GBPUSD compounding your analysis
Rob Lee of AiMS continues his forex educational blogs with Mastering Elliot wave.
Using Elliot wave on the Daily chart we track 1-2-3-4-5 points (points, not waves) and then apply A, B and C correction. A goes to 4, B to 3 and C to 2 giving us A4, B3 and C2 sequence and targets for taking profits both with and against the trend using a hedging matrix.
GBPUSD Elliot Wave
Putting it all together, from previous GBPUSD charts in our blog your see how we find entry and now how we exit.
Remember that there are waves within waves, the last GBPUSD action (March 2010) at the “bottom” for example is a 4-hourly Elliot 5 up to the correction which at the time of writing is at A4 of its correction. have a look on current 4- hour charts and see if you can find it, mark it up on a chart and track it.
Mastering Elliot will take you from a run of the mill trader into the world of super returns with clear trading plans and controlled compounding and positional management.
Hint: look for carry trade positions within the waves i.e. pairs that give you roll over fees in a given direction, AUDUSD long was a very good option recently until its slight bear bias.
GBPUSD Near-Term update
GBPUSD forex training update for students. As discussed in Mike Young’s Traders Help desk chat room >>>
Forex Training Chart
Hedging Forex
Forex currency trading can be a very risky investment as the market can swing both in an upward and downward movement in seconds depending on the market conditions. Some people, and indeed institutions, try to control these volatile market swings by hedge trading their positions.
For instance it is possible with some forex trading systems to hold both a long and short position on a currency pair, which means that you have both bought a lot of currency with a view to profiting from the rise and the fall of a currency pair.
For example a currency pair could be the Great British Pound as related in value to the US Dollar or GBPUSD, a rise in this market would be referred to as a long position as opposed to a fall in this currency market, which would be referred to as a short position.
In practice what this would mean is that either way the market moves you are gaining on one position while you lose the equivalent amount on the other position.
The net result of this on first sight would suggest that you cant particularly loss money but also you cant gain any money so how can this be of any particular use in an effort to successfully trade on the forex.
Well of course no money can be made until you close one of the positions, which would be the one that is losing money while leaving the other currency position open that is gaining profit to move further and gain you an overall profit.
You could for example close the losing position at a 20 pips loss and then close the profiting position at a 40 pips gain, giving you an overall profit of 20 pips.
It should be remembered of course that a currency pair could well move in one direction and exceed your 20 pips level to close the position but then reverse in direction and never reach your targeted gain level of 40 pips so even hedge trading is not a guarantee of certain success.
The 20 pips loss level and 40 pips gain level are only used here as an example and if you use this method of trading you would be well advised to set your own levels that you feel are right and acceptable to your own currency trading experience and acceptable risk strategy.
All that can be said is that it does offer an alternative method of currency trading but should still be ventured into with predetermined loss limits and careful study of the currency market.
You should practice hedging with a demo account before committing to live trading.
Forex Focus: GBPUSD the week ahead
A little history needs to be explained to forecast the GBPUSD this week and the next few weeks.
1.7042 on 5th August 2009 ended the British Pounds intermediate-term run against the US Dollar after the crash, which as we all remember concluded on the 23rd January 2009 at the historical low of 1.3503.
1.7042, at the 50% Fibonacci retracement area of the fall from 2.015 posted on the 17th July 2008 to the historical low frames our picture of the pounds relative weakness against the USD, incidentally the 2.015 beginning on the “crash” fall also featured in a 1991/1992 major double top and as such appears to have been used again as a staging area for major shifts in sentiment.
It’s worth noting that the 4th Novembers 2007 high at 2.115 actually begun the pounds demise against the dollar and when brought into play shows current price below the Fibonacci 38.2% (1.6432), this seems to be over looked by many Pound analysts and commentators, at least in public and certainly has been a center rod of the latest head and shoulders fall and consolidation ever since the 1.7042, coincidence?
To finish our history lesson our 1.7042 fall concluded on 1.5702 which has been a regular monthly changing point throughout recent history, it happens to be a the 33% or 2/3 of the “crash” and the 38.2% Fibonacci retracement level of the retracement of the climb out of historical low, a retracement of a retracement.
Over the next few weeks, we would expect a general and broad ascent of the GBPUSD pair up and too the channel line (purple upper angular line), from here we expect the tentative pennant to be tested (add lower purple line) and reveal the Pounds true weakness against the USD.
GBPUSD forecast chart
GBPUSD update – Elliot wave
GBPUSD Elliot Wave
Elliot wave analysis complete at the Fibonacci 50% mid-term, trend should stage through the ABC correction before continuation.
GBPUSD Update
GBP hit its highest against the dollar in nearly a month on Wednesday after comments from a Bank of England official that it was close to holding back on economic stimulus added to the view the economy is recovering.
