theoretical and can’t be implemented. ‘Even for us in starting Optuma and building the tools, all this quantitative work on null hypothesis and significance testing had a really academic feel to it and helped us go back and say, OK, we want to build a whole way of looking at a sample distribution and comparing how our test fits on that.’

Defining ‘quant’

What does being a ‘quant’ mean to Mathew?

‘The term ‘quant’ is a little bit of a misnomer,’ he says. ‘It’s a perception of people building mathematical models, and it sounds hard, but I think that as a quantitative technical analyst I just want to measure.

‘If I’m measuring my idea in a way that gets rid of all biases, and I’m being as robust and thorough as I can, I’d say that’s being quantitative.’

Quantitative analysis is also so much more than backtesting, he adds. ‘The backtesting is the end result. First we need to do what we call signal testing, finding every single example of a signal and looking at the profile of it. What’s my average return, how long does that outperform the market? And based on that information I can then bring it into a back tester.

‘For example, if I took a signal and I was getting 5,000 signals in an eight-year period, that’s 55 signals a month. Then I can ask, ‘Is that even achievable, would the transaction costs kill me, can I manage that many trades?’

‘If I’m doing intraday trading maybe I can, but if I’m only watching the market once a week and sitting down on a Saturday morning, rebalancing my portfolio and making decisions for what I’m going to do Monday, maybe not. So it’s building that understanding as well.’

Be Sure to Check out Mathew’s Platforms

Mathew Verdouw can be found on Twitter @optima, and make sure you check out his blog at optima.com/blog.



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7 Step Trading Checklist Before Entering Any Trade

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The video above focuses on the main aspects of the trading checklist and this article seeks to unpack further aspects of the trading checklist in greater detail.

Why You Should Use a Trading Checklist

Implementing a trading checklist is a vital part of the trading process because it helps traders to stay disciplined, stick to the trading plan, and builds confidence. Maintaining a trading checklist presents traders with a list of questions that traders need to answer before executing trades.

It is important not to confuse a trading plan with the trading checklist. The trading plan deals with the big picture, for example, the market you are trading and the analytical approach you choose to follow. The trading checklist focuses on each individual trade and the conditions that must be met before the trade can be made.

Your Trading Checklist

Before entering a trade, ask yourself the following questions:

  1. Is the market trending or ranging?
  2. Is there a significant level of support or resistance nearby?
  3. Is the trade confirmed by an indicator?
  4. What is the risk to reward ratio?
  5. How much capital am I risking?
  6. Are there any significant economic releases that can impact the trade?
  7. Am I following the trading plan?

1) Is the Market Trending or Ranging?

Trending markets

Experienced traders know that finding a strong trend and trading in the trend’s direction, has the potential to lead to higher probability trades.

There is a well-known saying that trending markets have the ability to bail traders out of bad entries. As can be seen below, even if a trader entered a short trade after the trend was well established, the trend would continue to provide more pips to the downside than to the upside.

Traders need to ask themselves if the market is exhibiting signs of a strong trend and whether ‘trend trading’ forms part of the trading plan.

Ranging markets

Ranging markets tend to see price bounce between support and resistance to trade within a channel. Certain markets, like the Asian trading session, tend to trade in ranges. Oscillating indicators (RSI, CCI and Stochastic) can be of great use to traders that focus on range trading.

Range trading

2) Is there a significant level of support or resistance nearby?

Price action tends to respect certain price levels for a number of reasons and being able to identify these levels is key. Traders do not want to be holding a short position after price has dropped to the key level of support, only to bounce back higher.

Key level of support EUR/USD

The same applies when price approaches a key level of resistance and typically drops lower shortly after. Trend traders typically look for sustained breaks of these levels as an indication that the market may start to trend. Range traders will on the other hand, look for price to bounce between support and resistance for prolonged periods.

3) Is the trade confirmed by an indicator?

Indicators assist traders in confirming high probability trades. Depending on the trading plan and strategy, traders will have one or two indicators that complement the trading strategy. Do not fall into the trap of over-complicating the analysis by adding multiple indicators to a single chart. Keep the analysis clean and simple and easy to view at a glance.

4) What is the risk to reward ratio?

The risk to reward ratio is the ratio of the number of pips that traders will risk in the hopes of reaching the target. According to our Traits of Successful Traders research, which analysed over 30 million live trades, traders with a positive risk to reward ratio were nearly three times more likely to be profitable than those who do not. For example, a 1:2 ratio means that a trader risks half of what he/she stands to gain if the trade works out. The image below further depicts this principle.

risk to reward ratio good vs bad

5) How much capital am I risking?

It is essential for traders to ask this question. Often traders blow up their accounts by leveraging the account to the maximum when chasing “sure things”. One way to avoid this is to limit the leverage used on all trades to ten to one, or less. Another helpful tip is to set stops on all trades and ensure that the aggregate amount risked is no more then 5% of the account balance.

Before placing a trade, ask yourself, “how much capital should I use?

6) Are there any significant economic releases that can impact the trade?

Sudden market news has the potential to invalidate the “perfect” trade. While it is almost impossible to anticipate things like, acts of terror, natural disasters or systemic failures in the financial markets, traders can plan for economic releases like NFP, CPI, PMI and GDP releases.

Plan ahead by viewing our economic calendar which highlights major economic releases from the top trading nations

7) Am I following the trading plan?

All of the above is of very little use if it does not tie in with the trading plan. Deviating from the trading plan will result in mixed results and only frustrate the trading process. Keep to the trading plan and do not place trades unless the trading checklist has been completed and confirms the trade may be executed.

Trading Checklists: A Summary

  • Having a trading checklist does not automatically mean all trades will become winning trades. It will however help traders to stick to the trading plan, trade with more consistency, and avoid impulsive or reckless trades.
  • If you are new to FX and trading in general, it is crucial to trade with confidence. Learn how to build confidence in trading.
  • At DailyFX we have dedicated a podcast to the trading plan and how to create one.
  • Document your trades and stay accountable with the help of a trading journal.



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