Peter Marsden's Forex Blog

Any long term investment strategy should ideally consist of multiple smaller strategies contained within a larger overall strategy. Excess volatility can lead to quick gains and substantial losses to your portfolio of currency pair positions. Long term forex investors look for areas of support/resistance, fib levels (with extensions), larger moving averages, and prior swing highs/lows to better their odds of a successful trading position. Well placed strategic entries are what separates the big boys from the rest of the forex crowd. There is a reason why only 5% or 10% of all forex traders succeed. They are the ones buying on the dips and selling into the rallies, when everybody else is late to the game. They are the ones that manage risk, limit losses, and maximize gains by strategically placed entries and holding their positions longer, taking partial profits, and letting the remainder of the position run on house money, until the trend is exhausted.  How do they know where a bottom or a top is? Everything we have learned about forex tells us that trying to pick tops and bottoms will bankrupt our account fast. But yet, the big boys consistently accumulate sizeable profits with fewer trades per month, holding winning positions until exhausted, covering their positions with a hedge when necessary, and placing their limit orders at major support/resistance. You can be assured that they are not trading the 15 min chart for their long term positions. They study the long term charts to see where the currency pair has been, where it has bounced, and where it is likely headed in the future.

Let’s take a look at the GBP/USD for example. Zoom out on your monthly chart, and you will see a strong uptrend from June of 2001 after making a low around the 1.3680 price. The Zig Zag indicator shows 3 waves up from June 2001, to the recent high at the 211.43 price. During this time, we have seen both the USD and the GBP experience interest rate increases, until the point where the Fed paused the rate hike pattern. BOE continued hiking until the swap differential swung toward the GBP. As the Fed began cutting rates, the differential increased, and the GBP/USD became a viable carry trade for a long position. Risk aversion and panic selling of higher yielding Yen pairs began to appear in 2007, and Market Sentiment turned extremely anti-dollar. You can clearly see on this monthly chart where the 2nd wave (corrective) ended and the uptrend resumed around 2005. Corrective wave 2 (down) lasted from Dec 2004 to Thanksgiving 2005. Take note that these trend changes occur around major holidays. Make sure to include this pattern into your long term strategy. Let’s examine this monthly chart a bit further. Notice the 5 sma channel formed by the 5 sma open , the 5 sma low,  the 5 sma high, and the 5 sma close. Notice the crossover of the 5 sma open and the 5 sma close on uptrends and downtrends. Notice how many times the price retraced to one of these sma’s and reversed. Notice how a reversal of trend occurs when the price closes above the 5 sma high, or below the 5 sma low. Observing the candle closes on the monthly, weekly, and daily charts in relation to the 5 sma channel will indicate what your position should be in any currency pair. Newbies should allow for volatility by placing stop losses above or below where the market is likely to bounce. Entries must be placed where the market is likely to bounce or continue. For this, we look at previous swing highs and swing lows on the larger time frames where price was rejected. It will usually take multiple attempts to break cluster support/resistance. So your entry should be placed at every major swing high and swing low. Stop losses are placed on the opposite side of these levels at a reasonably safe distance, which is not likely to be hit. A tight stop loss will be hit more often than not, then the price will retrace or reverse trend to your original entry. An entry closer to cluster support/resistance will allow for a tighter stop loss. Your risk to reward provides you with a higher probability of success. If the support/resistance breaks with a candle close, then you take a reasonable loss. You would then enter the new trend after the first retracement. Nearly all breakouts retrace before resuming. Your reward is a sizeable pip gain, much larger than your possible loss. So using a small “tester” size position is needed when placing these orders. The position is added to by selling into rallies on downtrends, and buying dips on uptrends, until your first partial take profit target is hit. Stop losses are moved to break-even or +1 after confirmation of trend. At this point you have a no loss trade. Once the close price breaks the 23 fib of the last high/low swing, you can be fairly confident that the 38 fib will be tested. Take partial profit when the 38 fib is touched. Expect a bounce there, then a resumption to the 50 fib if that bounce gets rejected by buying or selling interest. Use the candlestick formations to determine price action. Look for signs of reversal or resumption.

