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The Scale of Market Quakes (SMQ), created by Richard Olsen, co-founder of Oanda, is a measure that quantifies the impact of price events in the Currency Forex Markets. By measuring how big and how fast the prices of a market instrument moved by the time of a political and economic event, news release or natural disaster, the SMQ provides analysts with ways to compare how much such events have influenced trading decisions and the flow of market order executions.

As the Olsen SMQ calculation is based on the price evolution of a currency through time, any event causing a raise in the markets volatility can be indentified and set apart for further analysis. This makes it a valuable Fundamental and Technical Analysis tool capable of quantifying the impacts caused by news events, the placement of large orders, cascades of liquidations, and ubiquitous unbalances between buyers and sellers, for example.

Reading the Olsen Scale of Market Quakes Charts – SMQ

Let’s take as an example a SMQ chart of 2008 Jul 03 at 12:30 GMT, exactly at the release time of a basket of main economic events composed by:

• ECB - Jean-Claude Trichet speech
• USA – Initial and Continuing Job Claims reports
• USA - NFP report (Non Farm Payrolls)
• USA – Average Hourly Earnings reports
• USA – Average Weekly Hours
• USA – Unemployment Rate
• USA – ISM Non Manufacturing

Figure 1: FxStreet.com Economic Calendar at 2008 Jul 03 (only events between 11:45 and 14:00 GMT)

 

The chart bellow shows the hourly EURUSD Forex spot prices at 2008 Jul 03 and on the two previous days. Note how the releases strongly pushed the EURO down by a relatively large amount.

Figure 2: EURUSD – Hourly Euro vs Dollar Forex spot prices at 2008 Jul 03

 

Looking at the Scale of Market Quakes chart, we can see that the release of those basket of news produced an average impact on the EURO equivalent to a SMQ value of 1.9, which is amongst the largest impacts the Euro have had during other NFP releases.

 

Figure 3: Average EURO SMQ Chart against main currencies at 2008 Jul 03 – 12:30 GMT

 

The currencies dissection on the left side SMQ radar shows that for the Euro, the largest impact caused by currency events at 12:30 GMT was against the Dollar (EUR/USD) and the Pound (EUR/GBP) while less pronounced movements where found on EUR/CHF and EUR/AUD.

Also note that the Olsen SMQ is produced with a 2 hour lag, and that SMQ peaks will be shown before the peaks on the currency charts. This way, although SMQ is calculated after the price movement, its measures are displayed before the end of the movement and approximately at the time of the event that caused the move in the markets.

To alleviate this 2h lag, a 1h estimate is also calculated and displayed in the chart. According to the article “The Scale of Market Quakes”, this estimation overshoots the final value by roughly 20% on average.

 

Olsen’s Intrinsic Time and the calculation of the Scale of Market Quakes

The Olsen Scale of Market Quakes is calculated based on the notion of Olsen’s Intrinsic Time. The Intrinsic Time is an alternative way of viewing the price evolution on trading markets were the time is measured from one price move overshoot (OS) to the next.  Price overshoots are market with diamonds on the chart bellow:

Figure 4: Intrinsic Time: Directional Changes (DC) and Price Overshoots (OS)

 

For a intrinsic time point to occur, there must be enough movement against the previous prevailing trend to trigger a Directional Change Threshold (DC), where the DC is defined by a fixed percentage of the previous move. From this point onwards, the Price Overshoot (OS) starts to be counted until another Directional Change is triggered.

In the same way as we have different Timeframes and Tick Charts on conventional charting, we can have different Intrinsic Time charts by using different percentages as the Directional Change Threshold.

The Olsen Scale of Market Quakes takes the calculation of the Intrinsic Time one step further and, for each price movement in the market, the SMQ will measure how many DC thresholds, from 0.05% to 500%, would be be triggered, normalizing then the values into a scale from 0 to 6.

Because of that, big SMQ magnitudes will always correspond to big price price moves but, big price price moves may not always receive a big SMQ magnitude. If a big movement has developed in time as small and lengthy price swings, it may not trigger high enough DC thresholds thus not receiving a high SMQ magnitude value.

