Rethinking How to Use Risk/Reward – PART 1

The Risk/Reward Calculation
Divide the amount of money you stand to lose if the trade is unsuccessful (risk) by the amount of money you stand to win if the trade is successful (reward).

For example, let’s say a trader is thinking about buying the GBPUSD pair. Based upon where he wants to place his stop loss he stands to lose $50 if the trade doesn’t work out. That is the potential risk. And let’s say based upon where he wants to place his take profit he stands to win $150 if the trade does work out. That is the potential reward.
The trader is willing to risk $50 for a possible $150 reward; that is a 50:150 or 1:3 risk/reward ratio.
Here are some other examples of risk/ reward ratios:
- If you risk $100 for a possible $200 reward; that is a 100:200 or 1:2 risk reward
- If you risk $200 for a possible $800 reward; that is a 200:800 or 1:4 risk reward

What is an Acceptable Risk/Reward?
Most traders consider 1:2 (risking 1 to make 2) as the minimum risk/reward ratio. The preference is 1:3 or higher. The thinking is if you are going to take the risk, the amount of money you stand to gain should be substantial. On the surface, losing small and winning big sounds like a solid strategy. Traders are also quick to point out that you could win less than half your trades and still make a good profit using 1:3 or higher risk/reward ratios.

The Shortcoming of Risk/Reward
The risk/reward does not address the probability of the trade being successful. If the risk/reward ratio is 1:3 it means the price has to travel three times as far for the trade to be successful.
So the fact that the profit is three times as great as the loss is to make up for the fact it’s three times less likely to happen.  And the loss is only a third of the profit because it is three times more likely to happen.
For example, let’s assume the trader buying the GBPUSD pair is trading 1 mini-lot and is risking $50 (50 points) to try and make $150 profit (150 points). That is a 1:3 risk reward. This is how it would look on the chart at the time the trade was entered into:

GBPUSD Daily Chart August 7, 2014

How to Properly Use Risk/Reward
In the above GBPUSD example the risk was 50 points ($50) and the profit target was 150 points ($150). The probability is you will win one out of four and that amounts to a breakeven result:
- 1 win of $150
- 3 loses of $50 = loss of $150
- That’s breakeven
- No advantage there
The advantage comes when you think (based upon your analysis and experience) that a trade with a 1:3 risk reward has better than a 1 in 3 chance of success. When that is the case you are getting a better payoff than you think you should get. And that represents a speculative edge.
For example, if you thought the GBPUSD buy trade had a 1 in 2 chance of increasing 150 points (profit target) before decreasing 50 points (stop loss); you would have a speculative edge because if you win the trade you will be paid off at the 1 in 3 chances rate ( $150 profit for a $50 risk).
That in essence is at the heart of all trading; an actionable opinion of payoff versus probability. 

Rethinking How to Use Risk/Reward – PART 2

Risk/Reward Moves Inversely to Favorable Price Action

Here is an example. Let’s say you buy GBPUSD at 1.6600; you place a take profit order at 1.6700 and a stop loss order at 1.6500. Your risk is 100 points and your possible profit is 100 points. The risk/reward is 100:100, which is a 1:1 risk reward ratio.

Now let’s say the trade moves in your favor by 80 points so GBPUSD is now at 1.6680. Let’s recalculate the risk reward; the risk is 180 (1.6680-1.6500) and the reward is 20 (1.6700 -1.6680). The risk/reward is 180:20, which is a 9:1 risk/reward ratio. You are now risking 9 to make 1.

So why is this Important?
Because it challenges the concept of letting your profits run. If I were to ask 10 people if they wanted to let their profits run(try for that last 20 points) or close the trade and take the 80 points profit; 9 out of 10, if not 10 out of 10, would say take the 80 points. The point is this; letting your profits run is not worth the risk at some point.

How Does Risk/Reward Move in Relation to Unfavorable Price Action?
Here is an example. Let’s say you buy GBPUSD at 1.6600; you place a take profit order at 1.6700 and a stop loss order at 1.6500. Your risk is 100 points and your possible profit is 100 points. The risk/reward is 100:100, which is a 1:1 risk reward ratio.

