October 22, 2008 02:49

Technical Analysis – EUR/USD What is the Long-Term view?

Posted In: Technical Analysis
By:

10-21-08

1:26a GMT – As traders we tend to focus in on our time frame of comfort. If you are a day trader that could be anywhere from 5 minute to 30 min charts. If you are more of a mid-term trader you might focus on the 60 minute, 4-hour or daily charts. Most independent traders don’t have the luxury of really examining the longer-term monthly or weekly charts because, well, you need to make money today – not four months from now!

But that is not to say that we should never look at those longer term charts. Longer term charts can provide us invaluable information as to the trend of the pair, and give us a great view of which direction we should be looking to trade on the shorter-term charts.

Today I want to do exactly that. As an exercise that should benefit us all I am taking a look at the monthly chart of the EUR/USD, to give us better perspective on our shorter-term trades. The first thing you notice looking at the chart below is that the EUR/USD is more or less at the 1994 level of 1.3000. In 1995 there was a brief spike up to 1.4500 before plummeting to an all-time low of 0.8250 in March of 2000, when the Fed interest rates were high and Europe was struggling to unite.

In late 2001, after the US stock market issues, the wars in Afghanistan and Iraq were launched we see a slow and steady decline in the dollar’s value which leads to an inevitable climb to an all-time high of 1.6000 this year.

What has happened since then though? The chart speaks for itself. The pair has dropped 3000 pips in only 3 months! Anyone holding long on this drop has lost their shirt and is no longer trading!

Currently the pair is hovering right on support at 1.3000.

So you are probably asking: Mark, what does this mean to me? I’m an independent trader. I can’t make trades based off the monthly chart! The answer is one of the most tried and true trading strategies around: look for areas of confluence.

Areas of confluence are when you find that multiple chart time frames all signal the pair is going in the same direction. For example in the month chart we can see that the pair is obviously headed downward. We then take that information and look at the 4-hour or even the Daily chart for selling opportunities, most likely at resistance levels.

If you can learn to trade at areas of time-frame confluence, practice good money management and look for candlestick confirmations you will be part of 5% of traders who succeed in this market.

Trading Idea:

(click to enlarge)
 

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