 

Comparing Market Impact with the Olsen Scale of Market Quakes
SMQ Charts

The charts bellow show the behaviour if EUR/USD during a series of NFP – Non Farm Payrolls releases from 2007 Aug 03 to 2009 Mar 03. By looking at the charts we can measure the impact that each NPF release had on the Euro and also compare how the SMQ magnitudes behave given different spot price responses to those events.

 

Figure 5: Little reaction from the market vs Drop-and-Recovery

 

 

Figure 6: Same change on Forex EURUSD spot prices, but with different steepness

 

Figure 7: Volatile Markets with different price activity and range sizes

 

Figure 8: Drop-and-Recovery with different price activity

 

More about the Olsen SMQ - Scale of Market Quakes

To learn more about the Olsen Scale of Market Quakes and SMQ Charts check out the following links:

Online Olsen SMQ Charts

Full Description of Olsen Scale of Market Quake Charts

The Scale of Market Quakes by T. Bisig, A. Dupuis, V. Impagliazzo and R.B. Olsen

An extensive set of scaling laws and the FX coastline by J.B. Glattfelder, A. Dupuis and R.B. Olsen

You don’t need to have a perfect timing to profit from the big, longer term moves of the Forex Markets. With the right strategy, you can even survive initial pullbacks against your position without fear of stop-loss hits or margin calls.

That’s one of the reasons why currency trading is not only governed by the spot Forex markets. Currency Derivatives such Futures and Options add powerful dimensions for the retail Forex trader that are traditionally only exploited by the big players such as banks and hedging funds.

In the article “Combining Forex Spot And Futures Transactions”, Noble DraKoln, president of the Liverpool Trading Company and Speculator Academy, explains how to use Currency Futures Contracts and Options as ways ride bigger Forex moves by managing the risks taken on the spot prices.

 

For more advanced trading techniques using Options, check the article “Practical And Affordable Hedging Strategies” by Tristan Yeates.

 

NFP LIVE COACHING: How to conservatively make money during Non Farm Payrolls

With the right trading techniques, Nom Farm Payrolls can offer excellent opportunities to make a huge amount of money in no time. In this article, we will discuss news trading strategies and show you how to get free live coaching during NFP news release.

Live Trade Coaching on NFP Non Farm Payrolls

Wayne McDonell, Chief Currency Coach at FX Bootcamp consistently guide traders who are willing to learn the ropes on Forex and news trading. Being already on its 48 edition, he presents Live Non Farm Payrolls coaching sessions at every NFP release since 2006 at FXStreet.com.

During each his webminars, Wayne walks the audience through his detailed news trading strategy as well as the same other strategies he coaches at FX Bootcamp on a daily basis. People attending the presentation are free to ask questions at anytime while the market is moving via a simultaneous chat room.

To attend to Wayne McDonell free NFP live coaching sessions you can just register yourself at FXStreet by using any of the following links:

http://www.fxstreet.com/live/sessions

http://www.fxstreet.com/live/sessions/session.aspx?id=9ee201c2-e6de-4bbd-a514-cb065fd02b42

 

Get ready for the live NFP news action!

Watch these video training courses with Wayne McDonell beforehand to prepare yourself for the live NFP webminar:

Strategic & Tactical FOREX Trading (Part 1)

Strategic & Tactical FOREX Trading (Part 2)

Moving Averages are the best lagging indicators in a trader’s arsenal, specially when combined with a good set of leading indicators.
But what are the best moving averages among the best trading settings?

In this first of two articles, we will discuss how the many types of MA’s can be optimized to solve different trading problems. We will start with the 5-T3 Adaptive Moving Average, the 14-ILRS MA and the 5-Hull Moving Average.

In the second article we will talk about the 21-EMA, the 55-EMA and the 200-EMA, going through their applications in the trading pit.

Download the Indicator AllAverages.mq4 containing the Best Moving Averages described here.

Download the template Youpip.com - The 6 Best Moving Averages.tpl with the suggested setup from this article.

Click here for more information on YouPip Forex Analysis, Templates and Indicators.