Now let’s say the trade moves against you by 80 points so GBPUSD is now at 1.6520. Let’s recalculate the risk reward; the risk is 20 (1.6520-1.6500) and the reward is 180 (1.6700 -1.6520). The risk reward is 20:180, which is a 1:9 risk/reward ratio. You are now risking 1 to make 9.

So why is this Important?
Because it challenges the concept of cutting your losses. If I were to ask 10 people if they wanted to cut their losses (not risk that last 20 points) or keep the trade open and possibly make back the 80 point loss plus an additional 100 points profit (180 point turnaround); 9 out of 10, if not 10 out of 10, would say keep the trade open and risk the last 20 points. The point is this; cutting your losses to save a small part of your risk (in this case saving the last 20 points) is not worth the elimination of any chance to recover and profit from the trade at some point.

So what’s the solution?
A trailing stop loss that keeps the risk reward close to what it was when the trade was entered is one possibility. Another possibility is multiple lots.
Multiple Lots – Lock in Profits and Reduce Risk
This trade management strategy starts with a 1:1 risk/reward ratio. From there a relatively small favorable price action reduces the risk by 83% and dramatically improves the risk/reward ratio. Another relatively small favorable price action eliminates all risk and locks in a guaranteed profit.
Here is an example:
1. Buy 3 mini lots (30,000) of GBPUSD at 1.6600
a. Stop loss is $120
- Sell 3 mini lots if the pair goes down 40 points (1.6560); risk is 3X40=$120
b. Take profit is $120
- Sell 1 lot if pair goes up 20 points (1.6620); profit is 1X20=$20
- Sell 1 lot if pair goes up 40 points (1.6640); profit is 1X40=$40
- Sell 1 lot if pair goes up 60 points (1.6660); profit is 1X60=$60
- Risk/reward is $120:$120, or 1:1 risk reward
 2. The first action is either:
   a. GBPUSD goes down 40 points and the stop loss is triggered
- Sell 3 lots 40X3=$120 loss
- Bottom line you lose $120
   b. GBPUSD goes up 20 points and the first take profit is triggered and the stop loss is raised by 20 points
- Sell 1 lot 20X1=$20 profit
- Remaining position is long 2 lots
- Move stop loss up by 20 points (to 1.6580 from 1.6560) on the two remaining lots 
3. Let’s assume the GBPUSD pair increased 20 points to 1.6620, and that triggered first action b; now let’s recalculate risk/reward:

- Long 2 lots we bought initially at 1.6600
i) The stop loss is now 1.6580
 ii) Maximum risk on the two remaining lots is 20X2=$40
 iii) The other lot was closed at a profit of $20 (1X20)

Therefore after first action b; the maximum loss is $40 on the two remaining lots, which would be partially offset by the $20 profit on the lot already closed. Which means a loss of $20 is now the worst case (the risk)

The potential reward remains the same – $120:
- Sold 1 lot after 20 points (1.6620); profit is 1X20=$20
- Sell 1 lot if pair goes up 40 points (1.6640); profit is 1X40=$40
- Sell 1 lot if pair goes up 60 points (1.6660); profit is 1X60=$60

The risk/reward is $20:$120 or 1:6 risk/reward ratio. The risk was reduced by 83%, from $120 to $20. You’re now risking $20 to make $120, you’re risking 1 to make 6.
4. The second action is either
a. GBPUSD goes down 40 points to 1.6580 and the stop loss is triggered
- Sell 2 lots 20X2=$40 loss
- Partially offset by the $20 profit on the first lot
- Bottom line you lose $20
b. GBPUSD goes up 20 points to 1.6640  and the second take profit is triggered and the stop loss is raised by 20 points
- Sell 1 lot 40X1=$40 profit
- Sold 1 lot earlier 20X1 =$20 profit
- Remaining position is long 1 lot
- Move stop loss up by 20 points (to 1.6600 from 1.6580) on the one remaining lot
5. Let’s assume the GBPUSD pair increased 20 points to 1.6640 and that triggered second action b; now let’s recalculate risk/reward:

- Long 1 lot we bought initially at 1.6600
i) The stop loss is now 1.6600
ii) Maximum risk on the one remaining lot is 0X1=$0
iii) The first lot was closed at a profit of $20 (1X20)
iv) The second lot was closed at a profit of $40 (1X40)

Therefore after second action b; the worst case (the risk) is a breakeven on the third lot and a $60 profit on the first two lots

The potential reward remains the same – $120:
- Sold 1 lot after 20 points (1.6620); profit is 1X20=$20
- Sold 1 lot after 40 points (1.6640); profit is 1X40=$40
- Sell 1 lot if pair goes up 60 points (1.6660); profit is 1X60=$60

The risk/reward is now off the charts so to speak. Worst case make $60 (if stopped out of 3^rd lot at 1.6600, which is breakeven). Best case make $120 (if 1.6660 take profit is reached on the 3^rd lot).

