The dollar’s bounce was short-lived and even the equities rally that begun late last night (EST) on President Obama’s announcement that Bin Laden had been killed has begun to transition back into the market psychology that preceded the announcement. From strictly a trading point of view, the news is not a game-changer and the fade makes perfect sense.

The trends in place, namely the

1) downtrend in the U.S. Dollar

2) uptrend in the Dow

3) uptrend in crude oil

…have not changed. In fact the correction was weak at best.
The strength in crude oil and weakness in the dollar are creating exactly the environment that aussie bulls need to pressure 1.1000.

The 240-minute AUD/USD has a Channel Up chart pattern that can be traded off uptrend line support (swing buy) or through the uptrend line resistance (breakout buy). Chart pattern alert provided by Autochartist.

Notice that there are two chart patterns on the the 240-minute AUD/USD. The first (left side in blue) was the initial momentum breakout buy from the congestion of the Ascending Triangle formation. The subsequent rally has formed a Channel Up and this is a valid pattern because of the fact that it has formed within the context of an uptrend.

Ideally, I’d like to wait and see if 1.1000 can temporarily exhaust the rally and send prices to the 20 period SMA for an aggro swing buy and perhaps even lower to the uptrend line support of the Channel Up and the 34 period EMA high that is overlapping the pattern’s support.

The 240-minute EUR/USD has bounced from the 20 period SMA as prices continue the assault on the 1.4800 major psychological level. This longer-term intraday uptrend is rallying within the Channel Up pattern that has support lining up with the 34 period EMA high offering excellent confirmation of the bullish trend on thei time frame. Buying into pullbacks all the way down to the pattern’s uptrend line and even to the 34 period EMA low would be considered a swing and trend following entry long.

The 240-minute EUR/USD has a Channel Up chart pattern. Chart pattern alert provided by Autochartist.

There is a high degree of volatility on the shorter-term intraday time frame as the 15, 30, and even 60-minute charts are moving sideways in a distribution market phase. There is an intraday double top along the recent 1.4881 and 1.4880 highs. This level seems to be a near-term fade level as the selling pressure stacks below the 1.4900 level.

The U.S. Dollar is continuing to struggle against the euro for the same reason its lagging more major currencies: The expectation that the Federal Reserve will likely be among the last of the major central banks to raise interest rates.

The yen continues to lose ground against the dollar despite the fact that the dollar has yet to find any footing above the 74.00 major psychological level. The catalyst? The Standard & Poor’s downgrade of Japan’s outlook to “negative”. The reason is sound however since there is expectation that the March 11 earthquake likely will effect exports and this is obviously supporting the S&P’s bearish outlook on the currency.

The USD/JPY has broken higher through the downtrend of two chart patterns, both Falling Wedges, as buyers are supporting the pair above 82.00.Chart pattern alert provided by Autochartist.

The reversal of the Falling Wedges(s) has an upside target of 82.61. This level does line up with past resistance which does not necessarily mean prices will travel to this level but increases the likelihood for exhaustion if it does.

The 240-minute USD/JPY has reversed two Falling Wedge patterns and triggered a longer-term intraday trend reversal. Chart pattern alert provided by Autochartist.

There is no clear Directional Bias on the daily USD/JPY and this does add an extra element to the trend reversal because there is no dominant psychology on the pair. Today’s move on the 240-minute chart is the first green GRaB candle since the April 11 Asian session and the first blue (neutral) GRaB candle since the April 21 on the daily chart.

One of the most common mistakes I see when I comes to recognizing - well, actually NOT recognizing - the differences in activity between the different financial centers. For example, the average pip movement from 8am to Noon EST is very different than that of twelve hours later between 8pm and Midnight. A trader who looks at the earlier half of the trading day and expects the same type of volatility and price movement would (generally) be wrong and disappointed.

Take a look at two of the most traded pairs in forex. I like the example of these two pairs because one is focused in Asia (USD/JPY) and the other is the cable (GBP/USD), which has an unusual rhythm as compared to other pairs that trade against the U.S. Dollar.

(On each graph below, the pip movement is listed on the vertical axis while the time of day in EST is on the horizontal axis.)

