Hi,
Two days ago, I traded long on EURAUD when I found an ABCD Pattern on the H4 timeframe chart. This morning this trade was about +35 Pip and at 8:30AM The USD going up with the NFP event and I don’t know why, the EURAUD Pair drop about 80 Pips and kick my SL out of the trade. I want to know if this is normal than a pair (who not include USD (Like EURAUD)) react as strong to a US Dollar event? How to trade Hours (Days) Pattern between these kinds of events?
Thanks.
Chris
Hello, Chris
This is going to be a [I]long[/I] answer to your question. I apologize, in advance, for the length.
Let’s take a look at the effect of Friday’s NFP release on [I]three major USD-currency-pairs,[/I] two of which are key to understanding what happened to the EUR/AUD. The three pairs are EUR/USD, GBP/USD, and AUD/USD.
Each of these pairs experienced a short-term swing from a HIGH just prior to the NFP release at 8:30 am (New York time) on Friday, to a LOW within an hour following the release. Measuring these swings from high to low, we see that [I]EUR/USD dropped 1.03%[/I] (-115 pips); [I]GBP/USD dropped 1.12%[/I] (-147 pips); and [I]AUD/USD dropped 0.85%[/I] (-65 pips). So, we note that three major currencies paired with the USD experienced [I]three different percentage decline[/I]s as a result of a single event (the NFP release).
In general terms, we can state that, at the time of the NFP release, the AUD was the strongest of these three, the EUR was second strongest, and the GBP was the weakest — based on the percentage declines suffered by these three currencies versus the USD.
We could argue all day about whether varying weaknesses in these three currencies [I]existed prior to NFP,[/I] and were simply revealed in the subsequent resetting of prices, or whether the varying weaknesses in these three currencies [I]were caused by the NFP event.[/I] Regardless, the resetting of prices in the AUD/USD, EUR/USD and GBP/USD established the new relative-strength relationships among these three.
Which brings us to the EUR/AUD (which you asked about) and the GBP/AUD (which you did not ask about).
NFP momentarily measured the relative strength of the three currencies we are discussing against a common benchmark, the USD. And, in so doing, NFP established that the AUD was (at that moment) stronger than the EUR, and the EUR was (at that moment) stronger than the GBP. Accordingly, NFP reset the prices of AUD/USD, EUR/USD and GBP/USD — [I]as well as every other currency paired with the USD.[/I]
These price resets were automatically translated into price resets in every [I]currency-cross-pairing,[/I] whether the currencies involved were major currencies, minor currencies or exotic currencies.
In the case of the EUR/AUD, the weaker EUR paired with the stronger AUD drove the EUR/AUD pair down.
And in the case of the GBP/AUD, the [I]much weaker[/I] GBP paired with the stronger AUD drove the GBP/AUD pair [I]down even harder.[/I]
To put numbers on these price resets, [I]EUR/AUD dropped 0.52%[/I] (-75 pips). And [I]GBP/AUD dropped 0.74%[/I] (-126 pips).
We have looked at five pairs — EUR/USD, GBP/USD, AUD/USD, EUR/AUD and GBP/AUD — and we have calculated five different percentage declines, all due to a single event — the U.S. NFP release.
Referring once again to your question about the EUR/AUD, if the EUR/USD and the AUD/USD had declined by the [I]same percentage,[/I] following the NFP release, then there would have been no change in EUR/AUD, and the stop-out you suffered would not have occurred.
As it happened, that was not the case.
.
What a fantastic explanation, Clint
Thanks, Chuck.
First time I’ve seen fundamentals and maths come together in one simple yet profound explanation.
Now, why didn’t I think to use “Chuck” as my username? Too late to change it now, I suppose.
Yup.
Some guy who has never posted in the forum already has that username.
And some guy who [I]has[/I] posted has the username [I]ChuckNorris[/I].
If you want to scan all the “chuck” variants already registered here, find the [B]Community[/B] tab (top of this page), click the drop-down menu, click [B]Member List,[/B] click alphabet letter [B]C,[/B] and scroll forward to pages 334, 335 and 336.
As for changing your screen-name, it might be worth a try to ask the Administrator to change it (to one not already in use), while still preserving your user profile (join date, post history, etc.).
Failing that, you can always register again, as a brand-new member (again, under a unique screen-name). But, your identity as [I]Pointless[/I], together with your user profile, will sink out of sight after you stop using it.
If you resort to a new member registration, don’t make the mistake of having a “conversation” between your old identity and your new identity. The forum calls that “sock-puppeting”, and it will get you banned (if they detect it, or someone reports it).
I don’t know whether user-names (screen-names) are case-sensitive. If they’re not, you might be able to register [I]chuck,[/I] in lower-case letters. It can’t hurt to try.
You can change your avatar anytime you like (you can do it yourself, using the [B]UserCP[/B] tab at the top of this page), and Babypips doesn’t care if your avatar is the same as some other member’s avatar (although the other member might give you some flak).
.
Excellent explanation of cross-pair movements, Clint. Thanks!
Great explanation, Clint!