5 - T3 Moving Average – The Golden Dynamic Support / Resistance

The 5 Period T3 Moving Average is by itself one of the best swing following indicators that can be used in any market and timeframe. It works by providing short term dynamic support and resistance where the price will bounce many times during the development of a trend swing.

Tim Tillson’s T3 MA is an Adaptive Moving Average that uses the difference between the current price action and the value of a same period EMA to correct its accuracy.

After the market has formed a trend, the price action will stay above or bellow the T3(5) for virtually the entire duration of each of its swings. If a candle crosses the T3(5) and then close without crossing it back, this will usually mean that the swing is over. Another full candle closing in a crossover position will confirm the swing termination.

In a Trending Market, good entries can be made based on a T3 (5) bounce happening on higher timeframes.

The 5 - T3 Moving Average Entry Strategy

Place an order in the same direction of the trend just at the time the price hits the T3(5) MA. Trail a stop loss in a lower timeframe as price bounces back in the direction of the trend. If price crosses the T3(5) and doesn’t return in the same candle, exit the trade.

• This strategy works great for bounces on the H1, H4 and D1 timeframes.
• After placing the order, manage the trade using the a lower timeframe (such as the M15 for an H4 entry).
• Do not use this strategy in ranging markets.

 

14 - ILRS Moving Average – The Wicks Tracker

The smooth 14 period ILRS Moving Average likes to be away from price action just at the right distance to let wicks develop without crossing it. Because of its behaviour, this MA is great for trailing stops and even aggressive swing re-entries after a trend has developed itself.

During a trend swing, it’s not unusual to see one or two naughty candles closing with wicks exactly at the ILRS(14) MA, by the pip.

 

ILRS stands for Integral of Linear Regression Slope. It is one of the smoothest MA’s and carry very little market noise.

The 14 - ILRS Trailing Stop Strategy

The ILRS(14) is the best moving average to trail a stop-loss tight on a trending swing.

• After the trend has formed, trail your stop-loss 1 or 2 pips away from the IRLS(14) MA candle by candle.
• Leave some more space if you are trailing stops on the H1 or higher timeframes.

5 - HMA Moving Average – The Trend Watchdog

The 5 HMA, or 5 Period  Hull Moving Average tracks the price very closely with some overshoot. This makes it a good MA for alerts and trend following indication.

During the formation of a trend:

• The 5 HMA cross off the 5 T3 is the first alert that a swing is forming.
• The 5 HMA cross off the 14 IRLS usually confirms that the new swing has been formed.
• The trend swing then proceeds with the 5 HMA parallel to the 5 T3.
• A 5 HMA cross back on the 5 T3 signals that the trend has lost momentum: The price may run sideways before continuing or the trend will terminate soon.
• A 5 HMA cross back on the 14 IRLS usually confirms the end of the swing to a more sloppy price action.

Note: More experienced traders will want to discard discard the 5 HMA information and trade directly on price action or other leading Forex tools. Too much confirmation on lagging indicators can make you late for the best entries and exits.

Major forex players such as central banks, hedge funds and big carry traders like to pay particular attention to key price levels that have bigger repercussion on a country’s economy than the mere and nosy ups and downs of its currency fluctuations. The so called Psychological Levels are prices that can cause anxiety and expectation on the people following a financial instrument. They are self-fulfilling, meaning that people will take some course of action based solely on the price reaching those levels.

Most Important Forex Psychological Levels:

Dollar Parity
USD/CHF = 1.000 will normally trigger actions by the Swiss National Bank to return the Swiss Franc to more “normal” levels trading above parity. Market moves can be quite aggressive at this level and spill to EUR/USD, given the Euro/Swissy correlation. Other currency pairs that are near parity in recent times are the Aussy (AUD/USD) and the Loonie (USD/CAD).

Rounded Numbers
Rounded Numbers with double zeros (such as EUR/USD 1.3200), or even better with a triple of zeros (1.3000), are levels that a lot of people are waiting to jump into a trade. Many Pending Entry Orders and Target Take Profits are triggered right at those prices while protecting Stop Losses should stay in a safe distance allowing space for a bears-and-bulls battle and wicks caused by the triggering of more aggressive stops standing more closely.