USD/JPY Price Movement provided by PowerStats from Autochartist

The USD/JPY has recently shown that the Asian session has increased significantly in volatility as can be seen by the length of the bars at 17, 18, 19, and 20. This would represent 5:00pm to 9:00pm EST. Historically, the U.S. overlap with Europe and the U.K. is consistently the more volatile trading hours of the day but even now the average pip movement picks up when Paris and Frankfurt open, again when London opens and pushes once more with the New York open - which is second highest in volatility.

GBP/USD Price Movement provided by PowerStats from Autochartist

The GBP/USD in one of those pairs that not only can march to the beat of its own drummer but is also one of the main reasons that many traders worldwide will trading the Paris, Frankfurt, and London opens. Notice how the volatility and price movement range peaks during these hours?

The rhythm of each pair has a personality and with these peaks and a valleys in price movement are the financial centers that cause the volatility. Understanding when these will occur helps with trade entry as well as risk management.

As the trading week is beginning there are so many trends against the weak U.S. Dollar that there’s basically one thing to do: TREND FOLLOW.

Arguing with a clear, established trend is protracted, account suicide…

The rally in crude oil got a big boost on the 20th as prices peaked at 111.66 showing that the bulls were gaining speed and ready to tackle 112.00 again. This is significant because the selling pressure build between 112.00 and 113.50. The loonie which has been gaining steadily on the greenback has bounced once on the daily time frame to trigger a short sell, swing entry.

What’s interesting about the downtrend is that it has seen an acceleration to the downside through mid-mach and April. It is reflected in not only the 34EMA Wave but also chart patterns that have formed within this downtrend.

USD/CAD Chart Pattern Alert provided by Autochartist

Notice the large Channel Down pattern that formed on the left side of the chart. It’s fairly shallow in terms of the angle. More recently the Falling Wedge that has formed reflects the downside acceleration seen as crude oil rebounded from the 105.31 to 105.47 area.

It’s still going to be a waiting game for short sellers like me where I would rather wait for bounces to sell into along the 1) 20 period SMA, 2) 34 period EMA low, and 3) the downtrend line resistance of the Falling Wedge.

The economic calendar is the easiest and first place that a trader in any market should refer to identify these times. This is simple, easy, and often over-looked. For forex traders the calendar should be one that recognizes economic events worldwide. For me since, my trading day is focused on approximately four “prime time” hours, I will find the there is a mix of mainly European and U.S. data. I am active during the overlap between Paris, Frankfurt, London, and New York. These financial centers truly do make up a significant part of the daily turnover.

In fact one of simplest ways to explain why I choose this time as well as show how different not only financial centers can behave but also the difference in participation and therefore turnover (which also effect price action follow-through) is to introduce PowerStats from Autochartist into the discussion.

If you have read about the turnover that comes from Europe and the U.K. you’ve perhaps skimmed the BIS (Bank of International Settlements, www.big.org) reports on the growth of forex and which financial centers impact the forex market. So we’re back to the time discussion because if I know that nearly 40% of turnover occurs while Paris, Frankfurt and London are open for trading that means that between the hours of 2:00am and Noon EST I am likely to see the most important opinion and significant price action of each day (assuming there is no bank holiday in any of those cities).

Here’s a look at the EUR/USD graph below and the typical trading rhythm of the day. Note the range of each hour and consider what would make the price move higher or lower within the range.

The “Hour of Day” is in Eastern Standard time.

EUR/USD Price Movement Range graphic provided by Autochartist

See the peaks and valleys? Consider “who’s awake” during those hours. You’ll see as it applies to the EUR/USD, the market “wakes up” as Paris and Frankfurt begin their day, peak in volatility as New York opens and overlaps with Paris, Frankfurt, and London, and then drops off as Europe and the U.K. end their respective trading days and leave only the U.S. open as the east coast heads into lunch.

Two aspects of my seven keys of trading are trading times and proximity/volatility. We’ll discuss volatility specifically here.

Realize that the forex trading day is broken up in to 24 hours and that all of these hours ARE NOT equal in their *typical* price movement and volatility. Therefore we as traders need to understand what each hour and - in a larger way - what each financial center overlap will bring.

Over the next few articles I will discuss how I have done this in the past and how I am not accomplishing this task with much more accuracy. First of all, most of us know that there is a “rhythm” to the market, ignore it and you’ll be moving to the wrong beat. On a dance floor, we simply look like a fool but in the markets…it costs us MONEY.

