Most Effective key Notes for emerging trading chart patterns !

To reinforce a shift in mind-set from an exclusive technical analysis view to a fundamental analysis perspective, another way to understand why and how fundamental forces impact market prices is to visualize the market (set of all prices) as a swarm that shifts shape and direction when there is a catalyst/stimulus that probes the boundaries of the swarm. 

A single ant or bee is not very smart, but their colony’s behavior emerges as having a nonrandom shape. Watch a school of fish, a flock of birds, or a swarm of bees. Watch how they instantly move and shift shape and form a collective direction. It looks organized. It looks like the direction and forward movement is designed and intentional, but there is no organizer. Similarly, our markets swarm and react to many different variables. The price direction can shift quickly, but there is a discernable pattern. 

Even if the trader does not know what is moving the markets, the shape of the price patterns reveal that something has happened. By looking at the market as being like a swarm the trader can apply strategies and analytics that detect trades that ride that swarm! Based on this underlying feature of swarm behavior, swarm intelligence programs are now emerging that model markets based on equations that model swarm behavior.A recent example of a “currency” that can be best understood as reflecting swarm behavior is bitcoin. 

Crypto currency buyers are buying because others are buying and vice versa for sellers. In a similar way, the spread of the influenza virus into a pandemic reflects the same crowd behavior pattern where contagion works in waves. Contagion of a virus assumes a parabolic path until it reaches a peak. These contagion patterns are very similar to market patterns in response to a shock. The take-away for the trader is that the price is not two dimensional, but very much a crowd/swarm behavioral phenomenon. This is a critical knowledge.

Filtering the Signal from the Noise

While the potential number of fundamental variables is enormous, the trader is challenged to filter the signal from the noise. The signal, from a fundamental perspective, is a break in expectations. This brings us to the role of data releases. Some data releases are more important than others. Their importance is directly reflecting the extent that they impact the balance of expectations regarding the future of monetary and interest rate policies. 

A Trump tweet is usually less impactful on a currency price, compared to a speech by a central bank chairperson. In looking at a data release, the trader should simply ask whether a surprise in the release would affect expectations regarding central bank actions. One need not be glued to every data release. But it is appropriate for the trader to closely watch central bank decisions, particularly those of the major central banks, such as the Federal Reserve Bank, Bank of England, and the European Central Bank. 

Since the recent period of quantitative easing is essentially over, the markets are prone to surprise at a central bank’s decision. When the Bank of England increased rates for the first time since Brexit, on Novmber 2, 2017, the pound moved over 230 pips' The uncertainty in the coming years will be whether central banks will continue to tighten, or pause as the recovery from the great 2008 collapse becomes complete.

Measuring Risk-Off and Risk-On Conditions

In addition to scanning the economic calendar, the trader should take a quick overview of market conditions. This is also known as “Regime Conditions,” which is defined by trader Jason Roney as “the total market environment encapsulating all pertinent fundamental, technical, and sentiment data for a particular asset class” Recognizing that for the human trader measuring the total market environment is virtually impossible due to its irreducible complexity, the forex trader can achieve a reliable measure of market conditions by focusing on whether the markets are risk-on or risk-off.Envision a conversation between two traders named Santa and Banta. 

Underlying asset	Direction in risk-on markets	Direction in risk-off markets
US dollar	Strengthens	Weakens
VIX	Falling	Rising
Yen/dollar	Strengthens	Weakens
Gold	Weakens	Strengthens
Bond yields	Falling	Rising
Crude oil	Strengthens	Weakens

Santa, says “How are you trading the US dollar today?” Banta replies: “It looks like the markets are risk-on and therefore I am looking for buying signals.” In a real sense, all directional decisions on trading currencies imply a conclusion on whether the markets are risk-on or risk-off.After all is said and done, equity markets provide evidence of optimism or pessimism on the economic prospects facing a country. Currencies simply are the medium that is converted into shares, bonds, commodities, and other assets. When markets are risk-on, there is little fear of economic or financial crises. When markets are risk-off, fear of economic difficulties become the focus of attention. Table shows the basic relationship of markets and risk-on/risk-off conditions.

