Monthly Archives: March 2024

A potentially tricky end to the week with a slew of Bank Holidays on Friday and Monday leaving some markets open and some closed. Tomorrow also sees the release of this week’s data point of note, US PCE. The core reading y/y is seen holding steady at 2.8%, while the closely watched PCE Price Index y/y is seen nudging 0.1% higher to 2.5%. Any deviation from these figures will likely cause a US dollar reaction, especially in holiday-thinned markets. Today sees the release of the final look at US Q4 GDP (12:30 UK) and Michigan Consumer Sentiment for March (14:00 UK).

For all economic The US dollar is picking up a bid going into these data releases and the long weekend, helped by a softer Euro. The US dollar index is closing in on the mid-February swing high and a clear break above would leave the dollar back at highs last seen in November 2023.

US Dollar Index Daily Price Chart

The Euro remains under pressure and is testing big figure support at 1.0800 against the US dollar. Recent market focus on the weakness of the German economy has triggered speculation that the European Central Bank may go for back-to-back rate cuts, starting at the June meeting, ahead of the August break. The latest market pricing shows an implied rate of 3.50% for the July meeting.

A break below 1.0787 would leave EUR/USD vulnerable to a further sell-off with 1.0698 the next level of support. The pair have broken below all three simple moving averages and this leaves EUR/USD vulnerable to further losses.

EUR/USD Daily Price Chart

IG retail trader data shows 55.17% of traders are net-long with the ratio of traders long to short at 1.23 to 1.The number of traders net-long is 0.73% higher than yesterday and 43.72% higher than last week, while the number of traders net-short is 4.39% lower than yesterday and 21.98% lower than last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/USD prices may continue to fall.

GBP/USD is just above1.2600 and is set to test the recently supportive 200-day simple moving average, currently at 1.2588. A break below would turn the chart further negative, with the 50% Fibonacci retracement at 1.2471 as the first line of support.

GBP/USD Daily Price Chart

USD/JPY remains at levels that may provoke official intervention by the Japanese authorities. The BoJ recently moved interest rates out of negative territory as it began to unwind decades of ultra-loose monetary policy, but the Yen remains weak. Official talk yesterday produced a small sell-off in USD/JPY back to 151 but this is now being reversed. If Japanese officials ramp up the rhetoric, a long weekend with low liquidity could see USD/JPY move sharply.

USD/JPY Daily Price Chart

What is bias in trading?

Trading bias is a predisposition or perspective of the financial markets whereby traders believe there is a higher probability of a certain outcome as opposed to any other alternate possibilities.

These trading biases are determined by technical and/or fundamental factors that support a specific outlook that explains market behaviour. This often relates to market trends being either bullish/bearish which signals appropriate trading strategy and style.

Why do Traders Need Bias?

Traders need bias in order to form trade decisions that align with their specific trading strategy. The end goal is to make good decisions with real money on the line. There are so many decisions to be made on each trade that it can be overwhelming and can often lead to errors.

For example, a trader needs to determine what market to trade, when to get in, how long to hold the trade, when to get out, and what trade size. There are many other decisions that enter in as well such as, do I move my stop loss, do I take partial profits and scale out (there are many more choices to be made, but you get the point).

In the trading world, a newer trader often gets hung between the potential for profit and the possibility of loss. They don’t have enough experience to produce and overwhelming emotion about the trade set up. They in essence, lack the confidence and ability to ‘control’ a positive outcome and wind up freezing with indecisiveness. As a result, they let other things improperly anchor that emotion for them like their recent demo results.

Newer traders tend to rely solely on outcomes to develop their perceptions. The problem with the outcomes is that even though some of those trades may have been profitable, they are likely riskier over the long run.

The below are the main components a trader needs to determine a trading bias:

• What market to trade?
• What direction do I trade?
• When to get in?
• When to get out?
• Trade size?

