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January 2nd 2014 Daily EUR/USD, GBP/USD Ananysis

Here we are at the beginning of a New Year which has potential to be the big correction year but to be honest I doubt it. As I mentioned in my year end commentary I really don’t think they will let it happen until after President Obama is out of office. However most of the time when things do blow up or correct in my view its not because somebody let it happen like they should have so the correction can be somewhat controlled. Most often there is exactly what happened this time and the people who think they can control something as large as an economy do what they think is best to protect them and their buddies at the top for as long as possible. So just what is it that happens to cause the proverbial domino effect?

Well it starts with just one big bank or large hedge fund looking at their books and seeing they have potential to lose substantial money in the near future. A very good example is the movie called Margin Call. It don’t have to be just like that where the realize their model is flawed and need to exit massive positions. It really only needs to be someone thinking the top is in and its time to protect their profits. This scenario unfolds slower since there will still be those willing to buy but once the wind gets around that one or more of the big boys are protecting their profits and exiting the market the domino effect has much greater potential as others do the same. Of course catching the fools willing to buy at the top caught off guard as always too.

Japan The Model?

Many have said and could easily be correct that Japan will be the catalyst for the big crash. They could be right but the fact that it hasn’t happened yet does show that there are dynamics at play that they didn’t expect. These differences in the dynamic structure of Japans debt can largely be what has kept Japan from imploding. Believe it or not even Ambrose Evans-Pritchard has claimed that the 20 years of QE in Japan has been a wonderful success. Be careful what you wish for buddy.

Having said that I would like to point out that there is a historical example we should be looking at and Ambrose seems to have missed. Thanks to Grant Williams this morning I felt it was important to share since we do have the US and China trying to start a taper and if inflation starts to take off in Japan next year they will too. So what is the example? It comes from the last time the Japanese had a similar situation and started to think things were all good and started their tapering down in the mid 1930s. This from todays release of Things Than Make You Go Hmmmm.

Yes, Japan has a chance of averting a slow collapse … and it may now be able to avoid that fate — in favour of a swift one. Back in the 1930s, the rub came when Takahashi’s policies needed to be reversed once Japan, too, was on a somewhat “even keel.”

While “Takahashinomics” (as the policies would no doubt have been dubbed had the Japanese press of the 1930s possessed
any panache) did engineer a remarkable turnaround in Japan’s fortunes, it featured military spending that increased as a percentage of the total budget every year, from 31% in 1931, at the beginning of his tenure, to 47% in 1936.When Takahashi set about unwinding his mammoth stimulus in 1936, however, things got a bit… sticky, as Myung Soo Cha notes in a paper entitled “Did Takahashi Korekiyo Rescue Japan from the Great Depression?”: … when the worst seemed over, Takahashi began to be concerned about inflation and tried to revert to stabilization. Reducing expenditures, he attempted to put an end to debt financing, while at the same time urging the Bank of Japan to absorb money it had supplied in the course of debt monetization. Ahhhh … the first Taper. “What happened next?” I hear you ask. Well, I’ll tell you:
(Wikipedia): Despite considerable success, his fiscal policies involving reduction of military expenditures created many enemies within the military, and he was among those assassinated by rebelling military officers in the February 26 Incident of 1936.
Yes maybe a little extreme but not at all unthinkable when people at the top are starting to lose their livelihood because the guy printing and making them rich tries to do the right thing for the economy an pulls back the punch bowl. Ok on to the charts for today.
The best way to describe the EUR/USD is a third push chop. Since we are at the beginning of the year and the first decent trading day its best to keep an open mind on direction. The price action on the 31st seems to show more confusion than anything except a small amount downside conviction with the Asian lows holding as resistance later in the day along with the gap down this morning. However considering the low volume day and end of the year its best to ignore all that and start fresh. The best level I see for the short today is 1.3818 but if I see the fake out of break out traders and stop run above 1.3792 I will consider the short from there but will want some vey nice trapping patterns. Otherwise I will consider the long from the 1.3731 area where we have some significant lows and the hourly 200 EMA for good confluence. I would also like to see them play the breakout traders first to the Asian highs but its not a necessity with the right price action.
EU 1hr chart
The GBP/USD looks to be heading to the upside with a 100+ push on December 31st but having some caution here is warranted today also. It sure seems that the Asian session has some conviction above the December highs but this could also be a fake out before a drop and a false push to the upside. The best level I see for the long is 1.6547 but since we already have a sizable Asian range the 1.6557 is valid as the Asian lows and lows of the gap candle. If I see the hourly conviction above the highs during the London live session today I will consider the long from 1.6576 with the right price action. The only way I will consider the short is the clean stop run to the highs and would prefer more than one trapping pattern in an hourly stop run candle or right after.
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GU 1hr chart

Forex News Today

The Economic Calendar starts off with Italian, French, German and Euro Zone Manufacturing PMI data. Most are expected to be flat and with the holiday season just over I expect a surprise to the upside if anything. There is the slight chance of the disappointment and we will get a larger reaction as I would expect a surprise upward to be more priced in.

Just 30 minutes later the UK Manufacturing PMI is released. Expectations are for a slight drop but still being well above the 50 level it will take a big disappointment to create a large reaction. Otherwise if it does manage to beat expectations the GBP will likely keep going up and this first push be true.

The US has Thursday Unemployment Claims. Thy expect a small drop but as usual a big surprise in either direction will cause a temporary stir but it will have to be very large to create a sustained move. I noticed they have made it a medium impact event now on our calendar but I still consider it high impact depending on the miss. Later is ISM Manufacturing PMI data  expecting a small drop but well above 50 also. The way I see this is it will most likely be a non event barring a rather large miss also.

Happy Trading


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1 Comment

  1. Merlin M
    Merlin M January 02, 07:47

    Appreciate for the above update, Chad!

    Reply to this comment

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