Summary Diagram

When it’s best to use Multiple Lots
Works best with momentum type trades. That is because the price just needs to keep doing what it has been doing most recently to reach that first action and reduce the risk by 83% and improve the risk/reward ratio from 1:1 to 1:6.
Another thing I like about multiple lots is the fact a positive action occurs after 20 points and a negative action happens after 40 points. All other things being equal, it’s twice as likely to get a positive action; because price only needs to cover half the distance (20 versus 40).
There is no requirement that you use the 20, 40, 60; it’s just what we used here as an example. What is key is to use the same proportions (e.g. 15, 30, 45; or 25, 50, 75).

Gold: Physical Demand, Investment or Protection?

When you think of Gold the first thought that comes to mind is Jewelry, then as an investment and as a means of safeguarding against economic or geo-political uncertainty.

How do you distinguish what takes precedence and how much weight to give each? This is one of the most commonly asked questions by Gold traders and people looking to get into trading Gold. The key is to understand the make-up of the Gold industry and what are the main components and how much weight each sector has.

Therefore, when looking at Gold as a physical asset used predominantly for Jewelry, you need to know that from all the Gold traded in the World, around fifty percent goes to Jewelry usage. As a result the weight we should give to this sector is substantial, and in turn any fluctuations in this sectors demand will have a significant impact on Gold prices.

So, after establishing that Gold Jewelry accounts for fifty percent, you then need to know who the main purchasers are, as it is their demand that will have the main impact on prices. Thus, in the jewelry sector China and India account for over fifty percent of all jewelry purchases a year, and subsequently are the main countries that determine price direction of Gold, based on their domestic demand.

As a result we have established that jewelry demand is a main component of the Gold market, and as traders we need to know that any potential pick-up or slowdown in demand from the main importing countries may have an impact on prices. However, one thing we need to be aware of is that the impact on prices from any change in demand will have a more medium to long-term impact on Gold prices.

The next major component in the Gold market is Investment. This has traditionally been a way in which society had used as a means in investing their money for a return in the future, and one that would be stable and immune from outside factors. This characteristic of Gold has made its appeal universal and has been around for many generations.

This universal appeal has made the investment part of Gold a major factor and one that can influence prices, even though it is not as big a component as Jewelry. The main factor of investing in Gold is that with the vast scope and reach to traders and investors around the World the impact can sometimes be more severe than the physical sector, and in turn can result in major price action in Gold. This was seen in 2011, when prices went up above $1900.

The main caveat in Gold investment is that the appeal is really there when other forms of investment are not appealing. Subsequently in times of economic uncertainty, such as the Sub-Prime Crisis and ensuing Global Recession the appeal for Gold was strong, as there was an uncertainty as to what would happen to the Worlds economies.

However, when we see a clearer economic landscape and there is confidence among investors they are more likely to invest in higher risk assets, such as Stocks and it is this factor that is the main factor in the amount of investment in Gold as an investment tool. As traders being aware of this characteristic and the current climate economically this will give you the gauge to be able to assess whether it is a period of time when Gold investment has an appeal or otherwise, and by going through this process you can understand what direction the Gold market should be in and by how much.

After establishing that physical demand and Investment are major components in the Gold market, the other major factor is the Safe-Haven appeal. This part of Gold is one of the most influential price and direction indicators for Gold, due to its universal appeal and necessity.

This means that when we have a situation, which warrants a form of protection, from a war, natural disaster, major economic event and other globally impacting events.  In these circumstances Gold is seen as the first port of call and the main market all investors, ranging from individuals, institutions and countries invest in to.
This universal appeal makes the impact on Gold more concentrated and has the impact of overriding the other main components in the Gold market, ranging from physical demand to investment.

