Momentum Analysis for Forex Scalpers

03/26/2013 9:00 am EST

Focus: FOREX

The GBP has been one of the market’s weakest currencies recently, and as the trend develops, traders will use momentum analysis to pick which forex pair to trade, writes Walker England of DailyFX.com.

The Great British Pound (GBP) has declined relative to most major currencies through the first trading quarter of 2013. However strong the trend may be, it can be difficult to find a suitable pair to apply a scalping strategy to. So how do we conclude which pair is suitable for scalping? To find out, today we will be looking at an example using the GBP/AUD currency pair.

To maximize the weakness of the pound, today we will be pairing the currency against the Aussie dollar. Taking a look at the daily chart below, we can really put this trend in perspective as it has declined a maximum of 1295 pips for 2013. With such a strong market trend, traders will be particularly inclined to sell the GBP/AUD. Even though the trend is clearly down, there can be swings against the trend, which can be meddlesome to scalpers. To optimize our chances of success with a scalping strategy, we will now move in and block off a 30-minute chart to determine short-term market momentum.

GBP/AUD Daily Trend

chart
(Created using FXCM’s Marketscope 2.0 charts)
Click to Enlarge

GBP/AUD Building Blocks
To find out if this trading momentum is heading in the same direction of our primary daily trend, we will now turn to a 30-minute chart and apply our building blocks analysis to the graph. Momentum traders use this technique to divide the prior trading week into halves. If both building blocks show momentum pointing in the direction of the trend, this can lend itself to future scalping opportunities.

Below, we have divided our previous trading week into segments labeled Block 1 and 2. Block 1 begins on Wednesday the 6th and runs through Sunday, the 10th. Block 1 shows the GBP/AUD declining and creating a new low at 1.4534. Block 2 confirms the weakness of the pair as price breaks out and creates a series of lower lows. Due to price selling off in both blocks, they have been colored red to reference its downward direction. Knowing that short-term momentum is continuing in the direction of the primary trend, short-term traders will now look for opportunities to sell the GBP/AUD.

GBP/AUD Building Blocks

chart
(Created using FXCM’s Marketscope 2.0 charts)
Click to Enlarge

Even though momentum is strong to the downside, current price can be seen advancing and attempting to move against our primary trend. Scalpers looking to take advantage of the longer-term downtrend will look to establish fresh sell positions on a swing back towards lower lows. In the event that prices continue upward and break a higher high, traders should potentially look for a new pair to trade or wait for a new breakout to lower lows.

By Walker England, Trading Instructor, DailyFX.com

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