What market to trade

The market to trade is often a confusing place to begin for novice traders. Traders often gravitate toward popular markets that do not provide relevant trade opportunities. At DailyFX, the sentiment tool can help traders select the appropriate market by producing long/short retail percentages.

This is not the only method by which traders can select a market to trade. Many traders use their specific trading strategy (e.g. trend trading) to identify appropriate markets. Other traders prefer using fundamental analysis; exploring such as political news or macroeconomic events as a foundation as to which markets to trade.

What direction do I trade

Trade direction is usually linked to the market trend which again ties into the trading strategy. This could be short- or long-term trend indications depending on the trader’s preference for trading time horizon.

When to get in and out

Trading the markets encompass technical and fundamental analysis. These can be traded in isolation or a combination to determine buy and sell points. These entry and exits are generally determined by technical tools such as indicators (moving averages) or by trading breakouts using price action.

Trade size

Trade size is essential to any trading plan. Novice traders often overlook this aspect and trade irrationally. Trade size needs to be taken into consideration according to account size/balance. At DailyFX, we suggest using a trade size so that you are not risking more than 5% on all open positions.

How to Develop Trading Bias using Technical Indicators

Supporting information provided by technical indicators – such as the moving average – can assist traders in acquiring a trading bias.

Moving Average:

Moving averages are another tool traders can use to determine a trading bias. Typically, traders use a 200-period simple moving average (MA). Traders can apply this indicator to any graph and see if the price is either above or below the moving average. If the price is above the average, traders can take a bias that the trend is up and look for opportunities to buy. Conversely, if the price is below the average, traders can say that the trend is down while having a trading bias to sell.

The charts below show trading bias using moving averages on GBP/USD. The 200-period MA has been added, and the price is trading well below the indicator. Knowing this, short-term day traders can take this information and form a bias to look for sell positions. This bias could be held until prices start to move back up toward a higher high and penetrate the moving average line. The opposite is true for prices trading above the MA as seen in the second chart.

Bearish trading bias:

Bullish trading bias:

Price Action:

The first way to identify a trading bias is through price action. Traders can view a chart and see if prices are generally rising or falling through the identification of a swing high or low. If prices are getting higher, and the lows are advancing as well, traders should form a bias to buy. If prices are declining (lower lows and lower highs), traders should have a specific bias to sell. By reviewing 200-300 periods on the chart, this technique can be used with virtually any trading strategy.

EUR/USD price action trading bias:

The chart above depicts a EUR/USD four-hour chart. Traders will begin their analysis by looking back on nearly two months’ worth of data. This will show traders approximately 300, four-hour candles. Notice how prices are slowly moving down to new lows for the period selected. This shows that the market is in a downtrend, which can allow traders to form a bias to sell.

What are interest rates and why do they matter to forex traders?

When traders talk about ‘interest rates’ they are usually referring to central bank interest rates. Interest rates are of utmost importance to forex traders because when the expected rate of interest rates change, the currency generally follows with it. The central bank has several monetary policy tools it can use to influence the interest rate. The most common being:

• Open market operations: The purchase and sale of securities in the market with the goal of influencing interest rates.
• The discount rate: The rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank’s lending facility.

Central banks have two main tasks: to manage inflation and promote stability for their country’s exchange rate. They do this by changing interest rates and managing the nation’s money supply. When inflation is ticking upwards, above the central bank’s target, they will increase the central bank rate (using the policy tools) which can restrict the economy and bring inflation back in check.

The economic cycle and interest rates

Economies are either expanding or contracting. When economies are expanding, everyone is better off, and when economies are contracting (recession) they are worse off. The central bank aims to keep inflation in check while allowing the economy to grow at a modest pace, all by managing the interest rate.

When economies are expanding (GDP Growth positive), consumers start to earn more. More earning leads to more spending, which leads to more money chasing fewer goods – triggering inflation. If inflation is left unchecked it can be disastrous, so the central bank attempts to keep inflation at its target level, which is 2% (for most central banks), by increasing interest rates. Increased interest rates make borrowing costlier and helps reduce spending and inflation.

