Last update: July 2021
One of the reasons I love the forex market is due to the consistent daily cycle that we can utilize as a trader. The market cycle is primarily utilized by day traders but swing traders will use it as well. A market cycle is a pattern in the market that much like a bike wheel will go round and round and round.
There cycles in many things in the market, such as:
This sector as specifical stocks such as COP and XOM will typically start moving up in Feb and March while they will start to top out coming into the summer months.
One of the most vicious cycles in the market is the one based on the GDP vs. Technical Analysis. As the economy is growing at the top end of a cycle the market is starting to top off. The reason this is so disastrous to consumers is due to the mindset. First, they simply do not understand the mindset of the traders and due to the economy growing they think it is finally time to get into the market. They finally have enough evidence to get back in and then the market starts going down but the economy is growing. Second, they fail to see why the economy will start to decrease in the future due to the correlations of the dollar and foreign markets slowing their purchasing of American-made goods. As the economy now tops out and corporations start to move to an area of safety including layoffs, the market will start to bottom out and go up while the consumer starts to panic. What it means, consumers buy at the top and sell at the bottom. This is the exact opposite of what the consumer should do.
Traders understand how far stocks typically move in motive waves. Once the stock moves into a similar range that in the past the trader will start to lock in profit. This drives the stock back into support where they will start buying again. This is called potential average yield or PAY. For example, if the stock moves 10 points in a prior motive wave once it moves 10 more points the traders will start to lock in profit as the trader will not hold past what I call “the point of probability”
Forex Daily Cycles
The forex daily cycle is no different. Everything has a cycle or a pattern that repeats, you just have to recognize the cycle and then trade the cycle. In the forex market, the cycle revolves around three things.
1) Bank Opens
When a bank opens up there is a lot of movement in the forex market for the currency that is related to the market that is opening up. There are four major opens related to the four major banks, Sydney, Tokyo, London, and New York. There are two trades based on the bank open. The first is the standard bank open. For example, the AUD/USD opens up at 5:00 pm EST, as you can see in the example below on the immediate open the AUD/USD pair starts heading down and then gets into a standard trend. We would simple sell the AUD, place a stop above Resistance and check the trade before we go to bed to either adjust the stop or pull off the trade.
Another example is the USD/JPY pair. The Tokyo bank opens up at 7:00 pm est. At the open tonight, the USD/JPY trade immediately starts to sell. With this trade we would sell the USD/JPY, place a stop and go to bed. I started calling this trade the Go To Bed trade after one of my forex mentors told me to stop managing the trade and simply go to bed. I typically do it on the EUR/USD pair as I am a little bit of a night owl but for many in the United States it would be the USD/JPY pair. In the morning you simply wake up and close the trade. In my experience, this trade has about a 65-70% probability of success and about an average of 25 pips return after drawdowns. The reality is that unless something else comes out to impact the trade in Europe or the open of the New York bank, the trade will fade in the same direction that it started. This is due to the momentum in the pair.
The above trades were both taken from tonight’s bank opens. The Bank open is an easy trade as it is simply a visual identification trade. If it opens up we will be buyers of the base currency and if it opens down, we sell.
2) Bank Closed
These trades are easy….don’t do them. When a bank is closed, there is little activity and thus the trends go neutral. Your profit potential is always better and the trader has higher probability when the bank is open vs a bank being closed.
3) News based Events
The news-based trade is what I call the Roller Coaster trade as it is fun, volatile and sometimes leaves you will a sick stomach. The number one reason most markets move is due to economic reports. This is why we discuss economic reports in our newsletters and in the Forex Report along many other things the coaches put out on Tackle Trading. You must understand the economic reporting system even if you never trade forex as it impacts all markets. Economic events are dominated by High-Frequency Traders as they program the numbers into their systems. There are two numbers that are important to an economic report, the first is the Market Expectation which is already build into price action. This is called the efficient market theory in that everything known is embedded in price action. We know the expectation, what we do not know is the actual number which is oftentimes wrong. The actual number upon the announcement will be immediately embedded into the price. Two decades go, the new number would take days to place into price, in 2014 it takes less than two hours. If you are going to trade the Roller Coaster you must be in front of the computer and understand standard movements vs non-standard movements. In the Trade Center, there is an economic calendar
Here are a couple of examples from last month’s USD economic reports. I love the USD reports but I also will trade JPY and EUR reports as well.
In all of these examples, the market prior to the announcement is neutral. This is due to a couple of reasons. The first, the US market is closed as the economic reporting system happens typically prior to the stock market opening. Second, no one wants to get in front of the HFTs that will dominate the event. Prior to the event the trader will identify resistance and place a buy stop above the level of resistance and a sell stop under support. In essence by doing this we do not care which way it goes, we simply want to jump on the HFTs coat tails. Furthermore, you already have a stop loss placed once one side of the trade is triggered. The trades are placed based on a standard lot contract value of 100,000 which in the US our position size would be 2000 and in London 1000. As you can see in the below example a clear understanding of standard movements and non-standard movements. Once you see the info priced in, pull the trade.
My favorite economic event is anything to do with any central bank announcing anything to do with monetary policy.
The forex cycle takes time to understand and master. I hope my videos and putting together the Forex Trading 101 series with the Forex Report, Strategy videos and blog posts helps.
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