Let's Get The Party Started
Everybody loves a good party, and currency traders are no exception. The current runaway trend in the Canadian Dollar, covered in depth in last week's article "Blast From the Past" is a great example of a full-on, "break out the party hats", good time of a party, and traders who are long on the Loonie continue to reap the benefits of a strong economy and firm commodities prices. Who cares if the neighbors call the cops? It's time to party!
The nature of the currency market is that as one trend is winding down, another one is beginning somewhere else. One reason for this is because there is so much more institutional money, and so much money in hedge funds, compared to just a few years ago. The fierce competition for investors has created a lemming-like state among these funds, which seem to possess infinite capital but are blessed with only so many good trading ideas. When institutions see a trend developing, there is now a tendency to "pile on" and this creates a kind of self-fulfilling prophecy. For instance, if traders can see that the Japanese Yen is weak, they tend to short the Yen, making it even weaker. Likewise, if everyone can see that the Canadian Dollar is strong, there is a tendency to buy it, thus making it stronger. The result of this self-perpetuating system is that when a trend finally ends, everyone searches for – and in essence creates – a new trend.
The trend in the Canadian currency really began to pick up steam when the Yen trades began to move sideways. For example, the Australian Dollar / Japanese Yen (AUD/JPY) currency pair was in a scorching uptrend, but then flattened out in the middle of April (see figure 1). This was around the same time that the Canadian dollar started to roar. It's almost as if traders lost their enthusiasm for shorting the Yen at around the same time they fell in love with the Loonie.
Figure 1. AUD/JPY flattens out in mid April, as traders are drawn to other opportunities. Source: Intellicharts
Not surprisingly, the New Zealand Dollar / Japanese Yen pair (NZD/JPY) also sports a similar flat look after a strong uptrend. This pair lost its steam at about the same time as AUD/JPY (see figure 2).
Figure 2. The NZD/JPY currency pair has also gone flat for the time being. Source: Intellicharts
Meanwhile, the Canadian Dollar continues to dominate the headlines, smashing the USD/CAD pair down to yet another 30-year low (see figure 3).
Figure 3. USD/CAD reaches yet another 30-year low. Source: Intellicharts
A weak U.S. Existing Home Sales figure on Friday contributed to weakness in the USD/CAD pair, although the greenback held its ground against the Euro and Great Britain Pound. In fact, the U.S. Dollar reached a three-month high against the Japanese Yen and a six-week high against the Euro earlier this week (see figure 4).
Figure 4. EUR/USD pair slides as the U.S. Dollar fights back against the Euro. Source: Intellicharts
Why is the U.S. Dollar finally making a stand against the Euro? Analysts expect a rebound in employment, with this Friday's payroll report expected to show a gain of 135,000 new jobs, bouncing back from last month's soft result of 88,000. Keep an eye on this Friday's wage inflation figure, as hourly earnings are expected to rise by 0.4%, thus pressuring Ben Bernanke and the Fed to keep benchmark U.S. interest rates at 5.25% for the remainder of the year. Interest rate futures contracts, traded on the Chicago Board of Trade (CBOT), now indicate that the overnight lending rate will remain at its current level until next spring, when a rate cut to 5.00% appears likely.
So which currency pairs are setting up for possible breakouts? Where will the next big trend occur? One interesting candidate is the Great Britain Pound / Japanese Yen currency pair (GBP/JPY). While some of the Yen pairs mentioned above have flattened out, GBP/JPY maintains a nice trajectory and is approaching key resistance. An ascending triangle within the uptrend is clearly visible on the daily chart (see figure 5).
Figure 5. An ascending triangle is visible in the GBP/JPY daily chart. Source: Intellicharts
A look back at the weekly 10-year chart of GBP/JPY shows that the pair has just breached a significant long-term resistance level (see figure 6).
Figure 6. GBP/JPY breaks through resistance formed in 1998. Source: Intellicharts
Not only do we have an uptrend with an ascending triangle, we also have a currency pair that is trading at a new ten-year high. Not a bad combination!
Just remember, enjoy trading with the trend, don't fight against it, and when it finally does end, take a good look around. Chances are that just as the lights go out on one party, a new one is beginning somewhere else.
Question of the Week
Q) Hi Ed, I would really love to get into trading the forex market, and I'm just wondering what route I should take. I hope to trade part time for a couple of months or 1 to 2 years and hopefully trade fulltime.
Ed Ponsi) Thank you for your question. There are a few things you can do to improve your chances of success. My first concern for you is to avoid failure. Many new traders do fail, but most of them do not take the trouble to understand the Forex market before diving in. Most of them do not take Forex trading courses, view Forex DVDs or read good books about trading until after they have had negative results. It's a shame that so many people unnecessarily lose significant capital prior to understanding the importance of education. I'm happy to see that you're using Online Trading Academy as an information source, because unfortunately there are many unqualified and ill-suited individuals purporting to offer a trading education, when their only real skill is marketing. Stick with Forex educators that offer real training and have the credentials to back it up, and avoid the charlatans who make outlandish promises but have little to offer in the way of real trading experience.
Next, focus on risk management. If I could build a perfect trader, I start with good risk management skills, because this is where the game is really won or lost. Focus on cutting losses; never tolerate a large loss. Stick to your risk management rules above all else. Learn how to create a real trading plan, and execute your plan flawlessly. If we can do these things, the pieces of the puzzle will begin to fall into place.
Since the Forex market is open 24 hours per day, many traders trade successfully on a part time basis. There are "set and forget" strategies that allow Forex traders to create entries, exits, and stops and then just walk away. This is possible because Forex provides an extremely "thick", liquid trading environment, and because of this there are few ‘gaps' in price, which are normal in equities and futures markets. Because there is liquidity at every price point, currency traders have a greater degree of certainty as to the price at which their orders will execute, allowing them to walk away from the platform – even for extended periods of time – and still execute their strategies properly. This is just one of the many advantages of Forex trading.
Have a question about Forex trading? Send an email to eponsi@tradingacademy.com and we may use your question in an upcoming newsletter. Until next time, best of luck to you in trading. |
Ed Ponsi is a globally recognized name as a lecturer and teacher and is the former Chief Trading Instructor for Forex Capital Markets. An experienced professional trader and money manager, Ed has advised hedge funds, institutional traders, and individuals of all levels of skill and experience. He is a regular contributor to TradingMarkets.com, SFO Magazine and FX Street, and is currently writing his first book for Wiley Finance.