ECB press conference

Mario Draghi, the President of the European Central Bank (ECB) delivered his speech yesterday. Given his history of press conferences, Draghi has been known to shake the markets in the most haphazard way.

Firstly, the interest rates as expected were lowered by 10 basis points for main refinancing operations, 35 basis points for marginal lending facility and another 10 basis points for deposit rates. For the first time here, deposit rates are negative.The EUR/USD rate pre-speech was around 1.3660, taking into account the effect of interest rate parity, a drop of deposit rates of -0.1% would have resulted in the rate to consolidate to 1.3646 (1.3660 x 0.999 ), all else equal. The graph shows the the lowest point during the speech at 1.3658. The difference of 12 pips is due to investor sentiment and as proven here, interest rate parity is a concept that holds.

Moving on, there were other policies to strengthen the Eurozone economy namely the targeted longer-term refinancing operation (TLTRO). The TLTROs will mature in September 2018, in around 4 years. TLTROs are used to provide liquidity to the financial sector. The positive impact of this action is to increase the confidence in the Eurozone. An action like this would cause the EUR/USD rate to go up.

As quoted in the speech, "... to maintain a high degree of monetary accommodation, as well as to contain volatility in money markets, we decided to continue conducting MROs as fixed rate tender procedures with full allotment for as long as necessary....". Unlike TLTROs, MROs which stand for main refinancing operations mature in one week. This step by the ECB would impact the currency markets by reducing the volatility of the Euro. New traders could choose to trade Euro pairs as the risk is lower.

Real GDP in the Euro area rose by 0.2%, where the annual increase of the real GDP by 1% is foreseeable. Compared to the press conference in March, the extrapolated real GDP growth for 2014 has been revised downwards while the estimate for 2015 has been revised upwards. 

Without going into the details of monetary analysis of M1, M3 and M3 a decline of the demand for Euro can be seen.

Experts would say buy the rumour and sell the fact and time in time the trend repeats itself. After hitting an all day low of 1.3503, EUR/USD rose to 1.3670.

The full speech and the question and answer section can be found from the ECB website.

I made close to a 60 pip gain by shorting EUR/USD slightly before the speech and exited after a few minutes. I would have went in long after that but I did not have a decent internet connection last night to watch the news live had I known the full content of it.

Downtrend rhythm for USD/JPY M1

The M1 graph shows a downtrend rhythm for USD/JPY. I did not calculate the ratios, as I am certain at this level USD/JPY is set to decline.

Entry point for a short as at the red arrow.

Double top for EUR/USD

The M5 shows a double top formation, and paired with Fibonacci retracement, these lines provide a good indicator to short and new support levels.

I went in for a short as seen in the red arrow entry, with a stop loss set at my resistance line.

More price action: Double top for USD/JPY

My set up for scalping is purely price action, with a focus on the M5 charts. There is too much noise for M1 and M15 requires a slightly longer holding period. 

A double top formation can be seen for this pair. The two tops can be used as a reference for resistance where the price does not have enough buyers for it to breach. 

Double bottom for EUR/USD

The M5 graph showed an uptrend sign at around 5.30 pm. I am collecting my long positions for this pair.

If history should repeat itself, EUR/USD will spike upwards pre-Draghi speech and then tumble down during/after. The ECB President is expected to cut rates.

Double top for GBP/JPY

Earlier this morning, a double top formation was seen in the M1 GBP/JPY graph.

This presented a good shorting opportunity based on price action. In addition to price action, fundamentals favoured the Yen as the average cash earnings was more than forecast and prior period. Besides that, Japan`s 10 year bond auction yield increase slightly. A change in 10 year bond yields would affect a currency based on interest rate parity.

I shorted the pair at 171.486.

US ISM Manufacturing PMI misses target

As per title, the major economic data for US tonight was the ISM manufacturing PMI. This is the leading indicator for the economic health of the manufacturing sector released by the Institute for Supply Management.  The actual figure at 53.2 was lower than both what analysts expected and the prior month.

I`m quite the fan of data trading, hence I shorted USD/JPY and went in long for EUR/USD.

How China`s PMI data affects the Australian Dollar

Using the figures from yesterday`s PMI numbers, a long for AUD/USD would give a few quick pips.

This would have given around 6-7 pips if the entry was made during the start of the trading session. The key to data trading is that once a trade has turned positive, it is time to close it, even with just a few pips. The temporary momentum could reverse in a few minutes.

As seen in the M15 graph of AUD/USD above, after the temporary strengthening of the Australian Dollar, it fell by nearly 100 pips. This is an inherent danger of data trading when one doesn`t exit fast enough.

China`s manufacturing PMI for May

China`s manufacturing PMI (Purchasing Managers Index) for May outperformed expectations by expanding more than estimates and April. The actual figure, at 50.8 was more than 50.4 in April and 50.7 initially estimated.

Purchasing Managers Index is an indicator on how well the manufacturing sector is doing. A figure above 50 represents an expansion, while below 50 shows a contraction. A more precise explanation can be found here. 

Most forex brokers do not have the option to trade a Renmimbi pair so the next best option is to trade the Australian Dollar. For a scalper, a gain should be possible with a trade in favour of the AUD tomorrow when the markets open. For instance buying AUD/USD should give scalpers a few easy pips. Traders should not hold this pair too long as Australia has several key economic data out tomorrow, starting with the buildings approval at 9.30 am.

Trading with odds

Based on probability, there`s a 50% chance of getting the trade right with forex, since the only options are to either buy or sell a currency pair. Next, by controlling the risk factor, one can choose to use a ratio of 1:2 for stop loss to target price. This should ensure that the net results would be a positive, even if only 50% of the trades are winners.

In reality, this idea on probability seems rather idealistic as it is much easier to hit the stop loss than target price. Perhaps when trading with odds alone, one should enter the trade opposite to the one initially thought about.