We’ve all have anecdotal experience of the market’s rhythm, the ebbs and flows of volatility that surround economic releases, speeches, and press conferences. We’ve seen that these events bring a heightened sense of awareness that each word or number could effect the mood of the market. Any time the market is on edge - which is exactly what occurs at moment like I’ve just listed - the price range increases along with our RISK.

Another aspect of this wider (and more erratic) price movement is how it effects our trade entries, trade management, and the levels that we will consider are “in play”. Levels “in play” are simply those prices that we have identified on the chart as potential levels where the market will REACT. There are one of three reactions we could see at a price level that we’ve identified as support or resistance: Prices can accelerate, stall, or reverse. Levels “in play” are DECISION LEVELS.

I have used psychological levels, Fibonacci levels, trendlines, support and resistance for nearly my entire trading career. Many of you know that I also use GRaB candles and my 34EMA Wave for my forex trading analysis. These are the tools I use to discover decision levels! Another tool is to identify chart patterns which I automate using Autochartist on my MT4 charts so that I have my trend analysis via the 34EMA Wave and chart patterns automatically identified on the same chart using Autochartist. These tools are best used in combination with an understanding of trading times and when price action is most likely to effect the market’s mood or psychology.

The USD/JPY congestion has continued to squeeze the pair into what could be consolidation as the volatility drops. This is accompanied by what is a neutral to bearish sentiment as prices trade near the support of the Triangle pattern that has formed. Notice the red to blue transition in the GRaB candles reflecting the prior market sentiment/momentum (bearish) to the current sentiment, neutral, which is seen in the blue GRaB candles.

The daily USD/JPY with the GRaB plug-in and 34EMA Wave

The likelihood for a breakdown comes as the Dow Jones shifts into distribution and prices on the dollar continue to remain weak. Both these factors could play into the hands of USD/JPY bears and break the pattern to the downside.

For more details about my forex trading set ups, read my daily forex analysis. Follow me on Twitter updates on this and other forex trades.

The GBP/USD has been a swing buy that I have been trading with the bullish Directional Bias of the daily showing a solid “twelve to two o’clock” uptrend. This has me focusing on the intraday time frames for mainly shorter-term opportunities to buy along with my longer-term long position. However as the pair squeezes between recent highs along 1.6280 - despite today’s pierce of 1.6300 and high of 1.6329 - there is an argument for the cable rolling over intraday.

The 60-minute time frame indicates that the GRaB candles have gone neutral (blue) and this is a transition from the green (bullish) GRaB candles that dominated as prices rallied. The 34EMA Wave is also flattening out.

60-minute GBP/USD chart with MT4 GRaB plug-in and 34EMA Wave

The 60-minute chart has also formed and broken lower through an Ascending Triangle pattern. Ascending Triangle chart patterns form when prices action forms a horizontal resistance line and an uptrending support line. Ideally this pattern should occur as prices are moving sideways indicating congestion or preferably consolidation.

Triangle pattern alert courtesy Autochartist

The breakdown is more an uptrend line and perhaps a slightly aggressive intraday reversal. Therefore I am interested in where the selling pressure (resistance) may come form near-term to help the bears push sentiment and momentum lower. That resistance could come from recent highs between 1.6280 and 1.6253. Another tool I will use is the pip movement range of the pair:

GBP/USD price movement analysis provided by Autochartist

For more details about my forex trading set ups, read my daily forex analysis.

For Twitter UPDATES on this and other forex trades, click here.

Yesterday I explained my thinking behind the swing trade I was waiting on in the aussie in yesterday’s update. We have bounced from the 0.9800 level and are within the resistance of the 34EMA Wave as well as the just below the resistance of the 200 period simple moving average.

AUD/USD with the 34EMA Wave and GRaB plug-in courtesy of Interactive Data

While the entry is now valid, when I am stepping in front of bullish sentiment and momentum in the near-term (see the lower chart) I would like to see that start to fade before adding more lots to an initial “put-my-toes-in-the-water” entry even though I am following a larger (in this case down) trend. Ideally the five and 15-minute charts will begin to transition out of their uptrends and into more sideways market trends to confirm the selling pressure I am relying on for the swing short on the 240.

For more details about my swing set ups read my daily forex analysis.

For an UPDATE on this trade, click here.