Historical and Daily Levels
Historical highs and historical lows are always watched with anxiety while intraday traders normally respect the previous daily candle with more importance given to the previous day high and low. Also look for these levels on higher periods such as the weekly and monthly charts.

Prices that appear on the Media
Hyped numbers or price levels that are on evidence are always a reason for traders to rethink their positions and create trade plans. Be cautious when the candles in your chart approach them.

Trendlines
Trendlines are the trader’s best friend and one of the best leading indicator a trader can use in his charts.

While trades are entered on a bounce of long term trendlines (at H4, D1, W1 and MN timeframes) with relatively loose stop-loss triggers, medium and short term trendlines can be very accurate and it is not unusual to find them working on a “by the pip” basis.

Breakouts are another example of trendline entries, specially when they are confirmed by a “support/resistance role reversal” when, after a breakout, the prices retrace to the trendline and then bounce back away.

Horizontal support and resistance lines are special cases of trendlines. When combined to Pivot Points and/or Fibonacci levels, they usually reveal very probable bounce or role reversal areas.

Types of Trendlines

• Support and Resistance Horizontal Lines
• Support and Resistance Trend Lines
• Median Lines
• Logarithmic Trend Lines
  (Check out this article to see why Logarithmic Trendlines work)
• Andrews Pitchfork (see bellow…)

YouPip.com publishes free chart analysis with high probability trendlines and pivot points updated many times a day. Check it out!

Pivot Points

Pivot Points are great at predicting turning points in the currency markets. Because so many traders have believed on them, they become a self-fulfilled prophecy predicting monthly, weekly and daily prices around pending orders are placed and automatic trading software make their bets.

While the classic pivot points are the best prices to watch on a daily basis, all the other pivots start to become important when looked from a weekly and monthly perspective.

Always pay attention to daily R2 and S2 classic pivot points. Specially near London Session closing time, they represent important turning points caused by cash outs of traders who follow the Londoners and head home, finishing their trading day.

Another powerful use of pivot points rely on the overlap and clustering of different types of monthly, weekly and daily pivots over a price area. Fibonacci, Psychological levels, Trendlines and other lagging indicators such as Stochastic turns will add more confirmation and precision to probable reversals at a pivot point area.

Types of Pivot Points

• Classic Pivot Points
• Fibonacci Pivot Points
• Camarilla Pivot Points
• Woodie’s Pivot Points
• DeMark Pivot Points

Fibonacci Retracements and Extensions

The famous Fibonacci sequence is considered the best measure for proportion and equilibrium on all forms present on Nature.

Fibonacci ratios also seem to be intrinsically bound to the human senses, be it when we stare at the perfect proportions of a beautiful woman, or when we are catch by the greed and fear of dealing with the price swings on the currency trading markets.

Whichever way they may work, the Fibonacci retracements and extensions will be seen and respected on most trend swings at the Forex currency pairs.

Their best use is on trending markets, where they work in fractal manner by showing turning points on price extensions and retracements, either during each individual swings or full trends and price moves.

Again, look for agreement between long and short term Fibonacci ratios and their overlap with other leading indicators for the best trading opportunities.

Forex Psychological Levels

The so called Psychological Levels are prices that can cause anxiety and expectation on the people following a financial instrument. News hype, dollar parity, rounded prices, daily high and lows and historical levels are normally respected by many traders and may cause a trend to stall or even reverse.

Click here learn more about Forex Psychological Levels

Andrews Pitchfork

Many traders consider Andrews Pitchfork the best trendline methodology although its use is widely misunderstood and underused in most Forex articles.

Andrews Pitchfork defines three lines of extremely high bounce rates that consist of a median line plus other two parallel lines that are drawn on each trend swing using its swing high, swing low and the previous swing point.

While trying to fit a pitchfork on a trend by forming a channel will work great at most of the time, this is not the main use of Alan Andrews work.

We will soon write an article about the best uses of Andrews Pitchfork. Keep checking at www.youpip.com from time to time.

