The US dollar looks ready to rally in the forex market

By far the most heavily traded currency is the US dollar. And the euro is the currency most traded against it. In fact, trading against the dollar is by far the biggest market in the world.

Many traders restrict their activities strictly to forex – and for good reason.

First, the markets are open virtually 24 hours a day, thereby eliminating surprise gaps in the charts which can occur when markets have re-opened after the mandated close-down in response to some news item hitting the markets during this pause.

If the opening quote is beyond your protective stop, your loss will be greater than you had planned. This is not good.

Also, the sheer volume of trading means that market manipulation – other than by central banks – becomes too difficult and markets are more or less free.

That means forex markets are among the best for analysis by technical means, including my methods.

I like trading forex and I’m sure you have at least looked into these markets. Many superb trading opportunities lie within.

The value of the dollar is a critical factor behind many related markets and that is why all traders should monitor its progress.

The dollar has been in a slight uptrend in recent months, but is currently testing a long-term downtrend line. Breaking below this line would be of major significance and perhaps lead to further losses.

Of course, many eyes are upon the US Federal Reserve, which has hinted that it may begin ‘tapering’ its massive dollar-creation programme as early as next month.

The impact on the dollar would be great, of course, whichever decision is made.

But this has set up some interesting situations on the charts of some currencies – let’s look at two of them.

EUR/USD is at a critical point

Here is the daily chart showing the long-term downtrend line drawn off the June 2011 high (red arrow).

EUR/USD spread betting chart

Note that I did not use the previous higher high. That is because with the second high, I can capture many more touch points with my line.

Also, I have a lower tramline which captures several touch points and sports a prior pivot point (PPP). Despite the slight overshoots, this is a reliable tramline. It validates my upper one.

The point to note is that since June 2011, the market has been trading in the channel between the tramlines. There has been no trading outside of this channel, which has been going now for over two years – a very long time in the markets! The lines represent solid lines of support (lower) and resistance (upper).

And currently, the market is testing the upper line again. Remember, the upper line is a line of resistance.

If the market punches above this line, it would be breaking over two years of reliability.

So the market is at a critical point.

What can the hourly chart tell us?

EUR/USD spread betting chart

I have my tramline trio with the upper line taking in the three major highs and having a nice PPP (in May).

My centre tramline has only one touch point, but a good PPP, and my lowest tramline passes close to the major low on 9 July.

These are really reliable tramlines.

But note that the upper tramline crosses the major down-sloping tramline I have on the daily chart.

Where they cross, I call that a ‘hat’ – and it represents heavy resistance. First, from the resistance of the down-sloping tramline (daily chart), and then from the upper tramline on the hourly.

When the market rallied into the hat, it was reversed by the powerful resistance inside the hat.

That then is a great place to look for a short trade, expecting the resistance to hold. These are some of the best trading opportunities I know.

The big test comes if the market declines to the centre tramline. If it breaks below that, it would help confirm the bearish case. And if it went on to break below the lowest tramline, that would be even better.

But the hat resistance may not hold – that is always possible. The market may decide to overcome that resistance. And that would change the bearish scenario entirely. That is why stop-loss orders were invented, of course.

But so far, the odds favour a turn at the hat. Now, onto the yen.

A great trade in USD/JPY

This has been a fabulous market since last autumn when the yen started depreciating vigorously.

USD/JPY spread betting chart

Here is the daily chart showing a solid trendline which has a very nice PPP (red arrow)

Remember, I always look for a PPP when deciding where to start looking for a reliable trendline (or tramline).

The market is currently testing this line.

Now here is the hourly:

USD/JPY spread betting chart

I have a superb upper tramline taking all of the major highs, and my lower tramline has solid PPPs, but only one touch point at last week’s low.

But observe the crossing of the lower hourly tramline with the long-term trendline – it has formed an inverted hat.

Just as in the euro case, this is a strong barrier to further progress, but this time, it represents major support – and so an excellent place to look for a long trade with a protective stop just below the hat for a low-risk trade.

What more can you ask of a trading system?

I know which way to trade (long or short), I have a logical entry area, and I have a logical place to enter a protective stop in case I am wrong.

I also have a major price target – the upper tramline – if the market goes my way.

It is a complete system in a nutshell – I am keeping it simple, which to my mind, is the key to trading success.