If the economy is contracting (GDP growth negative), deflation (negative inflation) becomes a problem. The central bank lowers interest rates to spur spending and investment. Companies start to loan money at low interest rates to invest in projects, which increases employment, growth, and ultimately inflation.

The cycle goes something like this:

How do interest rates affect currencies?

The way interest rates impact the forex markets is through a change in expectations of interest rates that lead to a change in demand for the currency. The table below displays the possible scenarios that come from a change in interest rate expectations:

Interest rate relevance to forex trading

Imagine you are an investor in the UK that needs to invest a large sum of money in a risk-free asset, like a government bond. Interest rates in the US are on the rise so you start to buy US Dollars to invest in the US government bonds.

You (being the UK investor) are not alone in investing in the country with higher interest rates. Many other investors follow the increase in yield and so increase the demand for US Dollars which appreciates the currency. This is the essence of how interest rates affect currencies. Traders can attempt to forecast changes in expectations of the interest rate which can have a large effect on the currency.

Here is an example of what happens when the market expects the central bank to keep interest rates on hold, but then central bank decreases the interest rate. In this example, the Reserve Bank of Australia was expected to keep interest rates on hold at 2% but instead cut it to 1.75%. The market was surprised by the rate cut so the AUD/USD depreciated.

Understanding forex interest rate differentials

Interest rate differentials are simply differences in interest rates between two countries.

If a trader expects the US to unexpectedly hike interest rates he/she anticipates the US dollar may appreciate. To increase the trader’s chances of success, the trader can buy the US Dollar against a currency with low interest rates as the two currencies are diverging in the direction of their respective interest rates.

Interest rates and their differentials have a large influence on the appreciation/depreciation of the currency pair. The changes in interest rate differentials are correlated to the appreciation/depreciation of the currency pair. It is easier to understand visually. The chart below compares the AUD/USD currency pair (candlestick graph) and the difference between the two-year AUD government bonds and the two-year USD government bonds (orange graph). The relationship shows that as the AUD bonds yield decreases relative to the USD bonds, so does the currency.

Interest rate differentials are widely used in carry trades. In a carry trade money is loaned from a country with a low rate and invested in a country with a higher interest rate. There are, however, risks involved with the carry trade such as the currency invested in depreciating relative to the currency used for funding the trade.

How to forecast central bank rates and the impact on FX markets

Fed funds futures are contracts traded on the Chicago Mercantile Exchange (CME) that represent the markets expectations of where the daily official federal funds rate will be when the contract expires. The market always has its own forecast of where the interest rate will be. A trader’s job is to forecast a change in those expectations.

For a trader to forecast central bank rates he/she will need to keep a close eye on what the central bankers are currently monitoring. Central bankers try to be as transparent as possible to the public about when they expect to increase interest rates and which economic data they are currently monitoring.

The central bankers decide to increase or decrease interest rates based on several economic data points. You can keep up to date with the release of these data points using an economic calendar. Inflation, unemployment, and the exchange rate are some of the major data points. The trader must be in tune with the central bank policy makers and almost try to forecast what their actions will be before they state it to the public. This way the trader can reap the benefits of the markets change in expectations. This method of trading is based on the fundamentals which is different to trading using technical analysis. See our article on Technical vs Fundamental analysis to understand the different ways to analyze forex.

Forex traders can opt to trade the result of the interest rate news release, buying or selling the currency the moment the news releases. See our guide on trading the news for more expert information.

Advanced forex traders may attempt to forecast changes in central banker’s tones, which can shift market expectations. Traders will do this by monitoring key economic variables like inflation, and trade before central banker’s speeches. See our Central Bank WeeklyWebinar for expert commentary on the latest and upcoming central bank decisions.

Another method is to wait for a pullback on the currency pair after the interest rate result. If the central bank unexpectedly hiked rates, the currency should appreciate, a trader could wait for the currency to depreciate before executing a buy position- anticipating that the currency will continue to appreciate.

