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Momentum Analysis for Forex Scalpers

Momentum Analysis for Forex Scalpers

Walker England, Forex Trading Instructor

Article Summary: The GBP is currently one of the markets weakest currencies. As the trend develops, traders will use momentum analysis to pick which Forex pair to trade.

The Great British Pound (GBP) has declined relative to most major currencies through the first trading quarter of 2013. However strong the trend may be, it can be difficult to find a suitable pair to apply a scalping strategy to. So how do we conclude which pair is suitable for scalping? To find out, today we will be looking at an example using the GBPAUD currency pair.

To maximize the weakness of the Pound, today we will be pairing the currency against the Aussie Dollar. Taking a look at the Daily chart below, we can really put this trend in perspective as it has declined a maximum of 1295 pips for 2013. With such a strong market trend, traders will be particularly inclined to sell the GBPAUD. Even though the trend is clearly down, there can be swings against the trend which can be meddlesome to scalpers. To optimize our chances of success with a scalping strategy, we will now move in and block off a 30min chart to determine short term market momentum.

Learn Forex – GBPAUD Daily Trend

Momentum_Analysis_For_Forex_Scalpers_body_Picture_2.png, Momentum Analysis for Forex Scalpers

(Created using FXCM’s Marketscope 2.0 charts)

GBPAUD Building Blocks

To find out if this week’s trading momentum is heading in the same direction of our primary daily trend we will now turn to a 30 min chart and apply our building blocks analysis to the graph. Momentum traders use this technique to divide the prior trading week into halves. If both building blocks show momentum pointing in the direction of the trend, this can lend itself to future scalping opportunities.

Below we have divided our previous trading week into segments labeled Block 1 and 2. Block 1 begins on Wednesday the 6th and runs through Sunday the 10th. Block 1 shows the GBPAUD declining and creating a new low at 1.4534. Block 2 confirms the weakness of the pair as price breaks out and creates a series of lower lows. Due to price selling off in both blocks they have been colored red to reference its downward direction. Knowing that short term momentum is continuing in the direction of the primary trend, short term traders will now look for opportunities to sell the GBPAUD.

Learn Forex – GBPAUD Building Blocks

Momentum_Analysis_For_Forex_Scalpers_body_Picture_1.png, Momentum Analysis for Forex Scalpers

(Created using FXCM’s Marketscope 2.0 charts)

Even though momentum is strong to the downside, current price can be seen advancing and attempting to move against our primary trend. Scalpers looking to take advantage of the longer term downtrend will look to establish fresh sell positions on a swing back towards lower lows. In the event that prices continue upward and break a higher high, traders should potentially look for a new pair to trade or wait for a new breakout to lower lows.

---Written by Walker England, Trading Instructor

To contact Walker, Follow me on Twitter at @WEnglandFX.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.