Therefore, when we see major global events such as the tensions in Ukraine, and the Middle Eastern tension in 2014 we see the impact on Gold prices and directions to be very large.

However, the main caveat in this type of Gold trading is that the event must have a global implication and impact, and generally is not confined to one country, but if that country were a major economic and geo-political power than that would still warrant Safe-Haven investment.

In conclusion, we have seen that there are many parts to Gold investment, and by knowing what each one is, what weight it holds, and when it applies will give you the required knowledge and confidence to be able to trade the Gold market with a sufficient degree of understanding. This will then give you the best chance in making profits from the Gold market whatever situation presents itself!

The EURUSD Forecast by Jimmy Young

EURUSD Forecasts – 1 Month, 3 Months, and 1 Year

On Wednesday, August 27 I received a request from a broadcast journalist for a professional opinion on how a currency pair will move in three different time frames; one, three and twelve months. They said I could choose the currency pair and the interview would last five minutes.
The EURUSD currency pair moving lower immediately jumped into my head. My thinking is the Eurozone fundamentals clearly point to a weaker EUR and that alone should be enough to drive the EURUSD pair lower over the coming weeks and months.

Eurozone Fundamentals:
Bearish monetary policy

o   Interest rates are low and heading lower
o   Quantitative easing (printing money) in the near future is a good possibility

Bearish economic fundamentals

o   Inflation is too low right now and is continuing to decline right now
o   Unemployment is too high right now and appears stuck at a very high level

Bearish geopolitical problems

o   Ukraine chaos not good for Europe and its likely to persist, possibly escalate
o   Euro member Government’s deficits are still a big problem

Bearish sentiment

o   Some Euro member Governments calling for a weaker Euro
o   European Central Bank (ECB) President Mario Draghi talking down the EUR

An unmistakably bearish Eurozone fundamental picture that appears likely to persist for weeks and months is a good start towards justifying a bearish EURUSD view.
The next logical step is looking at the US fundamentals for comparison.

US Fundamentals:
Bullish monetary policy

o   Interest rates are low but are expected to increase in 2015
o   Quantitative easing (printing money) is extremely unlikely in the coming months

Bullish economic fundamentals

o   Inflation is increasing and already very close to the US Central Bank’s target level
o   Unemployment is low

Bullish geopolitical problems

o   Ukraine chaos causes flow into the perceived safety of the USD
o   Middle East unrest also causes flow into the USD perceived safe haven

Bullish sentiment

o   The US is viewed as doing better economically than many of the other countries
o   Federal Reserve (FED) Chairperson Janet Yellen not talking down the USD

The bullish US fundamentals pointed to a lower EURUSD pair and therefore confirmed and strengthened the EURUSD bearish view.
Without a doubt, a comparison of the Eurozone and US fundamentals clearly point toward a weaker EUR and a stronger USD, which makes a bearish EURUSD view completely logical.
However, before shouting from the rooftops “Sell EURUSD”, it would be wise to make sure the technical (the charts) confirms the EURUSD bearish view.
EURUSD Technicals
A good place to start is the EURUSD monthly chart. This will show the summary big picture technical view and provide guidance for the one month, three month, and 1 year forecasts.

EURUSD Monthly Chart 2006-2014

The technically bearish EURUSD monthly chart shows a series of lower highs, dating back to the 2008 Global Financial Crisis. Each of the swing highs can be matched up with a significant Euro negative fundamental event.
Based upon the current fundamentals and technical, my forecasts would be as follows:

- 1 month (Sep 30, 2014): 1.3000
- 3 month (Dec 31, 2014): 1.2500
- 1 year     (Aug 31, 2015): 1.1500

These bearish EURUSD forecasts are my speculative guess based upon the fundamental and technical information available as of the August 27, 2014.
If new information confirms the bearish view (fundamental, technical, or both) then the direction of my forecasts will likely remain the same. Possibly the timing could change; meaning the targets could be met sooner.
If new information contradicts the bearish view (fundamental, technical, or both) then the timing and possibly even the direction of my forecasts might change.
My best advice is monitoring the fundamentals and technical every day. First get on top and then stay on top of what is going on.
When things are clear for you get involved. If and when you have doubts; close or cut back on your trade.

