Currency Pair Checklist

The first section of your trading journal should consist of a spreadsheet that can be printed out and completed every day. This purpose of this checklist is to get a feel for the market and to identify trades. It should list all of the currency pairs that are offered for trading in the left column, followed by three columns for the current, high, and low prices and then a series of triggers laid out as a row on the right-hand side. Newer traders probably want to start off with following only the four major currency pairs, which are the EUR/USD, USD/JPY, USD/CHF, and GBP/USD, and then gradually add in the crosses. Although the checklist that I have created is fairly detailed, I find that it is a very useful daily exercise and should take no more than 20 minutes to complete once the appropriate indicators are saved on the charts. The purpose of this checklist is to get a clear visual of which currencies are trending and which are range trading. Comprehending the big picture is the first step to trading successfully. Too often I have seen traders fail because they lose sight of the overall environment that they are trading in. The worst thing to do is to trade blindly. Trying to pick tops or bottoms in a strong trend or buying breakouts in a range-bound environment can lead to significant losses. You can see in Figure 8.1 of the EUR/USD that trying to pick tops in this pair would have led to more than three years of frustrating and unsuccessful trading. For trending environments, traders will find a higher success rate by buying on retracements in an uptrend or selling on rallies in a downtrend. Picking tops and bottoms should be a strategy that is used only in clear range-trading environments, and even then traders need to be careful of contracting ranges leading to breakout scenarios.

A simplified version of the daily market overview sheet that I use is shown in Table 8.1. As you can see in the table, the first two columns after the daily high and low prices are the levels of the 10-day high and low. Listing these prices helps to identify where current prices are within previous price action. This helps traders gauge whether we are pressing toward a 10-day high or low or if we are simply trapped in the middle of the range. Yet just the prices alone do not provide enough information to determine if we are in a trending or a range-bound environment. The next five indicators provide a checklist for determining a trending environment. The more X marks in this section, the stronger the trend.

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figure 8.1 EUR/USD Three-Year Chart (Source: www.eSignal.com)

TABLE 8.1 Currency Checklist_

March 30, 2005-7:30 AM EST

_Trending__Range

Currency Current Daily Daily 10-day 10-day ADX (14) Crosses Crosses Crosses Crosses ADX(14) RSI (14) RSI (14) Stochastics Stochastics Pair Price High Low High Low above 25 Bollinger 50-day 100-day 200-day below 25 Greater Less than >70 <30

TABLE 8.1 Currency Checklist_

March 30, 2005-7:30 AM EST

Currency Current Daily Daily 10-day 10-day ADX (14) Crosses Crosses Crosses Crosses ADX(14) RSI (14) RSI (14) Stochastics Stochastics Pair Price High Low High Low above 25 Bollinger 50-day 100-day 200-day below 25 Greater Less than >70 <30

EUR/USD

1.3050

1.3275

1.2998

1.3250

1.2876

X

GBP/USD

1.9150

1.9160

1.9100

1.9160

1.8935

X

X

X

X

USD/JPY

106.45

X

USD/CHF

1.1855

AUD/USD

0.7126

NZD/USD

0.7150

USD/CAD

1.1975

EUR/JPY

EUR/GBP

EUR/CHF

AUD/JPY

CHF/JPY

GBP/JPY

GBP/CHF

AUD/CAD

EUR/CAD

AUD/NZD

The first column in the trending indicator group is the "ADX (14) above 25." ADX is the Average Directional Index, which is the most popularly used indicator for determining the strength of a trend. If the index is above 25, this indicates that a trend has developed. Generally speaking, the greater the number, the stronger the trend. The next column uses Bollinger bands. When strong trends develop, the pair will frequently tag and cross either the upper or lower Bollinger band. The next three trend indicators are the longer-term simple moving averages (SMAs). A break above or below these moving averages may also be indicative of a trending environment. With moving averages, crossovers in the direction of the trend can be used as a further confirmation. If there are two or more Xs in this section, traders should be looking for opportunities to buy on dips in an uptrend or sell on rallies in a downtrend rather than selling at the top and buying back at the bottom of the range.

The last section of the trading journal is the range group. The first indicator is once again ADX, but this time, we are looking for ADX below 25, which would suggest that the currency pair's trend is weak. Next, we look at the traditional oscillators, the Relative Strength Index (RSI), and stochastics. If the ADX is weak and there is significant technical resistance above, provided by indicators such as moving averages or Fibonacci retracement levels, and RSI and/or stochastics are at overbought or oversold levels, we identify an environment that is highly conducive to range trading.

Of course, the market overview sheet is not foolproof, and just because you have numerous X marks in either the trend group or the range group doesn't mean that a trend will not fade or a breakout will not occur. Yet what this spreadsheet will do is certainly prevent traders from trading blindly and ignoring the broader market conditions. It will provide traders with a launching pad from which to identify the day's trading opportunities.

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