Let’s Skim the Cream…And Trade the Hottest Instruments for the Best Results!
Eric Furstenberg • 7 min read
I just had a look at daily charts of no less than 39 currency pairs. Out of all of these pairs, only a few really appeal to me at the moment. I’m not saying there aren’t great opportunities in the currency market right now, but at the moment there is a shortage of really explosive trends.
The GBP/USD, EUR/USD, USD/CAD, USD/CHF, and AUD/USD are stuck in wide ranges. If we look at the bigger picture of the USD/JPY, it is also range bound and trading sideways. Yes, it broke out of a tight consolidation a few days ago, but it’s really not very impressive.
Although there are good trading opportunities in ranging markets, the easiest way to make money is by trading instruments which are trending in a powerful fashion. We have an awesome friend in the markets – Mr. ‘Trend’. At the moment our big friend is just not very active in the forex market, unfortunately.
The FX market is a great playground for investors and speculators because of the immense liquidity it offers. Transaction costs are also very low compared to other markets, and currencies can be traded around the clock, 5 days a week. But when the market is going nowhere, thin spreads and superior liquidity won’t benefit you much, would it?
Separating the Wheat from the Chaff
Before we look at alternative instruments to the FX market, let me take you through a brief crash course to show you how to identify strong trends.
There are a few easy ways to determine whether a market is trending or consolidating. Let’s look at a few examples:
Swing Point Analysis
An important characteristic of a trend is the formation of higher highs and higher lows (in the event of an uptrend) or lower lows and lower highs when there is a downtrend. Here is a chart which explains this:
USD/CAD Daily Chart (2009)
Swing points are natural turning points in markets. The chart above displays the characteristics of a healthy downtrend: lower swing highs, and lower swing lows. This is very logical, but many traders aren’t very attentive to details like this.
When the price breaches an existing swing low, it is actually breaking through a former level of support. This is what we’re looking for when selling in a downtrend: support levels need to get broken as often as possible. Now look at the following chart:
USD/CAD Daily Chart
This is the most recent chart of the USD/CAD. Notice how the price is neither breaking support or resistance. This is a dangerous market to trade if you’re looking for trending opportunities on the daily chart specifically.
This doesn’t mean we shouldn’t keep an eye on this pair, though. If the price breaks through this resistance level, for example, it could turn into a powerful trend in no time. Range traders will also be interested in playing this range until it breaks.
Price in Relation to Moving Averages
Moving averages are handy tools which make trend identification really easy if you know how to use them. I utilize different types of moving averages, but the following example uses exponential moving averages:
USD/JPY Daily Chart (2014-2015)
These four exponential moving averages immediately give me a good idea about what a particular instrument is doing. When the price is above these moving averages and they’re moving further apart from each other, it indicates strong bullish momentum. Of course, you don’t need all of these moving averages to discern short-term momentum; the 20-EMA alone would have done a fine job. In fact, an experienced trader wouldn’t need any moving average to determine the momentum. What makes the combination of these EMA’s so handy, is that you can gauge not only the short-term momentum, but also the medium term, and longer-term momentum at a single glance.
Now look at this messy chart:
USD/JPY Daily Chart (2015)
In this chart, you can see how the four moving averages are scrambled, and basically moving sideways. At one stage the price is above the moving averages, then a few days later it is below them. There is no clear direction in the market, which makes it very difficult for trend traders to master it. When you’re sifting through different instruments to trade, you should avoid setups like in the chart above. Remember, we’re looking for instruments and setups that will give us a clear edge. We’re looking only for the cream, not for the milk!
Now that we’ve examined two simple ways to help us identify instruments with high potential, let’s look a bit further and wider than the forex market:
Dax – Home Run!
Dax Daily Chart
Here on the Dax(GER30), there is immaculate bullish momentum at the moment. Notice how the four exponential moving averages are diverging from one another, with the price floating well above them. These are the same ones used in the other examples – the 20, 50, 100, and 200.
In this daily chart of the Dax, we also see that a series of higher highs and higher lows have recently been formed. Both the swing point analysis and the moving average technique testify of a strong and healthy uptrend. This is definitely an instrument worth keeping an eye on.
