Article Summary: A common forex strategy is to use follow strong trends. The EURNZD was one of the largest movers this week and is currently resting on a support trend line offering 2 ways to enter a short trade.
The EURNZD lost about 275 pips this week. Will this trend continue or is this simply a partial retracement of a larger uptrend?
I think the trend will continue down as both longer term trend and shorter term analysis suggests there is more room to move to the downside.
Forex Analysis:
Yesterday, the European Central Bank held their benchmark interest rate steady but suggested future cuts may take place. This news sent the Euro selling as traders flee the lower rates. Additionally, the Reserve Bank of New Zealand released their monetary policy statement this week and suggested growth may reach 2.5-3.0% this year. As a result, capital moved into the New Zealand Dollar (NZD) causing it to strengthen.
Diverging central bank policy statements can create powerful trends as capital flees the falling interest rate and seeks out a higher or growing interest rate. Central bank policy statements like we witnessed this week tend to remain in place without much change for several months at a time. Therefore, a trading tip is to trade these diverging statements in the direction of the trend which would be to the downside for the EURNZD. Many newer traders miss out on these strong trends in cross pairs because they are focused on the majors.
Learning Forex Trading: EURNZD Retraces 55% for a Third Time
(Created using FXCM’s Marketscope 2.0 charts)
As you can see above, the longer term trend is clearly to the downside so this week’s move may be the front edge of a resumption of the bear trend. Applying technical analysis to the chart I see a couple of interesting patterns develop.
First of all, the past 3 reactionary highs each partially retraced the prior down trend between 54-57% and the recent swing higher is no different. If this pattern continues, new lows below 1.5000 may be on the horizon. However, we don’t want to blindly enter short trades. We need to pinpoint our entry and exit prices BEFORE entering the position.
Learning Forex Trading: EURNZD Rests on Trend Line Support
(Created using FXCM’s Marketscope 2.0 charts)
A second interesting pattern is that a head and shoulders pattern appears in the later stages of forming. It is early to formally call this a head and shoulders pattern but if it plays out, then prices may work their way towards 1.4750.
Using technical analysis we can see the price is currently on top of a support line dating back to August 2012. In the past these upward sloping support lines provided a couple hundred pip bounce to the upside. We don’t want to buy in anticipation of the bounce, we want to filter our trades in the direction of the trend and use the bounce or a break of the support line as our opportunity to sell.
If prices bounce higher, then perhaps the 200 SMA will provide resistance near 1.5700.
If prices do not bounce higher, then a breakout strategy below the support line makes sense. A stop loss can be placed just above the swing high on a break. (High Probability Breakout Trading in Forex 12.5 - video is 66 minutes with EURNZD Head & Shoulders pattern discussed near 57 minute mark)
Last week, we discussed how the EURJPY was the largest mover, yet this was possibly a partial retracement of a larger down trend. The currency charts suggest the patterns, but in the end, we never know where price is going to move. Therefore, it is important to place a stop loss on each trade in case the market doesn’t agree with your assessment.
Good luck with your trading!
---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education
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