Understanding and Using Fibonacci Retracements – PART 2

These unanswered questions about Fib retracements from PART 1 will be answered here:
1. Can we use other technical indicators to confirm it’s a good trade to take?
2. What about factoring in the news?
3. Can we wait for the price to start declining to be sure it’s a good Fib level to sell?
4. What about the stop loss and the take profit?

Can we use other technical indicators to confirm it’s a good trade to take?
Yes, you can use other technical indicators and you should for this simple reason; the Fibonacci retracement trades will work if you correctly choose the high/low swing moves to measure the retracements and you get the direction right.
In PART 1, we identified four retracements that occurred during a downtrend in the GBPUSD pair hourly chart.  We identified the 38.2%, 50%, and 61.8% Fibonacci retracement levels on each of those retracements as possible sell levels.

GBPUSD 1 hour chart – Sept 18^th to Oct 3^rd, 2014

Placing sell trades at the Fibonacci retracement levels that were reached would have resulted in 100% successful trades, assuming the stop losses were placed just beyond the 100% retracement level (see chart above). But they would not have been successful if you choose the wrong high / low swing points to measure the Fibonacci retracements or you got the direction wrong.
Let’s look at some examples:

Choosing the Wrong High / Low to Measure the Retracement
Had we chosen a slightly earlier high than point “A” used in PART 1, the 38.2%, 50%, and 61.8% retracement sell trades would all have been unsuccessful.

GBPUSD 1 hour chart – Sept 19^th to Oct 3^rd, 2014

Getting the Direction Wrong
Had we gone just three days further back on the GBPUSD 1 hour chart than we did in PART 1, we likely would have been looking for Fibonacci retracement buy trades on the move down from the highs. The results of our first few trades would have been all buy trade losers instead of all sell trade winners like in PART 1.

GBPUSD 1 hour chart – Sept 16^th to Oct 3^rd, 2014

What Have you learned so Far?
Drawing the 38.2%, 50%, and 61.8% Fibonacci retracements on the chart is an exact science. But it does not mean that the trades indicated from those Fib retracements will be successful trades. Don’t mix up being able to calculate an exact trade level with choosing a winning trade.
Let’s get this straight. A Fibonacci retracement is a percentage retracement of a prior move and nothing more. Without further analysis, the Fibonacci retracement itself is void of any predictive value.
The Fibonacci retracement gets its predictive value from being part of a larger analysis. So the answer to question 1, “Can we use other technical indicators to confirm a Fib retracement is a good trade to take?” is definitely yes; in fact, it’s a must.

What about Factoring in the News?
The technical indicators used to confirm a Fibonacci retracement trade idea is a good start but it’s not the whole story. Just one economic news event can cause an immediate 180 degree turn in a currency pair’s direction on the day and possibly much longer.
If you’re thinking you don’t need the fundamentals (economic news); think again. Look at it this way, if you knew that the US non-farm payroll to be released in 5 minutes was going to be a much better number than the consensus forecast; would you close out your winning USDJPY Fib retracement sell trades or keep them open and see your good profit turn into a loss in literally seconds because “all you need is the technicals”?
The bottom line is this; the economic news will impact your trade results so it needs to at least be considering as part of your analysis process. Even if all you do is close your trades before the major news events, you are reducing your unwanted risk significantly. However, there is a lot more you can do with the news. This will be the subject of a future blog.

Wait for the price to start declining to be sure it’s a good Fib level to sell?
Some traders find it inconvenient or undesirable to watch the market. They prefer to trade rotisserie style (set it and forget it). Most institutional traders prefer to watch the market and adjust their trade ideas and their open trades to the changing market conditions.
For them, waiting for a possible Fib sell idea to start to work before entering the trade is business as usual. For me personally, waiting for the trade to do what I think it should do is a must. I am always happy to trade off getting in at a worse price for confirmation that it is the right trade to be in.
So yes, waiting for the price to start declining to be sure it’s a good Fib level to sell is a GREAT idea in my estimation.
Wait about the stop loss and the take profit?
Once again the issue of watching the market or not watching the market comes into play. Market watchers have the advantage of moving their stops when the opportunity to lock in profit and reduce risk presents itself; set and forget traders can make a half-hearted attempt to do the same using trailing stops but such a mechanical approach is not nearly as effective.

