Article Summary: Last week’s FOMC event has affected the direction of the EURUSD. Learn to incorporate momentum analysis to determine if you should trade with the new trend.
Prior to last week’s FOMC event, the EURUSD was seen making steady gains toward higher highs. However, just before the news event the pair began to consolidate increasing the likely hood of a price breakout. Looking at the 4 Hour graph below, we can see that the EURUSD did indeed break lower, through levels of support, after the news. This move has left many Forex traders wondering which direction they should be trading the pair.
To find the answer, today we will focus on how to identify new short term momentum on the EURUSD.
Learn Forex –EURUSD Breakout
(Created using FXCM’s Marketscope 2.0 charts)
After a breakout, short term Forex scalpers want to ensure that price direction has indeed picked a new singular direction. This is a good strategy, to avoid trading into a false breakout while fighting market momentum. One way to identify new short term momentum is to divide the previous week’s trading into two distinct pricing blocks. The key to this analysis is to ensure that price is moving in one direction to identify the development of a new short term trend before entering into the market.
Below we can see the current EURUSD 30min chart divided into two pricing blocks. Block One is formed from Wednesday the 19th through Sunday the 23rd. During this period we can see the continued decline of the EURUSD to new lows at 1.3077. This decline is followed up by Block 2 which is also seen making new lows through 1.3057. In a strong downtrend, both blocks should be heading lower. In the case of the EURUSD this is true, indicating that Forex scalpers will now be looking for opportunities to sell the EURUSD.
Learn Forex –EURUSD Trading Blocks
(Created using FXCM’s Marketscope 2.0 charts)
It should be noted that price has already exceeded the low established by our second pricing block. This again confirms the strength of our new short term trend as price continues to decline. However in the event that price changes direction and breaks to a new high, this could be another indication of another trend shift in the EURUSD. In the event of this scenario, short term traders should seek better trading opportunities.
—Written by Walker England, Trading Instructor
To contact Walker, email wengland@fxcm.com. Follow me on Twitter @WEnglandFX.
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Determining the Direction of the EURUSD
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