Where do we go from here? Friday’s extraordinary U.S. Non-Farm Payroll Numbers will remain the markets’ focus next week; traders will be looking for further confirmation that the long awaited jobs recovery has began in earnest.

The first test will be March ISM non-manufacturing, due to be released on Monday at 10am ET; if the headline number is better than expected and the jobs component is better than forecast, then EURUSD will drop another 0.01; if ISM disappoints EURUSD will likely not respond much. That is because Fridays’ numbers were awesome and it will take more than one disappointing economic number to change market opinion.

Prior to ISM there are two Eurozone numbers – PMI Services and Retail Sales; if these numbers are below forecast EURUSD will likely loose ground; if they’re good don’t expect much to the upside; market will wait and see ISM before buying EURUSD.

By Monday at 9:50am ET a revised opinion of EURUSD is formulated; incorporating the Eurozone numbers and the price action following release. For example, if the Euroland numbers were good and EURUSD could not sustain a rally that indicates short-term EURUSD weakness; or if the numbers were bad and EURUSD declines that also confirms weakness. On the other hand, if EURUSD sustained a rally on good numbers or failed to decline on bad numbers then a short-term EURUSD strength would be apparent going into the ISM report.

Based upon EURUSD price action after Eurozone numbers release and also absolute price change from Friday’s close to now; going into the ISM number there are two possible scenarios:

• EURUSD is relatively weak
• EURUSD is relatively strong

If EURUSD is relatively weak and the ISM numbers (headline and jobs portion) are better than forecast then expect a good-sized EURUSD fall of 0.005 or more. If the ISM numbers are worse than forecast don’t expect much of a sustained upward move.

If EURUSD is relatively strong and the ISM numbers are better than forecast don’t expect a sustained downward move. If the ISM numbers are worse than forecast expect a strong, upside sustained move of 0.005 or more.

Here is how I determine the probable extent of an intra-day EURUSD price move. First of all the EURUSD rarely moves more than 0.005 between 3pm ET and 1am ET. There is no news during that time and therefore nothing significant happens. So if you’re trading the EURUSD during the Australia/Asian time period, you’re trading the wrong currency pair.

Between 1am ET and 3am ET there is usually a 0.0050 or better range in the EURUSD; the European markets open and there is real, natural corporate and other type business to be done. In addition, oftentimes the Asian banks with big orders wait for Europe because the liquidity becomes much greater. But don’t look for 100 point sustained moves during the European morning; they are few and far between.

The real action starts when the “New York” opens; most days there is at least a 100 point range between 7am ET and 11am ET; makes sense, all the economic data is released during this time. 11am ET to 3pm ET runs hot and cold, depending upon how the market is “set up”.

In Summary, catching a 0.01 move during the New York morning is entirely possible, catching a 0.01 move during European morning is a long shot, and catching a 0.01 move during Australia/Asia is extremely rare.


A word on scalping – don’t do it. Consider the following; assume you trade on a platform that makes a four point EURUSD spread and executes your stop losses at your rate. Assume further EURUSD is trading 1.2100-04 and you buy at 1.2104; EURUSD has to move 14 points to 1.2114-18 for you to sell at a 10 point profit; EURUSD only has to move 6 points to 1.2094-98 to stop you out. Think about that – you have a 6/14 or about a 1 in 3 change of winning!

A word on risk reward - it’s deceiving. For example, in the above example the typical response is “but I would leave my stop 10 points away and profit 30 points away”. Think about it; did you really improve your chance of success? Slightly; EURUSD has to move 34 points for you to win; if it moves 6 points against you, you lose. So 6/34 or 5.7 to 1 chance of winning and your essentially getting 3 to 1 odds.

Bottom line is if your broker guarantees stops and spreads the EURUSD price 4 points wide, don’t scalp trade.

There are circumstances when a 10-point stop can work to your advantage; this will be discussed at another time.


Note:

Jimmy Young is a seasoned institutional forex trader having 20 years of experience with different banks. He headed up bank FX dealing rooms. He is FX profitability consultant to major European private bank. He manages funds and also trades personal money. Between 1981 and 2004 he was a foreign exchange trader at following banks: Societe Generale, Julius Baer, Fuji Bank, Indosuez, Erste, Hill Samuel, Manufactures  Hanover, Paribas, European American. www.EurUsdTrader.com