Looking at the monthly chart, you can see where the price is trading below the green 22 sma but above the 5 sma low. You can see a breach of the 5 sma low on the previous candle. This chart is telling us that more downside is coming in this pair. An April close below the 5 sma low will target the brown 55 sma at 1.8787. But USD aversion (if the Fed continues cutting rates) will leave room to the upside for a good carry trade until the BOE signals a cut. The market has already priced in some bearishness with a plunge from 211 to 1.96. Pay attention to housing in the U.K.  You can enhance your chart interpretation skills by drawing trendlines, and fibonacci retracements.

Here is the monthly chart of GBP/USD showing price respecting the previous swing high/low (red horizontal lines) as well as the 23 fib and a white trendline. 1.9550 area is a good entry for a long position upon confirmation of rejection. A break of this area will signal a downmove of several hundred pips and the 38 fib sitting at the 1.8300 area. Notice the bearish divergence of the momentum incators while price was rising.  This chart is telling us to expect a sizeable correction downward until market sentiment signals a return to USD aversion. Consolidation will follow soon, testing highs and lows until a breakout, so buy and sell orders at cluster support/resistance will pay off until the breakout occurs. Take advantage of range trade by covering your position with a short term hedge.

I have zoomed in the monthly chart of GBP/USD to show how the trendline and 5 sma low have both  been respected so far. The next downside target is a trendline alongside the brown 55 sma at the 1.8850/1.8750 area. If this support holds, then the upside targets are the 2.00/202 area with daily swap paid on a long position.

The weekly chart is very bearish. March is correctional month annually. The green 22 sma is acting as support for now. If broken, we will see the red horizontal trendline at .8876 area, or the white weekly trendline bottom at the 38 fib (.8800 area).

4 hour chart shows a lower low.  It is retracing, testing the 5 sma high area, where it got rejected. This pair will test the highs and lows during a consolidation period, until it breaks out. Stand aside because it can go either direction. We need a candle close above 5 sma on daily to confirm long.

The daily chart which closed march 12, 2008 shows a panic sell-off from Negative Market sentiment, and annual JPY repatriation. This is the 3rd week of March, so expect more downside. Look for buying opportunites at the bottom. Those who are more risk tolerant can scalp it to the downside. Trade at your own risk contratrend. Bigger risks but big rewards are possible. Risk of loss on a resumption of trend is probable.

Tester positions should be located at support. The 5 sma and the 22 sma (green color) are in confluence. The 5 is still above the 22. All 4 momentum indicators are pointing sharply down. Wait until the new weekly, daily, and 4 hour charts are updated Monday/ Sunday night. Study what changes occurred over the weekend, and what Market Sentiment is doing. Asia could open very bearish if there is panic. Stand aside until this is resolved, and look to buy the pair at a good price. Wait for the market to run stops downward. The big boys are looking to buy cheap. And the way they accomplish this, is by driving the market down in times of low volume, and testing the long positions of newbies who bought it high chasing the market. They will drive the price below this zone to collect any stop losses sitting there. When a newby gets stopped out on a long position, he must sell to exit. Guess who is the buyer?

This 4 hour chart is helpful for intraday traders to determine higher highs/lows, and lower highs/lows. The Target is the confluence of sma’s then the red horizontal line representing a previous rejection. Making lower lows confirms retracement down to test previous support/rejections. Making higher highs confirms resumption of uptrend to test the previous highs.

The daily chart for aud/usd shows a retrace occuring. Look to buy it at the bottom of the channel/trendline for another test of the upper trendline resistance. Rejection with confirmation gives us a low risk/high reward. I see +200 pips to + 500 pips possible.

Here is a weekly chart of the aud/usd. 

A long position in this pair will pay you daily interest. The interest rate that you recieve depends on your broker. The rate for AUD is 7.50%. The rate for USD is 3.00%, and going lower, most likely. The weekly chart clearly shows a strong uptrend. Some analysts are predicting parity in the future for this pair, meaning that we may see the 1.00 level and above in the future. Aud is a commodity currency, and is correlated to the price of oil, gold, and crops, etc. Any rise in the commodities is bullish for aud/usd. Market sentiment is bearish USD for now. Investors do not want to own USD based positions at present. This is powerful information. We can exploit it to our financial gain, in various ways. One of the methods available to us is to own the AUD against the USD. With the chart telling us that there is upside potential to owning a long position on this pair, logic tells us to buy it (cheap) and hold it long term until we see a reversal. Therefore we stand to gain substantial profit from any rise in this pair to 1.00 from where it is now trading, in addition to daily interest earnings. Our strategy is to find a strong entry and ride it to resistance, or to ride it to our target of 1.00.