What I would add to that, after observing months and months of GBP/NZD movements,
there are several things to bear in mind when trading/watching cross pairs:
sentiment is usually driven by one Major pair for any length of time, for example
for GBP/NZD it has been NZD/USD to dictate moves for this pair, for the most part;
when sentiment reverses, the other Major pair begins to have an influence that is
overwhelmingly against its previous behaviour, including inverse reaction to previously
positive news/data, etc.;
reactions from one or the other originating Major pair may be amplified in the cross pair in a different
way, for example significant moves from GBP/USD or NZD/USD are amplified two- or three-fold in GBP/NZD;
what Clint said would be true (that is, that if two originating pairs moved by the same amount, the cross pair
would remain unmoved) has yet to happen on my watch, so realistically you will always get a move in the
cross pair based on the fact that the originating pairs will generally move differently to a same USD-led event
because of their different volatility or liquidity;
although, as I said in points 1) and 2) there will be (usually) clear leaning in sentiment toward one or the
other originating pair as the driver…However, just to give an example in GBP/NZD, even at a time when the
GBP/USD has become the (negative) driver for this cross pair, when the RBNZ made a dovish announcement
a couple of weeks ago during the Asian trading session, the resulting move from GBP/NZD was a considerable
boost to the upside: this means that in the short-term, you must still watch news items for both originating
Major pairs, because they can still create significant moves (and crosses like GBP/NZD can be very volatile…
see Eddieb’s thread ‘Balls of Steel’ in Forextown). However, that positive move for GBP/NZD did not last, and
the following event (BoE’s rate decision last week) made sure that continued negative influence from the
GBP/USD side stumped any prolonged recovery of upside sentiment for GBP/NZD.
I sometimes use this heat map from Oanda:
https://www.oanda.com/forex-trading/analysis/currency-correlation
You can select any currency (or CFD, metal, etc.) on the left and it will map its correlation strength
(positive or negative) in relation to all other listed instruments over several periods, up to one year back.
This could give you a good checking tool for EUR/AUD as its correlation to its originating pairs continues
to shift and evolve over time…
Thanks.
Thanks Clint, for this explanation. So, if I had a trade open from few days and need to cross this major event, what can I do?? Kill the trade or cross my fingers for a push in the good direction… What the good strategy?
There is no single, correct, definitive answer to your question.
[I]How you answer it for yourself[/I] will depend on several factors, all subjective and specific to the particular trade you are managing.
Basically, your choices are these:
[B]1.[/B] Hold your position, sit tight, and ride out whatever volatility a major news release might create.
Without meaning to do it, this is exactly what you did on Friday in your EUR/AUD trade.
Things to consider: Your stop-loss might get hit, taking you out of your trade — which is what happened to you on Friday.
Here’s a nasty possibility that’s happened to all of us more than once: You decide to ride out the news event; your pair spikes against you, hitting your stop-loss; and before you’ve had time to re-assess your situation, your pair spikes [I]in the other direction,[/I] hitting what used to be your profit target. Now, you’re kicking yourself for not selecting choice #2, below.
[B]2.[/B] Anticipate a lot of meaningless volatility, and move your stop-loss further away from the current price, just to give your pair lots of room to bounce around. Keep in mind that this violates one of the cardinal rules of trading, which is: [I]Never move your stop-loss in the direction of greater loss.[/I]
They say that rules are made to be broken. Is this one of those times? Only [I]you[/I] can decide this for [I]your[/I] trade, based on [I]your[/I] risk-tolerance, and on [I]your[/I] confidence in [I]your[/I] analysis.
[B]3.[/B] Step out of your trade (that is, close it manually) prior to the volatility of the upcoming news release.
Be aware that the major news releases are always characterized by front-running. That is, a minute, or so, before the general public (including you) get the numbers, “somebody” has already hit the market with some heavy-duty action. Are they guessing? Do they have inside information? We’ll never know for sure. But, their front-running just adds to a potentially volatile situation. So, if you select choice #3, don’t wait until the very last second to bail out of your position. Ten minutes, or more, prior to the release would make sense.
If the news release you are choosing to avoid turns out to be [I]sound and fury signifying nothing[/I] (as Shakespeare was fond of saying) — meaning that 30 minutes, or so, after the release, your pair is essentially unchanged in price — you can easily re-enter your position for the nominal cost of one additional spread. That’s a pretty small price to pay for avoiding a lot of chaos.
Two more comments, and then I’m done.
The two economic news releases that you should seriously consider avoiding are the U.S. NFP Report (with which you have recently become very familiar), and interest rate decisions from any of the major central banks. Other news releases — GDP, CPI, PPI, etc. — [I]can[/I] be big market-movers, but usually are not nearly as treacherous as NFP and the interest-rate decisions.
Looking back at the EUR/AUD trade that went wrong for you on Friday, I presume that you have looked at your charts since that event, and re-considered the LONG trade you were in prior to NFP. You were obviously trading [I]counter[/I] to the prevailing bearish swing that began on August 2. I would be curious to know what you were anticipating. Was your LONG position based on belief that the swing to the downside was over? Or were you trying to trade a very short-term bounce to the upside in a continuing downward swing? Hindsight is always 20/20, of course, and in hindsight we see that — after some waffling post-NFP — EUR/AUD had more to go on the downside (to date, 100 pips more to the downside).
Another long-winded reply from me. Sorry about that.
.