At the meantime check these great books. They are a must read for any trader wanting to take full advantage of the pitchfork methodology:

• Download Free e-book: Using Median Lines - An Emipirical Study – by Greg Fisher
• The Best Trendline Methods of Alan Andrews and Five New Trendline Techniques – by Patrick Mikula
• Other Greg Fisher Median Line books
• Pitchfork Channel Fitting Strategy

Moving Averages??

Yes, Moving Averages. You read it right. Although MA’s are lagging indicators by definition, some of them can predict price bounce areas ahead of time, acting in a leading way.

The best moving averages for use as leading indicators have higher periods and don’t move much with the development of price action in the last unfinished bar. The 200 EMA and 50 SMA are among the best examples but the same kind of strategy can also be used on some MA’s of smaller periods such as the 21 EMA, the 14 IRLS MA and the 5 T3 EMA.

To learn more about the use of Moving Averages check out:

• The 6 Best Moving Averages for Forex Trading

 

Market Correlations

Market Correlations offers one of the best ways to know in advance how a currency pair will behave in the near future. Very often one of the correlated markets take the lead on a S/R hold or breakout that are then followed by its peers. Also, Support and Resistance areas, Pivot Points and Fibonacci levels are often interrelated between the different correlated markets.

You can find weekly updated correlations for the most important currencies and futures contracts at the FX-Bootcamp’s blog.

Most Important Dollar Correlated Instruments

Futures Market (Exchange)	Symbol
Gold (Comex)	GCM0
Mini Crude Oil (Nimex)	QMN0
10 Year U.S. Notes (Ecbot)	ZNM0
Mini SP-500 (Globex)	EXM0
Mini Nasdaq 100 (Globex)	NQM0
Mini DJIA (Ecbot)	YMM0

Other Important Correlations in Forex

Futures Market (Exchange)	Symbol
DAX (Eurex)	FDAXM0
FTSE 100 (Euronext)	FTSEM0
NIKKEY 225 (Globex)	NKDM0

 

Currency Relative Strength Indexes

Index (Exchange)	Symbol
Dollar Index (Ice)	GCM0
British Pount (Globex)	6BM0
Euro (Globex)	6EM0
Japanese Yen (Globex)	6JM0

News Trading Tutorial: Take advantage of delayed news between UK and Europe

There are times in Forex when news releases of similar economic information happen on slightly different times on UK and Europe. These events can offer good trading opportunities for quick profits.

One example of such news events happened recently on April 20 with the release of UK – Consumer and Retail Price Indexes at 8:30 GMT and German / European Union ZEW Survey at 9:00 GMT.

 

Bellow are the FxStreet.com definitions of the Economic Indicators:

Consumer Price Index: The CPI is a key indicator to measure inflation and changes in purchasing trends. Generally, a high reading is seen as positive (or bullish) for the GBP, while a low reading is seen as negative (or Bearish).

Retail Price Index: is a statistical measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is widely considered as a key measure of inflation that indicates an accurate reflection of the cost of living. Normally, a high reading is seen as positive (or bullish) for the GBP, whereas a low reading is seen as negative (or bearish).

ZEW Survey: Economic Sentiment published by the Zentrum für Europäische Wirtschaftsforschung measures the institutional investor sentiment, reflecting the difference between the share of investors that are optimistic and the share of analysts that are pessimistic. Generally speaking, an optimistic view is considered as positive (or bullish) for the EUR, whereas a pessimistic view is considered as negative (or bearish).

 

By reading the definitions and knowing that there will be a 30 min delay between the news releases, one could make the following assumptions:

A better than expected UK CPI and RTI would indicate that UK Economy did relatively good for the period.

This tells me that, if the fundamentals of UK, German and Europe are at a similar level at the moment, and the same sort of data and calculations influenced both UK and German preview of the reports, Germany and Europe would also probably be more optimistic about their economies.

Thus, we could probably expect a similar better then expected response on the German / EU ZEW Survey.

