Past, Current & Future Price Behavior
Most of us understand how past events influence current price behavior. A great example of this is trend lines, which are very important support and resistance levels. Another example is trend. When investors and traders see a pattern of higher highs and higher lows for a given period of time they define that market as being in an uptrend. Past price behavior becomes self-fullfilling as speculators try to position themselves in the same direction as that trend to earn a profit. Depending on thier trading method their buying provides support when that market dips — counter-trend methods — and momentum when it rises — trend methods.
Future events also influence markets. When traders, speculators, and end-users of a market know there is an anticipated event with a strong chance of affecting price movement it will influence thier trading behavior. Tomorrow’s non-farm payroll provides an excellent example of this. Traders aren’t willing to take on the challenge of riding a market into influential support or resistance just ahead of a critical news release. We see on the chart below how each succesive rally this week lost momentum as measured by the MACD, until early this morning on the first approach to last week’s high, when price broke down as traders opted to exit long positons to protect earlier gains rather than risking maintaining long positions, given the probability of increased volatility tomorrow morning. Astute short-term traders recognize this as a trade set-up — price stalling at critical support or resistance the day before a significant news release – and move in to fade the prior move, which is what happened today in GBPUSD — see 60-minute chart below:
Jay Norris
www.trading-u.com
DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and may not be suitable for every investor. The value of currencies may fluctuate and investors may lose all or more than their original investments. Risks also include, but are not limited to, the potential for changing political and/or economic conditions that may substantially affect the price and/or liquidity of a currency.