Key Concepts

1. The interest rate decisions themselves tend to be less important than the expectations for future interest moves.
2. Trading currencies with increased interest rate differentials could increase the probability of successful trades.
3. It is important to keep up to date with economic data using an economic calendar to forecast potential changes in market expectations.

WHY TRADE CRUDE OIL AND HOW DOES CRUDE OIL TRADING WORK?

Crude oil is the world economy’s primary energy source, making it a very popular commodity to trade. A naturally occurring fossil fuel, it can be refined into various products like gasoline (petrol), diesel, lubricants, wax and other petrochemicals. It is highly demanded, traded in volume, and extremely liquid. Oil trading therefore involves tight spreads, frequent chart patterns, and high volatility.

Brent crude is the world’s benchmark for oil with almost two thirds of oil contracts traded being Brent oil. WTI is America’s benchmark oil, it is a slightly sweeter and lighter oil compared to Brent.

CRUDE OIL TRADING HOURS

WTI trades on CME Globex:

Sunday – Friday, 6:00 p.m. – 5:00 p.m. (with an hour break from 5:00 p.m. to 6:00 p.m. each day)

Brent trades on ICE:

Sunday – Friday – 7:00 p.m. – 5:00 p.m.

CRUDE OIL TRADING BASICS: UNDERSTANDING WHAT AFFECTS PRICE MOVEMENTS

When trading oil, the two major focal points are, as with many commodities, supply and demand. Whether there was an economic report like a news event or press release or tensions in the Middle East, the two factors that will be taken into consideration is how supply and demand is affected, because this will affect the price.

Supply Factors

• Outages or maintenance in key refineries around the globe, whether it’s the Forties pipeline in the North Sea or the Port Arthur refinery in Texas, must be monitored because of the effect it can have on the supply of oil. War in the Middle East leads to concerns about supply. For example, when the Libyan Civil war began in 2011, prices had seen a 25% rise from in the space of a couple of months.
• OPEC (Organization of the Petroleum Exporting Countries) production cuts or extensions lead to changes in the price of oil. For example, back in 2016 when the cartel had announced their decision to curb global supply by 1.9% (see chart below), the price of oil has risen from $44/bbl to as much as $80/bbl.

WTI and Brent Crude price reaction to OPEC supply cut:

Chart prepared by Warren Venketas, TradingView

• Oil Suppliers: Similarly, with understanding the importance of OPEC, it is also worth knowing who the top global oil suppliers are, and this information can be fond from the EIA website.

Demand Factors

• Seasonality: Hot summers can lead to increased activity and higher oil consumption. Cold winters cause people to consume more oil products to heat their houses.
• Oil Consumers: The largest consumers of oil have typically been developed nations such as the U.S. and European countries. However, in recent times there has been a surge in oil consumption in Asian countries, namely China and Japan. As such, it is important for traders to pay attention to the level of demand from these nations, alongside their economic performance. Any slowdown could affect oil prices and demand may fall.
• Correlation to Global Growth: The chart below shows the largely positive correlation between the price of crude oil and global growth. The Chinese and US economies being the two largest in the world are a great barometer for global growth. The chart includes their respective major stock indices which move in line with crude oil prices – when the equity indices fall, the price of crude oil tends to fall and vice versa.

WTI and Brent Crude positive correlation with FTSE China A50 and S&P 500 chart representation:

Chart prepared by Warren Venketas, TradingView

• Alternative Energy: While fossil fuels such as oil and gas continue to dominate cleaner energy sources, there is an incessant push towards sustainability on a global scale. This will definitely impact crude oil prices going forward which makes this a key factor to monitor in a crude oil trading strategy.

The impact of derivatives on the traditional valuations of crude oil have been thought by many to have destabilized the asset class. Simply put, the oil futures are thought to have reflected higher proportions of noise which do not reflect the fundamental data at the time. This is contentious within the investing community with some in disagreement with the above rationale, but it cannot be ignored that large speculative traders are becoming more influential with the flourishing derivative market.

