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.