Why identifying handles is crucial when you trade FX and why you then have to handle the concept.
FX traders will often see reference to the concept of “handles” when they read market commentaries, or read suggestions regarding FX trading strategies. As nomenclature it’s not designed to sound impressive, or to confuse the uninitiated, the word is simply a replacement for the words “round numbers”.
Key round numbers or handles are always carefully monitored by FX traders and market analysts. Such inflection points are often key areas where large institutions such as banks and hedge funds, will make their critical decisions, with regards to the positions they hold. Mainly on behalf of their own huge funds/clients in the funds, or for large corporate clients.
Such large institutions do not primarily trade in the same manner, by using the same trading methods, as retail FX traders. Large institutions who are trading huge size, will not wait for the: MACD, RSI, DMI, PASR etc to perhaps align on a fifteen minute time frame, to then trigger their market orders. There may be proprietary FX trading units in such banks, but even there they’re highly unlikely to use the vast majority of the technical indicator trading strategies, which have become popular in the retail trading industry, to trade the FX markets.
It’s worth noting what references are made, in the specialist financial media we subscribe to, regarding technical indicators. Over recent days, on or around February 5th-6th 2018, reference has been made in the mainstream financial press to cable (GBP/USD), trading close to the 200 DMA and near the key round number (handle) of 1.300. When such phenomena collide, analysts and market commentators, quoted in publications such as Reuters and Bloomberg, will often make reference to it.
The reason journalists mention the phenomena, is due to economists and traders at large banks and hedge funds, indirectly feeding the journalists clues, with regards to their decision making. They might reference; the RSI rising or falling above a certain level, a major currency pair crossing a 200 daily moving moving in a bearish or bullish move, or an FX pair trading at a key round number, or handle. The implication is that these key levels will cause a reaction and critical decisions will then have to be made.
It’s essential that retail FX traders pay close attention to any mentions of these factors in the financial press, the analysts and traders who are quoted are the individuals and firms who move the FX markets. They set the tone, they set the agenda, after they react to: fundamental economic calendar events, breaking political news and occasionally technical indications. Retail traders account for only circa 8% of trading, they cannot move the FX market.
It’s worth walking through a recent example to illustrate how retail FX traders can observe handles on their charts and how price reaching these points, can potentially encourage them to make more judicious and informed trading decisions.
On Tuesday February 5th, GPB/USD, also referred to as “cable”, fell through the critical handle of 1.3000. Price had threatened to breach the level for several days. From a fundamental analysis viewpoint, the recent lacklustre economic data releases relating to the U.K. had failed to generate bullish interest in the U.K. pound. Added to the lack of positive data, the ongoing and protracted subject of Brexit, has caused confidence in the U.K. economy to deteriorate, therefore support for sterling began to fade.
Not only did the value of GPB/USD fall through this critical round number/handle level, the level also corresponded with price reaching the 200 DMA to the downside. The 200 DMA is the 200 day simple moving average, when placed onto the daily time frame. Therefore, GPB/USD had entered an unusual zone; not only reaching and breaching a critical round number/handle to the downside, but also corresponding with the highly significant 200 DMA, which many traders at hedge funds and large banks will closely monitor.
These areas will also be zones were orders are clustered; buy, sell and take profit limit orders, are often sited at such points of confluence. Therefore, once such levels are reached, market activity can increase, likewise the liquidity for the currency and corresponding currency pairs increases, as traders managing huge size, make their decisions. What can happen thereafter, is for price to gravitate close to the handle for some time, price may oscillate in a tight range for several days, whilst a new direction is determined. Price can also trade in this narrow range for weeks, or months.
What is for sure, is that such a zone piques the interest of all market participants and in relation to GBP/USD, it’s likely that a major shift away from 1.3000 will come as a consequence of a final resolution, or further breakthrough in relation to Brexit, rather than any other technical indication being exposed on a higher time frame.
However, once again, the round number being reached, added to the 200 DMA being breached, whilst the U.K. Brexit situation drags on, is evidence of how and why FX traders should always consider both fundamental and technical analysis, when looking to make their trading decisions.
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