Want to know more about oil? Here are 8 Surprising Crude Oil Facts Every Trader Should Know !

HOW TO TRADE OIL: TOP TIPS AND STRATEGIES

Expert oil traders generally follow a strategy. They will understand the fundamental factors that affect the price of oil and use a trading strategy that suits their trading style. Each trading strategy is different, risk management is an important component to consistent trading, like the effective use of leverage and avoiding top trading mistakes.

A comprehensive crude oil trading strategy could include:

1. Fundamental Analysis
2. Technical Analysis
3. Risk Management

Once a trader understands the fundamental supply and demand factors that affect the price of oil, he/she can look for entries into the market using technical analysis. Then, when a buy or sell signal has been identified using technical analysis, the trader can implement the proper risk management techniques. Let’s go through an example using the steps outlined above:

1. Fundamental Analysis

On the 30th of November 2017, OPEC and Russia agreed to extend an oil production cut, which lead to a decrease in supply. The basic theory of supply and demand suggests that a decrease in supply should be succeeded by an increase in demand and consequently price. This is the fundamental analysis a trader would need to incorporate into their strategy in order to identify potential buy signals in the market.

WTI daily chart highlighting supply cut:

Chart prepared by Warren Venketas, IG

2. Technical Analysis

The next step would be to analyze the chart using technical analysis. There are a variety of technical indicators and price patterns a trader can use to look for signals to enter the market. There is no need to use many technical indicators, one that you understand well will do the job. A common yet very effective way to begin analyzing any chart is to identify the overall trend of the market. In this example, the implementation of simple price action is used to identify higher highs and higher lows which is suggestive of a preceding upward trend. This falls in line with our fundamental expectation of further upward price movement.

WTI daily chart showing preceding upward trend:

Chart prepared by Warren Venketas, IG

Once the bullish trend has been confirmed, the next step in the trading strategy would be to recognize possible entry points. Again, there are multiple tools and techniques to locate entry points but this example uses the Commodity Channel Index (CCI) indicator which moves into oversold territory shortly after the fundamental supply cut announcement was made. An oversold signal on the CCI advocates further price appreciation and the possibility of a long (buy) entry.

WTI daily chart with CCI indicator:

3. Risk Management

The final step in any trading strategy would be to employ sound risk management to every trade. At DailyFX we support the 1:2 risk-reward ratio guideline which basically means that the target level should be roughly two times more than the position stop-loss level. To manage risk, the trader could look to set a take-profit above the recent high and set a stop-loss at the recent low.

In this example, a recent swing low ($49.30) has been identified as stop level which is approximately $8 away from the entry price ($57.20). There is no recent high which in this case which would allow for a target projection using basic math. With the stop distance being roughly $8 away from entry, a 1:2 projection could seee initial resistance at the $73 level.

WTI daily chart with 1:2 risk-reward ratio:

This sample trade would illustrate a positive risk to reward ratio. We researched millions of live trades in a variety of markets and discovered a positive risk to reward ratio was a key element to consistent trading. Additionally, at DailyFX, we recommend risking less than 5% of capital on all open trades.

ADVANCED TIPS FOR OIL TRADING

Advanced traders can incorporate additional information when setting up trades. Traders sometimes look at the futures curve to forecast future demand, CFTC speculative positioning to understand the current market dynamic and can use options to take advantage of forecasted high volatility moves or to hedge current positions.

Futures Curve: The shape of the futures curve is important for commodity hedges and speculators. As such, when investors analyze the curve, they look for two things, whether the market is in contango or backwardation:

1. Contango: This is a situation in which the futures price of a commodity is above the expected spot price, as investors are willing to pay more for a commodity at some point in the future than the actual expected price. This typically signals a bearish structure.
2. Backwardation: This is a situation when the spot price is above the forward price for a commodity. This typically signals a bullish structure.

