Friday, September 12, 2008

An Introduction to Trading: Tracking Cyclical Movements in Markets



I'll be discussing this trade as part of my keynote presentation for the Forex Trading Expo on Saturday. Here we see last Friday morning in the EUR/USD futures following the jobs report. Note the range bound price action (top chart). The market sold down, failing to take out the overnight price low, and then rebounded sharply to make fresh highs for the morning. Significant selling met those highs, followed by fresh buying and nominal price highs for the morning on reduced volume. Selling once again ensued, with buying drying up as the morning progressed. It was when I saw that buying could no longer produce new price highs (top chart) that I sold the market, with the AM price highs as my stop out point. The initial price target was the midpoint of the range, which we hit on increasing downside volume (bottom chart).

If you review the post on the cyclical structure of price moves, you'll see that these same supply/demand dynamics play out in other markets as well. Markets make trending moves, run out of steam, reverse, run out of steam, etc. The bottom chart labels this process clearly; the volume dynamics within the Market Delta chart add important information to the price information. Note how the initial recognition of range bound action from the volume-at-price graphic (top chart) aided the conceptualization of the trade and the formulation of the price target. It's a nice, small example of how context is important in understanding the moment-to-moment behavior of markets.

As we move forward with the e-book, I will offer a variety of illustrations of cyclical market behavior at different time frames and how trade ideas follow from the conceptual structure.
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3 comments:

Andy said...

Why isn't Oil going up this afternoon? The Dollar is down, Yen down, Euro up, Pound up, Gold up...I thought we would see a stronger move to the upside given the dollar weakness.
Thanks!

TTmarun said...

Brett, I had a chance to see your presentation at the forex show in Vegas thru video.Great presentation, thank you.

yu explained what yu like to see when in a trade when looking at Market Delta. If long yu like to see the offer attract more traders and big size trading at the offer as price moves higher.

I have been at it now for 3 months using market delta and find almost on an equally basis when size is large on the offer it has just as much a chance to reverse.

after talking with others using MD that large players are using limit orders and sitting on the offers selling into the surge of buying. unfortunately the traders I've talked with don't have any insight on how to differentiate if its buyers hitting the offer or large player using limit orders absorbing the buying. both actions show green in MD.

could yu explain how yu differentiate these subtle scenarios?

Thanks JT

Tricia said...

'moment-to-moment'... hour-to-hour, session-to-session, day-to-day, week-to-week.

Recognising the cyclical movements AND being able to see these across the timeframes adds dimension 2-D to 3-D, B&W to colour.

Great topic!

T