Summary of Risk-On and Risk-Off Conditions : US dollar

The US dollar is an important tool for detecting whether the overall market has risk-on or risk-off conditions. The US dollar, however, is a misnomer in the context of forex trading. The dollar in one’s wallet is not the dollar that is traded in a currency pair. From the perspective of a trader, there is no US dollar standing alone without a reference to other currencies. There are, however, three types of US dollar indexes. They are USDX, DXY, and Trade Weighted Indexes. Forex traders use mostly the USDX.

Trade weighted indexes also present evidence of currency strength as they reflect the trading relationship of the US with other countries. The trade weighted index is used by central banks to assess whether a currency is getting too strong or too weak in the context of global trade. For the spot forex trader, the USDX is the most commonly used index to monitor and trade.The USDX provides an easy gauge to track whether the markets are experiencing positive or negative emotions. If the US dollar strengthens, then money flows to US assets. 

If the US dollar weakens, money goes to the sidelines until the fear is over. When focusing on the Eurozone, or Nikkei, or other stock markets associated with a currency, a similar relationship between the equity market and the currency of that country occurs. When a currency weakens, it means that the exports of that country will be more competitive. Export sectors will tend to increase. 

If a currency strengthens, it reduces the profitability of that export sector and the equities associated with that sector decline in value. With regard to the USDX, at first glance, it declined in price after the Federal Reserve raised the rates in December 2017, even though rates and expectation of rates rose. Conventional wisdom would expect the currency to strength alongside rate increases. But this kind of thinking is only partially correct. 

The price also has to reflect market emotions about the world economy and geopolitical crises. The result has been a weaker dollar than expected during the rise in rates from 2017 and into 2018. The trader should keep in mind that the US Dollar moves in reaction to multiple forces and it is not two-dimensional in nature.

VIX

Here is the Chicago Board Option Exchange’s (CBOE) description of the VIX : The CBOE Volatility Index® (VIX® Index) is considered by many to be the world’s premier barometer of equity market volatility. The VIX Index is based on real-time prices of options on the S&P 500® Index (SPX) and is designed to reflect investors’ consensus view of future (30-day) expected stock market volatility.

The VIX is known as the “fear index.”

When it moves toward a low point near support it indicates that the markets are calm and in a buying mode. But when it moves higher toward probing its recent highs and breaking through them, the markets are facing uncertainty and assets are being liquidated into cash. A good example is the week of February 5 and 9, 2018 when the Dow, on Monday February 5, had a range of 1597 points, with a high of 25,520 and a low of 23,923.Only to be followed on February 9 with the Dow Jones Industrial Index falling from a high of 24, 382 to a low of 23,360 (1022 points). During that week the VIX surged in volatility by 25%. Fear took over

The Yen Strengthening

In risk-off conditions, where the market desires to seek a safe haven, the Yen gets stronger. This phenomenon is not thoroughly understood, but it is a reliable pattern when there is increasing fear in the market. The fear could be due to geopolitical crises or a major disaster, such as the Fukishma earthquake of March 11, 2011. When the Earthquake occurred the reaction of fear caused the Yen to strengthen against the US dollar by the enormous amount of 611 pips. It strengthened as market expectations were initially such that the Yen would be repatriated back into the country. 

The Yen however, pulled back after these initial fears abated. The Yen also reacted to fears during the US elections as shown in Chart. The chart below confirms how the Yen initially strengthened during US election night in the initial fear that Trump would win. This is classic crowd behavior. By 1:00 am the next morning, the fear was over when Trump was the apparent winner. The Yen acted on US election night as a gauge of sentiment.

Gold 

Gold is historically an asset class where it rises in price when there is fear in the market in response to a geopolitical crisis. Sudden event catalysts for gold prices rising generate parabolic moves that can be seen as temporary in nature. Gold usually works in the opposite direction to the US dollar. 

Not surprisingly, coinciding with the financial crisis, gold had one of its biggest upward moves in history on Sept 16, 2008. It had an opening price of 779.75 and closed at 863.85 . This is an increase of over 10% in one day. Such a move was a clear omen of the magnitude of the impending and long duration of the financial crises.