We tracked this pair since February as the 200 day Moving Average held firm support for the NZD. The major MA’s converged to within 40 pips of each other, which is very narrow (see blue arrow). Price action then moved the NZD above the 50 and 100 MA’s and it looked as if the NZD was going to take off. There were 2 red flags though, that suggested this move was never going to materialize. These 2 points highlight the true difference between technical and fundamental analysis. Point one, if the 200 day MA was holding support why is it that the NZD never got a really good bounce? On more days than not, over the last 3 months the low seemed to have touched Support. Point two, the major MA’s did not favor price appreciation, which would normally see the 50 above the 100 and the 100 above the 200. In this case the 100 was above the 50 and sloped downwards. You will not win every trade so you want to keep percentage wins in your favor, which means rely on your confirmation strategies.
The Pound hit 1.4750 just last week and it seemed to be gaining momentum against the Greenback. There is no doubt that the GBP has held itself firmer against the USD compared to other pairs, however we are still in a bullish Dollar environment. The GBP found Support lows at 1.4250 and then started to retrace its losses. The problem for the Pound is that the major MA’s are all downward sloping and separated by a wide margin. The implication of width on the MA’s is that price has been falling steadily for an extended period, implying current momentum is still strong. We also make use of an Exponential moving average (EMA). The basic difference between an SMA and an EMA is that an EMA weights more heavily current price action while an SMA looks at all price action over the specified periods and calculates the simple average. On this daily chart we use an EMA5 and EMA8. The EMA5 over takes the EMA8 at the 1.45 handle (see blue arrow). All is looking good until just 2 candles later a Doji appears. A Doji is a candlestick who’s body in small with near equal size wicks on both ends. This often signals a reversal when coupled with a confirmation. The confirmation comes with the 2 ensuing down candles followed by the EMA8 crossing over the EMA3. Once again demonstrating you need to have good reason to trade against the trend, other wise it can little more than a fake out whereby your doomed trade turns negative.
Here is a case where there is no chance to trade against the trend. If nothing else it shows the usefulness of the moving averages and why finding directionally trend consistent entries has a better payoff with less risk. Compare the EMA5 and EMA8 on the chart below versus the GBP chart above. Considering that an EMA is faster or closer to price than an SMA and that we are using an exponential moving average of only 5 and not 50. You would expect several crosses to have occurred between EMA5 and EMA8 while the major SMA’s should be nicely aligned, with 50 followed by the 100, followed by 200. The last time the quick EMA’s cross was in April at a handle of 1.0570. These two extremes put price action by trend in perspective. Is the potential retrace against the trend strong enough to endure or will it fizzle out leaving you in losing position. While trading into the trend has the potential for a large longer payoff. If you went short the CHF in April on the EMA cross your trade has been ongoing for more than 1 month. This keeps you out of losing Long CHF trades and generated more than 1000 pips.
Written by bforex.com