Quick Tip: In a strong uptrend, the price often bounces off of certain moving averages, like for example the 20-EMA. By closely observing how the price reacts to a certain dynamic support level (like the 20-EMA so often is), you can pull the trigger on some really profitable moves.
Here is the same chart where the most recent touches to the 20-EMA are highlighted:
Dax Daily Chart
Do you see how the 20-EMA did a pretty good job of supporting the price throughout the last 80 trading days?
Of course, the 20-EMA isn’t the only moving average to take entries off. Let’s add the 35-day exponential moving average to the same chart:
Dax Daily Chart
Sometimes it helps to play around with the moving averages to find the ones that work the best. Because market conditions can change rapidly, and financial instruments often differ greatly, it is of paramount importance to adapt to the trend structure of the instruments you trade. Some will respect the 20-EMA. Others may not even touch the 20-EMA in several weeks like the Nasdaq did between 2017/01/03 and 2017/03/21. Look at this chart:
Nasdaq 100 Daily Chart
The Nasdaq is an American stock exchange which is the second-largest in the world gauged by market capitalization. Only the New York Stock Exchange is bigger. The Nasdaq 100 is an index of 107 securities listed by 100 of the largest non-financial Nasdaq companies.
If you had waited for a pullback to the 20-EMA, you would have waited for ages. We need to exercise much discretion when trading the markets. In an extremely bullish market with weak pullbacks like this, fine entries could have been taken on smaller timeframes like the 4-hour and hourly charts.
Just a final thought on the use of moving averages – if you use candlestick confirmation (e.g. a bullish rejection candle in an uptrend) in conjunction with pullbacks to specific moving averages, you will eliminate many losing trades and improve your win rate considerably. We will discuss more of this on another day, though. For now, let’s take a look at more examples of instruments displaying powerful trending behavior.
Apple Inc. – What a Mighty Ascent!
Apple Inc. Daily Chart
If you don’t have access to trading this share at the moment, don’t break your head over it. Some of the American equity indices (like the Nasdaq) are moving in a similar manner, and you should have access to at least some of them on your FX platform. What's more important, is to learn something from our analysis of these particular scenarios. After all, you will come across more opportunities like this at some stage, no matter which markets you trade. It’s critical to know how to discern between average setups and magnificent trending behavior in which you can make serious money.
Apple is a brilliant example of an instrument which has a massive amount of force behind it. This is the type of momentum that will fill your pockets if you know how to tackle it.
Once again, we have a situation where the four exponential moving averages are diverging remarkably. You will also notice that this divergence actually started to happen about 72 trading days ago. There have been plenty of opportunities to enter some really great buy trades during this time.
Ferrari – Full Speed Ahead!
Ferrari, Daily Chart
Do you see the potential in these type of setups? Some traders say: “I only trade major currency pairs”. Others only trade one or two pairs. Then you get the guys who only trade stocks or commodities. I have a friend who only trades Bitcoin.
I don’t like to limit myself. I like to engage in strong trending markets where the odds are working for me. Yes, I’m still active in the forex market at the moment, but I’m looking around me and playing the big moves in other markets as well. Just like in our family hardware business of more than 40 years, where we take our fair share of profits from different sectors of the market, in different seasons. In winter we sell tons of LP gas, wood, and paraffin for heating. In spring we sell truck loads of top dressing, fertilizer, and compost to the gardeners. In summer we fit glass damaged by hailstorms and sell swimming pool supplies. And in autumn we sell the vegetables we grow on our small holding and chop wood with our hydraulic wood splitter for the high demand in the winter.
If you haven’t made use of our free trading signals yet, I’d like to invite you to try it out. We know the power of diversification and are expanding our horizons to different asset classes. Besides our forex signals, we are exploring energies, commodities, and equity indices as well. Some of the new instruments we’re trading are gold, crude oil, and the Nikkei 225 stock index.
If you’re new to trading and don’t know where to start, we have all the information you need on the FX Leaders website: recommended forex brokers, forex trading strategies, live market updates by experienced analysts, and much more!