What direction of foreign exchange market research is the most effective?
Proponents of technical analysis have adopted the principle of ” price takes into account everything “, which defends against any criticism. Why study the influence of fundamental factors on the exchange rate if they are already included in the quotes of pairs on Forex? Why try to understand the worldview of central banks if the market already knows what they think? If everything was so simple, any technical analyst would have earned millions of dollars without any problems. In fact, information is interpreted by different people in different ways. In addition, who will guarantee that the data in the exchange rate is true? For example, now the market is confident in the reduction of the federal funds rate in July, but will the Fed really weaken the monetary policy?
No, I do not urge you to abandon the use of technical analysis in your practice! In no case! This area of market research is extremely important in making final decisions on the conclusion of a transaction, in determining targets and stop orders, and in building a competent risk management system. Nevertheless, in my opinion, only a reasonable combination of foundation and technology is the right path to success. Macroeconomics will help us understand the background on which markets operate. A typical example is a current situation on Forex.
The growth of the euro against the US dollar, from a fundamental point of view, is due to the greater ability of the Fed to weaken monetary policy than the ECB. The rate on federal funds is 2.5%, the rate on deposits of the European Central Bank is negative (-0.4%). In such conditions, it makes sense for the trader to look for “bullish” patterns on EUR / USD charts. As I noted on my blog, one of the most effective models is the Expanding Wedge. It is a combination of rising highs (points 1,3,5) and lower lows (points 2,4). There is a serious struggle between the “bulls” and the “bears” on the market, and the average trader should use coyote tactics: see who wins and take his side.
According to theory, a pullback after point 5 is accompanied by a decrease in trading volumes. This indicates the weakness of “bears.” The trader needs to strengthen vigilance: it is the correction to the levels of 23.6%, 38.2%, 50% and 61.8% of the wave 4-5 with the subsequent rebound from the support that serve as the basis for opening a long position. An additional confirmation signal is needed, and it does not keep itself waiting: on the rebound from the level of 61.8%, a bullish absorption model of the candlestick analysis is formed. ” The main recommendation is to buy at the return to previous levels (50% and 38.2% of the CD wave). A protective stop order is placed at a minimum swing.
Strategy for expanding wedge pattern
Technically, nothing prevents EUR / USD from continuing its northern campaign. Fundamentally, the further dynamics of the main currency pair will depend on the dialogue between Donald Trump and Xi Jinping in Japanese Osaka at the G20 summit. It is possible that the US dollar will recover for some time. As a result, consolidation will occur, and the “Expanding Wedge” pattern transforms into a “ Diamond-shaped bottom ”. Those who are familiar with the latest model of traders will have the opportunity to enter medium- and long-term long positions at the breakthrough of diagonal resistance.
Diamond Shaped Pattern on EUR / USD Chart
Thus, do not abandon the fundamental analysis, guided by the principle of “price takes into account everything.” There are many aspects invisible to the eye of a technical analyst. Only a reasonable combination of macroeconomic research and charting will keep the market for a long time.