Trades of the Month March #1

Sometimes you get you make a trade that so clearly demonstrates the power of technical analysis as a trading tool. This long trade of the USD/NOK (Norwegion Krone) was one such trade. The technical price action of the currency pair effectively predicted the eventual interest rate change days before it's announcement. In the weeks prior, the USD/NOK pair had broken out of a tight range, and with someone large gyrations had found every higher support (the most recent major weekly support level is the red dashed line on the chart).

The Sequence of Events:

• 2/26 - 3/1. The pair fails to break through major support and in doing so forms an inverse head an shoulders pattern (a strong sign of bullish reversal.
• 3/5-3/8. The pair sells of strongly but fails to reach the long term support level. It immediately rebounds
• 3/12 -3/13. The pair finds higher support and breaks sharply up. This is where I entered expecting a short term breakout and start of the next leg of the upward trend.
• 3/13 - Then Norwegian central bank announces an interest rate cut of 0.25%, which over time will decrease demand for the Krone, causing the USD$ to strengthen against it in relative terms. The result is an almost immediate rocketing up in price. I used a 2hr bar chart for the sake of context, but the majority of that huge bar's movement took place in about 5 minutes. I exited my positions in stages on the way up and just after the peak.

The increasingly high short term support levels leading up to the central bank decision, clearly show that the smart money (large banks and their trading desks) anticipated the interest rate change. As a result, a portion of this expectation was already built into the price. When this is the case, a currency pair will often move dramatically just after news is announced, but will then retrace much of the move over the following days as the anticipation of the announcement had already been priced in. Note on the chart that over the following days, 100% percent of the sharp upward move was retraced, almost to the pip. Trading immediately following news announcements hasn't been part of my strategy at all, in the future I may experiment with fading news announcements and try to capture some profits on the retracement.