 

With the above assumptions, we could prepare a trading plan by looking at places to take a trade on EURUSD based on whatever reactions UK CPI and RPI news had on GPBUSD.

As we can see in the pictures, UK news release were better than expected causing GBPUSD to rally almost instantly at 8:30 GMT (10:30 Broker Time) while the EURO remained stationary in its momentum waiting for its own news.

By following the assumptions previously maiden, EURUSD is expected to raise as well, so we would better look at good places to long it. There are two places worth noting:

Aggresive Long Entry during News Anticipation

As more traders in the world had probably similar assumptions, after the Cable volatility suppressed, they started to long EURUSD anticipating a rise caused by the ZEW Survey release.

An aggressive long  setup was then formed before an anticipation confirmation, with a stop loss just bellow the 1 min 200 EMA. This stop would be tightened just before the EURO news release to a place above break even or to about 4 pips below whatever value EURUSD would have just before the news.

More Conservative Long Entry on Anticipation Retracement

A more conservative entry would be after the confirmation of a bullish anticipation with its higher high and its subsequent retracement before the news.

The conservative long setup would be to enter before the news on the retracement hesitation with a tight stop loss of about 4 pips. Attention is needed to move the stop to Break Even preferably before the news or as soon as the price moves in the direction of the trade during the news.

 

News Trading Considerations

BEWARE THAT ANY TRADING DURING A NEWS RELEASE IS EXTREMELY RISKY

• Always protect your capital by entering a trade with a pre-set stop loss in the same order. Even if you plan to set the stop loss at a later moment, make the pre-set SL wider so you can tighten it afterwards.
  
  
• It may be hard to place trading orders during news and other volatile moments. Broker trading servers can get too busy and may not execute stop-loss change requests or any orders at all. Be provisioned for these situations by always defining a pre-set stop-loss together with your entry order.
  
  
• Depending on your broker, the spread can grow bigger and hit your SL levels during news or other volatile moments. Avoid placing trades with brokers that change the spread dramatically during news releases.
  
  
• Depending on your broker, price gaps and spread growing can make the price simply “jump” your stop loss rendering it useless. Beware of such brokers and always be present for a manual order close in a worst case scenario.
  
  
• Training on a DEMO account is always the most conservative way of trading.

Automatic Live Analysis Downloader

YouPip.com market analysis are updated many times during lateAsia, London and New York trading sessions.

The Live Analysis Downloader delivers Free Updated Forex Analysis and Indicators directly into your Metatrader templates folder making it much easier to keep pace to what is happening to Forex, pip to pip.

Learn more and Install YouPip.com Live Analysis Downloader

 

Troubleshooting Automatic Live Analysis Downloader

These are the typical problems that may arrise when using YouPip.com Live Analysis Downloader. They can be easily solved by re-installing SlickSVN or excecuting the automatic downloader with administrative rights:

No files were downloaded
A command prompt window opens and closes rapidly
'svn' is not recognized as an internal or external command, operable program or batch file.

If no files are downloaded to your Metatrader templates folder you may be having a problem executing the .bat file. To check what may be the problem follow the instructions bellow:

1. Make sure your internet connection is active and you are running "YouPip.com - Live Analysis Downloader.bat" as Administrator.
   (It may not work in some versions of Windows if run as a regular user)
   
    
   
   
2. Open a Command Prompt window as Administrator 
   
   
3. Type "svn" and then hit ENTER.
   You should see a message asking you to type "svn help" for usage. 
   
   
   
   In the case you receive a message like:
   'svn' is not recognized as an internal or external command, operable program or batch file, SlickSVN was not installed correctly or you may not be in administrative mode.
   
   
   
4. Go to your Metatrader folder, type "YouPip.com - Live Analysis Downloader.bat" and hit ENTER
   The automatic downloader will start and will show you a message with any error it may be getting.
   
   
5. If you get an Access Denied message, this is because of Windows 7 / Vista permission structure for the Program Files folder. In this case you can:
     - Change the permissions for your Metatrader folder
     - Install Metatrader into another folder outside Program Files
     - Execute YouPip.com - Live Analysis Downloader.bat in another folder outside Program Files