Understanding and Using Fibonacci Retracements – Part1

Who is Fibonacci?
He was a very famous 12^th centurymathematician; credited with, among other things, bringing to light an extremely valuable series of numbers used for complex problem solving called the Fibonacci sequence.
We care because the Fibonacci retracement calculations are based on this famous number sequence. If you are interested in more details about the Fibonacci number sequence, please refer to Wikipedia or do a general Google search. 
What are retracements?
Retracements are price movements in the opposite direction of the trend. For example, the GBPUSD pair was in a downtrend from September19^th to October 3^rd and along the way there were retracements (up moves).

GBPUSD 1 hour chart – Sept 18^th to Oct 3^rd, 2014

Why do we care?
Because the up moves (retracements) in a downtrend are excellent opportunities to put on a sell trade (a trade in the direction of the downtrend in this example).
How do we know when the retracement is likely to be over so that we can sell at an opportune moment and price?
This is where the Fibonacci retracement levels come in.
What are the Fibonacci retracement levels?
Percentage retracements of the trend based upon the Fibonacci number sequence; the most popular are 38.2%, 50%, and 61.8%. Traders draw them on the chart each time a trend retracement appears to be occurring. For example, the downtrend in the GBPUSD pair between September 19^th and October 3^rd has four significant retracements and a fifth retracement (far right of the chart below) might possibly be coming soon

GBPUSD 1 hour chart – Sept 18^th to Oct 3^rd, 2014

How are these Fibonacci retracements useful?
Traders use the 38.2%, 50%, and 61.8% retracements to put on trades in anticipation of the trend resuming. For example, the GBPUSD pair’s retracements between September 19^th and October 3^rd were as follows:



As the far right column of the schedule above indicates, the GBPUSD pair retracement percentages were 56%, 47%, 59%, and 71%. What that means is this: If you sold after a 38% retracement, you would have successfully sold on the move up before the down move resumed, in all four instances. If you waited to sell the 50% retracement you would have sold on the move up before the down move resumed in 3 of 4 instances. You would have missed selling in instance #2 when the retracement was only 47%.
How to prepare to sell the next Fibonacci retracement (#5)
At some point the GBPUSD pair will begin to move higher. When this happens add the 38.2%, 50%, and 61.8% Fibonacci retracements. Each of these retracement levels will have a corresponding price point, which for you is a possible sell price point.
For example, let’s assume the GBPUSD pair started to increase after reaching the 1.6065 low. Using the Fibonacci drawing tool software (all trading platforms have it) we can add the 38.2%, 50%, and 61.8% Fibonacci retracements:
•  The 38.2% Fibonacci (FIB) retracement is at 1.6136. If you wanted to sell the 38.2% Fib retracement, you would sell when price reached 1.6136. To do this you would simply put in an order to sell when the price is reached.
•  The 50% Fib retracement is at 1.6158. If you wanted to sell the 50% Fib retracement, you would sell when price reached 1.6158.
•  The 61.8% Fib retracement is at 1.6179. If you wanted to sell the 61.8% Fib retracement, you would sell when price reached 1.6179.

GBPUSD 1 hour chart – Sept 18^th to Oct 3^rd, 2014

Certainly there are still many unanswered questions, such as:
1.  What about the stop loss and the take profit?
2.  Can we use other technical indicators to confirm it’s a good trade to take?
3.  What about factoring in the news?
4.  After the price reaches the Fib retracement level, can we wait for the price to start declining to be sure it’s a good Fib level to sell?

Why Intra-Day Forex Charts Look the Way They Do

As intra-day traders, it would be better for us if the trends had minimal countertrends (price action in the opposite direction of the trend; also referred to as retracements) and consolidations (sideways price action; also referred to as range trading). It would be much easier to trade with the intra-day trend and not get spooked out of our trend trades due to periods of adverse or stagnant price action.
In Forex there are many valid reasons why these intra-day retracements and consolidations occur. If you familiarize yourself with the many reasons for these interruptions, then you will be less prone to misinterpret these bumps in the road as likely trend changes and reclassify them as unlikely trend changes. In other words, you will be less prone to “bottom and top fishing”.
While bottom and top fishing feels comfortable (it’s too low so I will buy it; it’s too high so I will sell it), the fact is intra-day currency pair trends persist and sustain more often than not. And therefore you would be better off assuming the trend will persist than assuming the trend will reverse.