Looking at the weekly chart, we see many things.  Note the price action in relation to the moving averages. We see the Zigzag indicator (aqua color) showing 3 waves up from  .7673 price (aug 12, 2007) to a high of .9405 (feb 4, 2008). The 3rd wave up has surpassed the 1st wave up, making a higher high. This is bullish. Price closed above the 5 sma high. This also is bullish. But we also see wicks on the tops of the last 3 candles. Each of these candles represents a one week trading period. I have drawn a red horizontal line to show where this pair will break out or reverse. It has tested this level 3 times, and will need a candle close above it to resume the uptrend. Entries near this price level will get stopped out on retracements downward. Ideally, we want a retrace down to support, and enter long at the bottom, after a rejection is confirmed. A low risk to high reward position begins at support. Long term support is a lot more stable than short time frame support. I have drawn additional red horizontal lines that provide illustrations of good entry points. Price has been rejected previously at these red lines, and that tells us that it will be so in the future also. On the weekly chart, the 5 sma is powerful support/resistance. Set up your chart to show the 5 sma high, low, open, and close. Drag and drop from the indicator list using the simple moving average. This weekly candle closed barely above the 5 sma high after a volatile week. Notice the size of the wicks above and below the candlestick. This tells us that there was movement in both directions and a tight stop loss would be taken out. It also tells us that the pair is consolidating its gains before pushing further upward in the future. But it may retrace down first in order to gain the momentum needed to break strong resistance. Our strategy calls for a buy on dips, with a tiny lot size that can withstand a larger drawdown. This is called a “tester” position. We let it run and collect the daily interest until the uptrend is finished. The cheaper the entry price, the better, of course. Look to buy at areas of former rejections. If the position moves against you, you still collect the daily interest, and because the position is tiny, the drawdown won’t hurt your balance, with proper MM. Add a second tester if you get a cheaper price. Continue building tester positions on each dip, and gradually you will have a solid investment. When the upside break out occurs, expect a retrace immediately afterward, then a resumption of trend to test the previous highs. Look for higher highs to be formed on the 4 hour, daily, and weekly chart for a heads up. Move your stop loss to +1 pip when the position becomes profitable. Then forget about it. Dont ever touch it again. Let the market do all the work for you. A strong retrace down will stop you out at +1 pip with interest. It has become a no risk position. If you get stopped out, simply add another tester at the new support zone, and begin collecting daily interest again.

Take the daily candle from the previous day and add the sum of the high, the low, and the close. Divide this sum by 3. The answer will give you a quick daily pivot. This formula can be used on any candle of any time frame to estimate current pivot points.

Adding up the sum of the high and low, then dividing by 2 gives you quick 50% fib calculation. This formula can be used to calculate candle 50% fib, or swing high/swing low 50% fib.

One very important lesson to be learned in forex is that the month of March is time for Yen repatriation back to their home currency. The fiscal year accounting process in Japan determines this, and the majority of repatriation is done in the first 3 weeks of March.

Plan for it, and exploit it. Downmoves in Yen pairs are impulsive and powerful. The moves down, because of a negative swap, are relatively short-lived, but exhibit massive pip swings.

I think all newbies in the first year of trading should reduce their lot size substantially. For example, if all you have to trade is one lot, and you use all of it for one position, you are at great risk. Forex is all about pips, not dollars.
For that same one lot size, you could place 10 smaller positions, thereby spreading your risk and diversifying.

If you are inexperienced, open your position with a tester, which is a tiny lot size placed near support/res with a good risk/reward factor. If support/res breaks you get stopped at a small loss. If it holds and reverses, then you get a good pip run. Add to that position when retracements run out of steam.

Major support/res levels should be your entry/exit targets.

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