Dollar Update
A few weeks back, I suggested that you may want to start thinking about buying the dollar. Many people email about this trading opportunity and have taken this trade so let's review and update. Specifically, the opportunity was to go long the dollar against the British Pound or the Euro. I highlighted the Pound short as this was the higher probability short that also offered the lowest risk and potentially highest reward (profit margin). This is a longer term trading opportunity that is working out well.
Before diving into the charts, let's review how and why currencies move. Interest rates, interest rates, interest rates. Money always seeks out the highest rate of return. Those countries that have stable governments that keep taxes low also tend to enjoy higher interest rates and growth. Global currencies always seek out these higher rates of return. I have been trading Foreign Currencies and bonds for many years and to be honest, you can almost trade currencies long term by only looking at a bond chart. I am not suggesting you go and do that but for those who have taken a futures class or Forex class with me, you know what I am talking about.
Here we have a chart of the 30 Year bond. For those who don't know, when bond prices fall, yields rise. When bond prices rise, yields fall. So, if the bonds are moving into a resistance (supply) level, what is likely to happen to interest rates when the bonds hit resistance? If bond prices fall from that resistance level, yields will rise. When yields are rising, that country's currency will rise in value against other currencies. In the chart above, we see that each time the 30 Year bond futures reach the 117 area, price falls fast. This is because there is plenty of supply at and above 117. With each decline in price, the higher yield causes the dollar to rally against currencies such as the Pound.
Here we have a weekly chart of the US Dollar. We can see the rally off the lows which is where the gains in the British Pound short have been coming from. Where is price going? The highlighted area above is a supply level for the dollar. While that may be a reversal point, it is also likely to be a magnet as that is how order flow works (I can explain in another letter). This is likely to be the first major stopping point for the dollar which is where we would look to take some profits on this trading idea in the Pound. At this point, you may want to consider moving your protective stops to breakeven which would mitigate risk.
While most people are beating up the dollar, never forget how you make money buying and selling anything. You must enter trades before the herd. These decisions must be made with objective, rule based ANTICAPATORY analysis. This is how we keep trading low risk, high reward, and high probability. Thanks for your time.
Have a great day.
Sam Seiden – sseiden@tradingacademy.com
|
Sam brings over 15 years experience of equities, forex, options, and futures trading which began when he was on the floor of the Chicago Mercantile Exchange. He has traded equities, futures, interest rate markets, forex, options, and commodities for his personal interests for years and has educated hundreds of traders and investors through seminars and daily advisory services both domestically and internationally. Sam has been involved in the markets since 1991 both on and off the floor of the Chicago Mercantile Exchange. He has served as the Director of Technical Research for two trading firms and regularly contributes articles to industry publications. Sam is known for his trading, technical research, and educational guidance.