FOMC Meeting Minutes: 3 Key Points and the USD-Negative Reactions

The market started the week softening the USD across the board. We saw rallies in EUR/USD, GBP/USD, AUD/USD, and declines in USD/JPY, USD/CHF, and USD/CAD just to name a few USD-crosses. Traders were walking back recent USD-strength, one that was partially based on expectations that the Fed is considering hiking rates in 2015.
The FOMC minutes had 3 main points:
1) Economy is still slow in recovering, and China’s downturn won’t help.
2) Members walking back some optimism shown at the turn of the the year – recent soft data is not just due to the cold. Thus low interest rate might be longer than expected, maybe through 2015.
3) Inflation is low and is a concern that can hold back any interest rate hike.
This provides some basis for the USD-weakness already put in earlier this week. The minutes revealed a committee that wanted to stay grounded and was concerned it was getting ahead of itself in projecting rate hikes in 2015 and 2016. Thus the minutes were relatively dovish compared to recent hawkish developments. The greenback was already sliding – the question is whether it will extend.
Let’s take a look at the USD/JPY, EUR/USD and GBP/USD.

USD/JPY vs. EUR/USD and GBP/USD developments:
USD-weakness looks best for EUR/USD and GBP/USD. However, the JPY is also weak, and USD/JPY has been bullish. Thus, it will take more to continue the uptrends in EUR/USD and GBP/USD than to reverse the prevailing uptrend in USD.
USD/JPY:

(usdjpy 4h chart 4/9)
The USD/JPY has been very bearish this week, and today’s minutes confirm that the market’s concern was being priced in.
If USD/JPY can’t push below 101.50, it will maintain a slightly bullish bias within the consolidation mode. A break below that extends the bearish outlook first to challenge the 2014 low at 100.75, towards the 100 psychological handle.
It will be tough to keep a bullish outlook for USD/JPY after the dovish minutes, UNLESS the pair rallies back above some common resistance in the 102.80-85 area.

The EUR/USD and GBP/USD are both being boosted because of the weak USD.
EUR/USD

(eurusd 4h chart, 4/9)
EUR/USD broke above the 1.38 resistance where it stalled earlier this session. The USD-negative reaction also pushed it above a falling channel resistance, thus reflecting bullish continuation. It’s next challenge will be to clear the 2014-high near 1.3966.
GBP/USD

(gbpusd 4h chart, 4/9)
GBP/USD is now about to test the 2014 high at 1.6822. Above that, cable’s next challenge will be the 2009 highs, situated in the 1.69-1.7050 area. If we get a throwback, look for support in the 1.6650-1.67 area. At this point, a break below 1.6550 will be needed to take away the strong bullish continuation outlook.

10 Things I Focus On As A Trader

One of the best things a trader can have is a filter that allows them to see what matters and what does not. Knowing where to focus our effort and time at to be a profitable trader is crucial. Some things will make us money and some things will cost us a lot of money and divert our attention from what does matter. Here are the 10 things I focus my time, energy, and attention to primarily:

1. I focus on what the current price action in the markets may be telling me based on support, resistance, gaps, moving averages, and a few technical indicators.
   
2. I study how price action played out on historical charts of the stock market in relation to my above indicators.
   
3. I spend a lot of time back testing trading systems that I have a theory about to see how they would have worked.
   
4. I develop entry signals off my studies so I have a good risk/reward ratio and a good probability of a profitable trade.
   
5. I focus on what my stop loss level will be before I get into a trade so I know how big to trade without losing too much trading capital.
   
6. I develop ways to exit my trades to lock in maximum profits and limit potential losses if wrong.
   
7. I find and read the best trading books I can buy based on others recommendations and Amazon reviews. I want books written by real traders not just writers or people with theories.
   
8. I hang out with some really good traders in a few facebook trading groups that have more experience than I do and I learn a lot from them.
   
9. I focus on following my trading system with discipline and not letting my emotions or ego interfere with making the right decisions.
   
   
10. I use the internet and social media to learn by finding the best information based on facts not opinions.
    

How To Interpret Backtesting Results In Metatrader 4

Video Script: 

Before we get too far into backtesting, we need to cover what backtesting is not.

The results of your backtest are not something that you should automatically extrapolate into future performance. The most common rookie mistake forex traders make is finding an expert advisor that makes money historically, and then ending their analysis there. They see that it made money in the past, so they expect it will do the same in the future.

This is the wrong approach.  The primary purpose of backtesting is not to prove that a strategy has made money historically.  It’s to try and figure out whether or not it will make money in the future.

So, how do you use backtesting to figure out if a strategy might work well in the future?  You try to break the strategy.  If you shoot a bunch of holes in the strategy’s historical returns and they hold up, then that is likely a good sign about its chances for future profitability.