CFTC/Speculative Positioning:

The Commodity Future Trading Commission Report (CFTC) is important when trading crude oil futures. It provides traders with information related to market dynamics and therefore s can be a good way to gain a sense of where oil prices are heading. Movements in the CFTC managed money net positions typically precede the move in oil prices.

Trading via futures and options

Buying futures and options, a trader must use the appropriate exchange for the oil benchmark he/she wants to trade. Most exchanges have criteria for who is allowed trade on them, so the majority of futures speculation is undertaken by professionals.

Oil Investing

Instead of trading the individual market, a trader can get exposure to oil through shares of oil companies or through energy-based exchange traded funds (ETFs). The price of oil companies and ETFs are heavily influenced by the price of oil.

Major Oil/Energy ETFs:

• Energy Select Sector SPDR (XLE)
• Vanguard Energy ETF (VDE)
• United States Energy Fund (USO)

KEY REPORTS EVERY OIL TRADER SHOULD FOLLOW

Weekly updates on the amount of crude oil inventories in the U.S. are very important pieces of data for oil traders – the release of which frequently leads to a bout of volatility. The inventory data is an important barometer for oil demand. For example, if weekly inventories are increasing, this would suggest that demand for oil is dropping, while a drop in inventories suggests that oil demand is outstripping supply.

1. American Petroleum Institute (API): The API produces a weekly statistical report, which highlights the most important petroleum products that account for more than 80% of total refinery production, while crude oil inventories are also included. This data is typically released on Tuesday at 16:30ET/21:30 London time.
2. Department of Energy (DoE/EIA): Much like the API report, the DoE report provides information on the supply of oil and the level of inventories of crude oil and refined products. This is announced on Wednesday at 10:30ET/15:30 London time.

USING SOCIAL MEDIA TO TRADE CRUDE OIL

Over the years, social media has become an increasingly useful platform to share ideas, pass on information and receive breaking news. This is the case for oil traders using #OOTT, which stands for the “Organization of Oil Traders” on Twitter. Here traders and industry leaders provide breaking news and key reports related to the oil market.

Moving Averages and Reaction to Price Action

Moving averages are simple technical tools that are designed to measure the average price presented on a chart for a designated number of periods. For example the 200 period moving average is shown below. This means that the closing price has been taken for the last 200 periods, added together and then that sum is divided by the input of ‘200’ to find an average price. Once this number has been established, the average is printed on the graph as a frame of reference, and as each new bar or candle comes in with new information, that will similarly be reflected in the average as the new higher or lower price is registered in the data.

Below we can see a USDCAD daily chart with prices trending downward. You should notice as price trends downward, the moving average will begin moving lower as well. With price moving down faster than the 200 period MVA, this is an indication that prices declining and the prevailing trend is ‘bearish’.Likewise as price moves upward, as it did on the left side of the chart, the average will slowly move towards higher levels, as well. Knowing this, we can now implement the moving average into our analysis.

Trading with a MVA Filter

You may notice from the above chart some incredible lag as it took the moving average quite a while to begin reflecting the down-trend in USD/CAD. This is partially by design, and is a direct function of the inputs being used in the indicator. Because this was a 200 period simple moving average, and because this reversal appears to have been particularly sharp, it took the moving average some considerable time before it too began to head-lower.

What’s Next?

After a trader has graded the trend, they then have a directional bias that can be used in a variety of ways. As we discuss in the article looking at popular strategies, trend filters can be used as a type of first step in a strategy, so that traders can then approach the market with a trend-side bias.

Or, even in its most simple of forms, traders can use a moving average filter to gain a potential bias with another indicator that can be used for entries and exits, such as MACD or RSI.

Such a strategy was laid out in the article, MACD Trading Strategy: 3 Steps to Find a Trend. The first step in that strategy is to grade the trend, after which the MACD indicator can be utilized with a trend-side bias.

In the following pages of this section on moving averages, we’ll get into considerably more depth behind this simple yet versatile indicator that can serve traders in a variety of ways.