weekly trading lesson

EUR/USD Head & Shoulders on the eve of NFP's

Friday, 02 June 2006 21:20:05 GMT  |  Written by Adam Rosen, FXCM Power Course Instructor

As we look at the charts less than 6-hours before the release of the much anticipated, and somewhat dreaded Non-Farm Payroll numbers, we can take a few minutes to take a step back, and look at the big picture, at least what’s evident on the daily charts. The EUR/USD appears to have completed one of the most recognized patterns on Wall St., the infamous head and shoulders pattern. This time tested favorite is simply a triple top where the center top (head) stands higher than the 2-outlying tops (shoulders). One popular approach we may take is to simply anticipate the 2^nd top, as it occurs. In this case the 2^nd shoulder falls very close the 61.8% Fibonacci (1.2889) level. This is currently exists just below the 1.2900 figure. Traders anticipating this ‘neckline’ of sorts will stand as resistance may choose to sell short just under resistance, with protective stops placed above resistance. What’s interesting to note is that the Bollinger Bands have compressed quite a bit over the course of the past few trading days. This indicates that the buyers and sellers have once again approached one another as market complacency sets in. Eventually these two opposing forces will meet, as the ‘winning side’ will overcome the ‘losing side’ and force either the long’s or short’s to scramble for cover in order to save whatever usable margin is left over.

Due to the fact that the NFP tends to be one of the most actively traded and volatile economic releases, we should exercise a special amount of caution when placing these stops as the market is known to ‘spike’ in one direction, only to reverse course shortly after. To combat the risk of being stopped out due to a quick market spike, we may stagger our entry and stop orders so that if a poor jobs number sends the market into a new stratosphere temporarily, as our initial position may be stopped out, we will then have the chance to re-enter the market at a better (higher) price, with stop orders staggered higher respectively. On the other hand, if our assumption is correct, we can see daily chart shows yearly lows rest below the 1.2000 figure giving ourselves a favorable risk to reward ratio, and therefore a logical trade. Best of luck in trading, and have a great day!!!

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