Short List of Reasons Why Intra-Day Trends Have Interruptions
1. Importers
2. Governments
3. Option traders
4. News events
5. Time of day
6. Technical condition
7. Currency pair

Importers
When an importing company purchase goods or services across international borders it needs to exchange its local currency for the foreign currency so that it can make the payment in the local currency of the exporter. If large enough, these types of transactions can impact the exchange rate. These transactions occur all day, every day.

Governments
Central banks are always in the process of tweaking interest rates. Central bank comments about possible changes in interest rates have a direct impact on exchange rates. Higher interest rate chatter causes a currency to increase and lower interest rate chatter cause a currency to decrease. The impact might not be large in terms of the longer term price chart but in terms of intra-day trading, the impact can be relatively large.

Option Traders
An option trader sells the right but not the obligation to buy or sell a currency pair at a specific price for a specific amount of time; and receives a fee upfront for giving the buyer this right. In so doing the option trader incurs risk and will buy or sell the currency pair he has given the right to in order to lower his risk. This buying and selling for hedging purchases is substantial and impacts exchange rates on an ongoing basis.

News Events
Exchange rates are continually nudged higher and lower based upon economic news events. The Tier 1 scheduled (on economic calendars so traders know when they will be released) news events, such as Central bank interest rate announcements, press conferences, testimonies, meeting minutes, inflation reports, employment, GDP, retail sales and CPI are the ones that create the big short term price spikes. The Tier 2 scheduled news events (economic news events not included in Tier 1) cause the small short term price spikes.
Besides scheduled economic news there is also unscheduled news. This can be economic news or other news. For example, a key Central bank official (economic news) might speak to the press unexpectedly (not on economic calendar). Or the Ebola news (other news) will impact exchange rates in the country or countries that get the latest press about Ebola and how it is impacting their country.
The impact of news events will cause movements in favor or against the trend and sometimes even cause a period of indecision. Sometimes there is good and bad news for a currency just minutes or hours apart. Sometimes both currencies in the pair have news on the same day – sometimes in the same direction and sometimes in opposite directions. All of this gets reflected in the charts. And most of the immediate price action after the news is of a temporary (not changing the big trend) nature.

Time of Day
Forex trading is a 24 hour a day market with three distinct trading sessions: Asia, Europe, and America. In Asia, the JPY, AUD, and NZD are actively traded and the price action in these currencies reflects enough buying and selling to assume the movements have a legitimate basis (more buyers than sellers). However, the price action in other currencies such as the EUR, GBP, and CHF is much less reliable because the liquidity is low and at times even a smaller order to buy or sell can move these currencies quite a bit. Perhaps as much as 10 times as far as a similar order placed during the European trading session.
There are also official exchange rate fixings at various times throughout the day. These fixings are the basis of large international payments and oftentimes the price action leading up to these fixings is manipulated by large players who stand to profit from a particular price fixing. We are not talking about moving the market 100s of points; more like 20-30-40 points; enough to derail an intra-day trade.
Other times of day, such as when the European traders are going home (approximately 16:00GMT) and squaring up (closing out) their intra-day positions, also experience temporary price distortions.

Technical Condition
Oftentimes the market gets ahead of itself and too many traders are on the same side of the market. This causes a temporary imbalance (not enough current buyers or sellers) and a sudden, somewhat significant countermove occurs; followed by a subsequent return to trend.

Currency Pair
The fact that an exchange rate can be impacted by one or both currencies on an ongoing basis makes the exchange rate particularly vulnerable to two way price action. For example, good news for the UK could drive GBPUSD higher and if followed later in the day by good US news that could drive the GBPUSD back down. An unchanged exchange rate based upon good news for both of the currencies in the pair makes sense; as does the two way intra-day price action when you consider the finer details (the timing of the news releases).
This article is making two key points
1. Intra-day price action is prone to be choppy.
2. Try not to misinterpret trend interruption for trend change.