The Dollar Continues to Roll
In last week's article, I mentioned that the sharp move lower in the Euro – U.S. Dollar currency pair (EUR/USD) still had room to run, and that "Euro has a very good chance to break this new support level" (near 1.4950) based on the velocity of the move. You could also add to that the fact that the weekly candle closed near its low, signifying that shorts were unwilling to take profits going into the weekend. Well, here we are one week later, and the EUR/USD currency pair is now nearly 300 pips lower than it was at last week's close. Not only that, but once again the weekly EUR/USD candle closed near its lows, once again indicating that shorts remain reluctant to take profits, and sellers may have still more inventory of Euros to unload (see figure 1).
Figure 1: EUR/USD continues to fall hard on the weekly chart. Source: Saxo Bank
The next major support levels appear to be 1.4500 (psychological) and 1.4350 (old support from late 2007 – early 2008). The velocity of the move shows near panic on the part of sellers, some of whom are trying to protect the huge profits they made buying Euros on the way up. As you can see from the weekly chart in figure 1, many Euro longs may still be holding on to profitable positions despite the vicious pullback of the past two weeks. This just goes to show how long and persistent trends in the Forex market can be.
Question of the Week
Q) Hi Ed, I read your articles every week and I always learn something new, thank you so much! In last week's article, you mentioned that Forex volume is so high that it would be impossible to count all of it, yet in the same article you mentioned that the daily average volume in the Forex market is $3.1 trillion USD per day. Forgive me if I'm missing something, but if the volume is so high that nobody can keep track of it all, where does that $3.1 trillion figure come from?
Ed Ponsi) Thank you for your kind comments and for your question. It's true that Forex volume is so high that accurate volume figures are not available, but every three years, the Bank of International Settlements (BIS) surveys major Forex market participants and then creates a volume estimate based on the information gathered. The most recent BIS survey, completed in 2007, yielded the estimated volume figure that I reported last week as $3.1 trillion (turns out it's actually closer to $3.2 trillion), a figure that is widely quoted and accepted. This figure represents an increase in volume of about 70% from the 2004 survey. According to the BIS, the $3.2 trillion average daily volume is equivalent to:
The survey even breaks down volume figures by geographic location. The United Kingdom continues to dominate the Forex markets, as it is home to many large banks and funds that are prominent players in the world of currencies. These stats only serve to reinforce London's reputation as the world's capital of Forex trading (see figure 2):
Figure 2: Breakdown of daily volume figures by location. Source: BIS Triennial Survey 2007
Finally, the Bank of International Settlements offers a volume breakdown by currency pair. Note that EUR/USD has the greatest volume by far; it's not a coincidence that this currency pair has the tightest spread on nearly every Forex trading platform. Generally speaking, high volume leads to tight spreads in the Forex market (see figure 3).
Figure 3: Breakdown of daily volume figures by currency pair. Source: BIS Triennial Survey 2007
Question of the Week, Part ll
Q) Regarding finding good volume information, you recently wrote:"...If a breakout occurs during a time of day when volume is known to be high, it would be reasonable to assume that the breakout is occurring on high volume; if it occurs during a time of day when volume is known to be low, the opposite would be true." What are those "known" times of day? Opening of markets, etc.?
Ed Ponsi) Thank you for your question. As you mentioned, the opening of markets, in other words morning in any given geographic location, is the time of day when the bulk of trading is done. For example, referring to the image in figure 2, more volume is generated in the U.K. than in any other location. So, it stands to reason that when it is morning in London, volume tends to be high. You could also say the same thing about the U.S., which is second only to the U.K. in Forex trading volume. Since morning in New York coincides with lunchtime in London, it is reasonable to assume that just as things are settling down a bit in the U.K., traders in the U.S. wake up and start trading. Also, most economic indicators are released in the morning, so this creates added volatility and can also attract added attention from traders. So, if a breakout occurs when it is morning in the U.S. and/or the U.K. – anywhere from 3 a.m. to noon New York time - then I would assume that the volume is likely to be high.
On the other hand, what if a breakout occurs at 5 pm U.S. East coast time? Well, that is a pretty quiet time of day in the U.S., as most New York traders are on their way home or having dinner. When it is 5 pm in New York, it is 10 pm in London, so I wouldn't expect too much activity from traders in the U.K. Also, when it is 5 pm in New York, it is only 5 am in Singapore and 6 am in Tokyo, too early for any meaningful activity from these Asian trading capitals. Taking all of this into account, I would assume that a breakout that occurs at 5 pm New York time is occurring on low volume and has a high likelihood of failure.