Asia analysis: China raises reserves
Asia Analysis, Asian stocks fell heavily overnight after China, the engine behind the global recovery thus far, raised its reserve ratio in yet another move that signals officials are moving towards a less accommodating policy stance. After China’s recent action to guide its benchmark money-market rate higher, speculation is mounting that interest rate hikes are on the way. The Shanghai Composite is down over 3% on the day, the Hang Seng down nearly 2.5%, and the Nikkei down nearly 1.5% – the latter weighed again by Japan Airlines stock which traded limit down for the second day in a row (i.e. trading halted after the stock lost the maximum 45% allowed within a single session).
The USD is having a mixed performance in relation to risk appetite at the start of this year; and today’s price action is giving very few clues with the DXY currently flat on the day at 76.92. EURUSD is still trading around 1.4500 levels, and once again we have a relatively thin economic calendar ahead which makes for difficult forecasting of the morning’s moves. German GDP is unlikely to overshadow last week’s Euro zone final Q3 GDP reading, and UK Industrial Production is the only other data due in the morning session relevant to FX markets. In the latter, analysts are expecting a 0.3% expansion from last month’s flat print, and with GBPUSD poised to threaten 1.6250 range highs, this will be an important reading to see whether there is enough momentum in the market for a breakout rally, or whether there will be a return to the ranges.
This afternoon there are no economic releases scheduled from the US, but towards the end of the session expect speeches from the Fed’s Plosser and Evans, along with the release of the Fed Beige Book.
Forex Correlations
| EUR /USD Correlation week ending 8th January 2010 | ||||||||||
| AiMS | EUR /USD |
AUD /USD |
EUR /CHF |
EUR /GBP |
EUR /JPY |
GBP /USD |
NZD /USD |
USD /CAD |
USD /CHF |
USD /JPY |
| Weekly | 1 | 0.72 | 0.43 | 0.66 | 0.18 | 0.16 | 0.81 | 0.46 | -0.89 | -0.56 |
| Monthly | 1 | 0.49 | 0.94 | 0.57 | -0.38 | 0.46 | 0.29 | 0.09 | -0.19 | -0.73 |
| Annually | 1 | 0.94 | 0.49 | 0.04 | 0.63 | 0.85 | 0.95 | -0.89 | -0.99 | -0.59 |
| GBP/USD Correlation week ending 8th January 2010 | ||||||||||
| AiMS | GBP /USD |
AUD /USD |
EUR /CHF |
EUR /GBP |
EUR /JPY |
EUR /USD |
NZD /USD |
USD /CAD |
USD /CHF |
USD /JPY |
| Weekly | 1 | -0.51 | 0.07 | -0.64 | -0.06 | 0.16 | -0.44 | -0.24 | -0.05 | -0.27 |
| Monthly | 1 | 0.2 | 0.56 | -0.47 | -0.45 | 0.46 | 0.21 | 0.64 | -0.4 | -0.54 |
| Annually | 1 | 0.9 | 0.55 | -0.49 | 0.7 | 0.85 | 0.88 | -0.91 | -0.81 | -0.35 |
Divergence
Correlations that have short-term differences when compared to longer-term correlations have a greater divergence from the norm and can be targeted for positioning during trading.
Correlation
Positive correlation figures that are less than +1 means that the currency pairs generally move in same direction. A value closer to +1 means that most of the time they move in the same direction.
Negative correlation figures that are more than -1 means that the currency pairs generally move in opposite direction. A value closer to -1 means that most of the time they move in opposite directions.
GBPUSD Weekly Report published
The GBPUSD forex pair took on a psychological profile on 8th Friday 2010 pausing the recent near term down trend run and re-finding the 1.6043 level after a dramatic 1.6110 high climb as profit taking was evident on the dollar across the board. 1.6043 marks the major trend Fibonacci level 38.2%, the Fibonacci retracement that represents the Pounds recovery from the 2008 crash.
The pounds weakness technically is clearly shown during its retracement cycle of the crash ending its intermediate bull run in August 2009 at the major trend Fibonacci 50% area (Fibonacci 50% found at 1.6831), although a peak of 1.7000 did penetrate the 50% level and was quickly beaten back within 24 hours.
Since then the Pound has shown great limitation producing the head and shoulders peaking 1.6876 (Fibonacci 50% again) and its rocky road descending to its current area around the 38.2%, the most notable milestone was the Bank of England contrasting statements within days of each other back in November.
Our Performance this week
Well we was caught out with this sudden “spike”, we gained what we felt where excellent positions above the major term 38.2% and one just below monitoring the positions we took profits on our primary short as the GBPUSD pair slowed around 1.5900 and felt technically and in terms of risk we where ahead of the game.
Booking our first profits and leaving the low risk trade just below 38.2% Major we relaxed (our traders turning on to other securities mainly stocks) the price action would not find the level again and would target its next major Fibonacci (A Dow Theory 33% at the 5700 area) after a struggle, this was confirmed with channel trend support.
The rest is now a learning tool and history as we managed to turn a 8k equity profit into a lowly 4.6k profit, see our weeks
trading statement of our 2010 Forex fund here >>
Our working chart for this week >>
Major trends: red Intermediate trends:blue