Let’s walk through the process of how we go about that. If you haven’t watched our last video on how to perform a backtest in Metatrader 4, pause this video and come back after you have.

If you are watching this video then you have likely purchased or found an expert advisor and are now looking to backtest it.  One of the reasons why you purchased it was likely the graph of historical results that were advertised along with the EA.

If you bought an EA, then the first thing you want to do with your backtest is to make sure that you have received the expert advisor that you paid for to receive. Does the performance actually live up to the hype

You’re going to do that the same way that you run any backtest. The EA vendor should supply some recommend settings. Your job is to use those settings over the period of the claimed performance. For example, if the vendor claims a 20% return in 2013 on EURUSD H1 charts, you want to test the EA over that exact same time period.

The results will vary somewhat between brokers, but the return should at least be in the ballpark of the expected results. If you find a substantial variation, that’s a major cause for concern.

Once you have verified that the EA backtests in line with the claimed historical performance, the next step is to look at how the EA performs when changes are made to its parameters.

Based on my experience, the best strategies tend to make money without extreme sensitivity to the settings used. It indicates something inherent within the strategy that captures market inefficiencies, without requiring the trader to calibrate settings like a nuclear physicist.

You’ll ask yourself questions like:

• Is there any combination of settings that cause my EA to overtrade?
• What values for the stop loss and take profit definitely kill the performance?
• Say that I’m trading an expert advisor that uses moving average crosses. How sensitive is the historical return to changing the MA’s period? For example, does changing the fast MA from 25 to 30 make a small or large difference in the final outcome?

Let’s use a moving average cross strategy as an example. If changing the fast MA from 25 to 30 makes a substantial difference in the final outcome, that is an extremely troubling sign. What if the optimal period in the future is actually a 40 period fast moving average? If your inputs are super sensitive, that might be the difference between positive and negative performance. If your inputs are not sensitive, at least you’ll land on the same side of the coin.

You test the parameters of a strategy by doing the work manually. Pull up your MT4 backtester’s inputs tab. Try different combinations of settings. If you’re using moving average crosses, try “walking” the fast period from a super small value up to a value near the slow moving average cross. Take notes of the differences in the final performance.

When you do the work manually, you’ll notice hot spots appear in the returns. One combination will outperform all the others. Is that best combination similar to the nearby settings that you used? It’s a really good sign if the results are similar.

The period that you use for backtesting is also very important. Most traders feel comfortable when they see five years of historical performance. They assume that means the strategy will continue working in the future.

My answer to backtesting is this question: do you care how much money an EA made 5 years ago or how much it will make tomorrow?

EAs and strategies decay over time. One of those most legendary trading strategies in history are the Turtle traders. These guys traded commodity futures and averaged over 80% returns in the late 1980s.

People still Google them because their strategy is open source. All of the buy and sell rules are given away. There’s one catch, though…. The rules don’t work anymore. At least not in the forex market.

The market evolves and changes with time. Just because a strategy worked 20 years ago, or 5 years ago, or even yesterday doesn’t mean it will work tomorrow. The best tool in your arsenal is to find an EA with encouraging performance on recent historical data. Check the parameters to make sure that they’re not overly sensitive. When you see something that you like, then and only then have you found an expert advisor that you might use on your live account.

Top Trade Idea For April 8th, 2014 – EUR/USD

Price action on EURUSD has been a real mess lately. Pair however lost around 300 pips from March high but it was not easy to take any action within this downtrend because of some very overlapping price action, and also because bigger trend is still up.

Pair fell down to 1.3671 following the NFP report on Friday, where prices could be forming a bottom now, especially if your primary tool for analyzing the markets is the Elliott Wave Principle. From that perspective we can see a double zigzag from 1.3966 high which is a corrective pattern. In other words, it’s a downward retracement within larger uptrend, and once this move is complete you would expect that decline will be fully retracement.

EURUSD 4hElliott Wave Analysis

Now the question is how to identify end of the pattern. Well, always when you see a five wave move from the low or high you should know that something is changing on that particular market. So in our example of EURUSD we will check the wave structure on lower, hourly chart.

EURUSD 1h Elliott Wave Analysis

As you can see pair has turned up clearly in five waves in impulsive fashion, which means that bulls are again trying to become stronger and that trend is changing from bearish to bullish mode.  Even if market changes a direction just temporary you would expect more gains after wave (b) / (ii) pullback. So from a trading perspective there is room for a trade to the upside.

Based on current market conditions and structure trade could be as follows;

Buy 1/2 of your position size at market

Buy limit for 1/2 of your position size at 1.3720

Stop loss is 1.3670

Target is 1.3870

Trade well!