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4Xlounge Round Table – Calm Before the Storm

Posted on Aug 25, 2011 in 4Xlounge Trade Signals Updates

4Xlounge Round Table Trading Signals

4Xlounge Round Table Trading Signals

 

As I was looking at charts this evening (EST) I couldn’t help but notice how quiet everything is. It is normal to have period of consolidation, but this is an “uneasy” quiet. Generally, when we have periods of consolidation, small pockets of strength will emerge to force the market back into sink. It is very unusual to have a period of consolidation in all time frames at the same time. In fact, by definition, we cannot call this a period of consolidation. If we were to use the strictest term of definition, we might use the word “recession”. Could this be a mini forex recession? If so, how can we profit from it?

 

Recession

Normally during a recession everything (or at least most “things”) lose value. However, the spot forex should not be able to experience a recession because all of the currencies paired. Meaning, if one currency loses value, the other will gain in relative value. This is know as the “base – cross” relationship. Quick example: if the EUR were to lose value in the short term, the EURUSD would move short (to the downside). Therefore the “relative value” of the USD would benefit from this move. Knowing this, how do we quantify a “forex recession”? If every currency is moving sideways, then all relative values become neutral until the next big move. Now you should be thinking, “how do I catch the next big move?!”. We will discuss that, but first let’s talk about how to spot periods of consolidation and why they setup an eventual “big move”.

 

Market Barometers

Our first weapon/tool of choice are the 4Xlounge Market Barometers. Our Market Barometers show us the “relative strength” of each individual currency (not currency pair) across several time frames. This is key to helping us spot consolidations. What we like to see is all 8 major currencies moving towards or at the 50 line. We usually see this on the Medium or Long Term Barometers, but rarely on the Big or Bigger Picture.

 

Bigger Picture Market Barometer

Bigger Picture Market Barometer

 

Remember, consolidations are relative to time frames. The longer or larger the time frame, the longer or larger the consolidation and eventual “big move”.

 

Technical Dashboard Console

One of my favorite tools for reading “trends within trends” is our Technical Dashboard Console. It requires a little practice, but once learned that data is incredibly accurate. Normally we focus on individual time frames to look for short term consolidation, then catch a trade back in the direction of the longer term or stronger trend. In this case, the consolidation is so massive, that even the global trend values are showing no real bias. Due to the nature of the algorithm (the math that drives the app), any value less than 30 on the global trend is basically showing “no global trend bias”. I honestly can’t remember that last time that I saw all 17 currency pairs showing 20 or less on the global trend value (at the same time).

 

Technical Dashboard Global Trend Value

Technical Dashboard Global Trend Value

 

Even more rare than having all of the global trend values at 20 or less is having all of the Market Barometers (all time frames) between 40 and 60. This is powerful confirmation that the market is basically doing nothing. Remember, if only half of the currencies were quiet, the other half would drive the Market Barometers below 40 or above 60. This shows us that all of the currencies are quiet (at least for the moment).

 

Technical Dashboard Global Barometers

Technical Dashboard Global Barometers

 

Catching the Storm

How do we put all of this together and find a trade? We know from our tools that we are in a massive consolidation. That, combined with what we know about the forex market, will help us determine the next “big move”.

  • The forex market never stays still forever. Why? this world runs on currency (money). Without it, everything would grind to an ugly halt.
  • The longer a market consolidates, the bigger the eventual breakout or “big move”. Why? during periods of consolidation, the market is “resting” or building strength (at least that is how I quantify it).
  • Forex jobber order volume is extreme low right now. This can’t last either. Why? because companies need cash to pay employees, buy goods and service, in short; to stay in business. When the jobber order volume picks back up, the volatility in the spot forex will also increase.
So how the heck do we find a trade with all of this data? Very simple, we watch the tools that helped us forecast the consolidation in the first place. Think about it; if having all of the currencies between 40 and 60 on the Market Barometer(s) = consolidation, then by definition; when currencies begin to move outside the 40/60 range, we are beginning our “next big move”. We can drill down even further and use our Technical Dashboard Console. Basically just sit and watch for pairs to break above 40 (and confirm with our price channels). It doesn’t matter if it is 40 red or 40 green, because we are not equity traders, we can make just as much profit running a pair short and we can running a pair long.

Never take the first horse out of the gate

I’ve been watch currencies for 10 years now. Markets change, volatility fluctuates, nations go to war, prince will change his name (again),  but one thing remains consistent; the first currency pair to break out of a period of consolidation is also the first pair to run out of steam after the break out. This is powerful information (no, not about prince changing his name). If we know to ignore the first currency pair that breaks out, we can use the first pair as confirmation. From my experience, the first pair to break out is usually the pair with the most pending jobber orders or the pair that has the most demand. How can we predict this? We can’t and we don’t need to. Remember, we don’t want to catch the first pair, we just want to confirm the breakout when it happens. Then we will pick our “horse” to win the race.

How to pick your horse

In the final analysis, forex trading is not gambling or even guessing; it’s math. The best math wins. It really is that simple. We want to find currency pairs with the best risk/reward payoff. To understand this, we need to understand how our trade will develop and what it might look like. Here is a quick run-down:
  1. First we will wait for confirmation – market barometers, technical dashboard and the first pair to break out (as explained above).
  2. Second we need to look at some risk/reward scenarios. We want to do this now and not wait until everything is moving. Basically, look at the currency pair’s price range (the price channel that it has been moving in during the consolidation) and measure it’s width. Why? because our stop will be on the top or bottom of the price channel (top is we go short and bottom if we go long). Then open the Daily Power Bars and look for a realistic goal using the fibo lines. Usually the closes line makes the most sense.
  3. Find a few pairs that have a 2:1 or greater risk/reward ratio. Meaning, the predicted stop must be 1/2 or less of the predicted target. Example; if your stop is 123 pips, your target would have to be at least 246 pips.
As of this posting, my favorite pair is the GBPCHF. So I will use this as a quick example. Keep in mind that this pair could be the first “horse” out of the gate, so we might not be able to use it. Here is a quick look:
GBPCHF Possible Setup

GBPCHF Possible Setup

 

GBPCHF Possible Setup

GBPCHF Possible Setup

 

Remember, if the GBPCHF is the first pair to break out, leave it alone. You will also notice that several currency pairs have “upward” or “downward” price channels. You can still use these, but they are harder to time, so I would leave them alone. If you want to use one the currencies pairs with the upward or downward price channels; keep in mind that your stop will be dynamic. Meaning, you will adjust your stop up or down every hour. You will follow the opposite side of the price channel with your stop.

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