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The currency markets continue to roar, as the soft U.S. Dollar, Canadian Dollar and Japanese Yen continue to be punished by the stronger Euro and British Pound. This has resulted in some incredible trading opportunities, as most of the popular currency pairs (along with some of the more obscure ones) have formed strong trends.
If you enjoy trending markets, then welcome to Traders' Nirvana. There are so many trending pairs right now that it's hard to keep track – sort of like trading Nasdaq tech stocks in the late '90's. Which is exactly what I was doing at that time, looking for strongly trending stocks within strong sectors within a strong market.
If you had told me at that time that I would soon become a full-time Forex trader, I would've laughed. That was before I understood the real power of Forex trends. They tend to last longer, because in the currency market, we trade entire economies instead of individual companies. This can lead to some exciting situations, as trend-following traders will be happy to tell you.
Consider the Euro vs. the Canadian Dollar (EUR/CAD), which has been on a spectacular recent run
(see figure 1) or the Euro vs. the Japanese Yen (EUR/JPY), which has been climbing steadily for most of the year
(see figure 2).
Figure 1: EUR/CAD (daily chart) launches into an impressive trend.
Source: FXtrek IntelliChart(TM) Copyright 2001-2006 FXtrek.com, Inc.
Figure 2: EUR/JPY reaches a series of eight-year highs
Source: FXtrek IntelliChart(TM) Copyright 2001-2006 FXtrek.com, Inc.
If this is the type of price action that you enjoy, I want you to understand that much of what you already know about trading can be applied to
Forex. A trend is still a trend; support is still support, ect. We use the same technical indicators and price patterns as futures and equity traders.
When I first made the switch to Forex, I had difficulty adjusting to this much bigger, slower-moving market. It took about two months for me to make the transition, but I hope to save you some time and ease your adjustment through my experience.
Patience is the key. I switched to longer time frames, placed fewer trades, and held positions for longer periods. Not only did this result in increased profitability, but it also decreased my overall level of stress. I found myself to be more relaxed, and because of this I enjoyed trading more than I ever had before.
Fibonacci Part 3: Some Final Thoughts On Fibonacci
First of all, thanks to all of you who responded to my earlier reports pertaining to the use of Fibonacci in the Forex market. Fibonacci is not perfect, it does not work in every situation, but there are times when it can be extremely effective when used correctly.
In my two previous newsletters, we referred to a bounce from a 50% Fibonacci retracement in
GBP/USD (Great Britain Pound/ U.S. Dollar). Since finding Fibonacci support on November 17, this pair has soared higher, rising by nearly 1000 pips at it's recent high! Here's the daily chart, as of December 3, 2006
(see figure 3):
Figure 3: GBP/USD soars nearly 1000 pips in 11 trading sessions (daily chart)
Source: FXtrek IntelliChart(TM) Copyright 2001-2006
FXtrek.com, Inc.
I'm thrilled to tell you that one of my students in the UK caught nearly the entire move! There is no greater joy for an instructor than to watch one of his students smash one out of the park. Nice work!
This also brings up an important point; the ability to hold on to winning trades can make a huge difference in your account. I'm sure there were many traders who went long
GBP/USD and caught a small piece of this move, and they should be congratulated.
But the ability to ride a winner of this magnitude can turn a bad year into a good year, or a good year into a great year. This is "reminiscent" of a quote attributed to a famous stock operator from nearly a century ago, who said:
"After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting
tight!" Jesse Livermore
Source: Reminiscences of a Stock Operator (Wiley Investment Classics, copyright 1923)
Closing out winning trades too early is a common problem among traders, and one that vexed me in my early days on Wall Street. I was always pretty good when it came to cutting my losses, but at first, not so great at holding on to my winners. What I ended up with was a series of small gains and small losses, which pretty much balanced themselves out.
It was not a disaster, but the results didn't justify the risk and effort of trading in the market. After "grinding it out" in this manner for several months, I finally realized that in order to succeed, I'd have to give my winners a chance to run.
Once we catch and hold a big winner, our perspective begins to change. We feel like a deep-sea fisherman who suddenly realizes that he's been fishing for minnows! It reminds me of Roy Scheider's character in the movie "Jaws", when he said, "We're gonna need a bigger boat!"
Last week, we also looked at AUD/JPY (Australian Dollar/ Japanese Yen), which found support at the 38.2% level in mid-November. Last week we mentioned that it might test this level again. In this case, the pair came within 15 pips of the prior support level before bouncing again
(see figure 4):
Figure 4: AUD/JPY falls just short of the 38.2% level before bouncing higher
Source: FXtrek IntelliChart(TM) Copyright 2001-2006 FXtrek.com, Inc.
The "Weak" in Fundamentals
How bad was Friday's ISM Manufacturing Report? The headline number (the one that draws most of the attention) came in at 49.5 (any reading below 50 indicates contraction). This was right on the heels of Thursday's Chicago PMI debacle, which was also below 50 (and well beneath estimates of 55.0).
But a look under the surface reveals that there is more damage than initially apparent. Here are some of the numbers behind the ISM number.... Once again, any number below 50 indicates contraction.
Employment Index 49.2 (just ahead of next week's NFP)
New Orders 48.7
Production Index 48.5
I could show you more, but you get the idea. We can't explain this away as an anomaly, because the weakness is systemic. Just in the past week, there were many notable cringe-worthy U.S. economic reports:
Durable Goods Orders -8.3% (expected at -5.0%)
Core Durable Goods -1.7% (expected to rise 0.4%)
Consumer Confidence 102.9 (expected at 106.4)
Chicago Purchasing Managers Index 49.9 (expected at 55.0)
New Unemployment Claims 357K (expected at 315K)
Construction Spending -1.0% (expected at -0.3%)
Is it any wonder the greenback is getting crushed? The one bright spot was U.S. Q3 GDP, which beat expectations handily (up 2.2% vs. 1.8% expected), but this resulted in just a brief respite for the beleaguered buck.
Although there is likely much profit in currency pairs like
EUR/USD, GBP/USD, and other short-USD positions, there was no dramatic bout of profit taking on the last day of the week, or on the last day of November for that matter. This tells us that, at least for the moment and despite big profits, USD shorts have decided to hang on to their positions.
Why does someone hold on to a trade that is already hugely profitable? Because the trader believes that there could be more to come. Forex traders are fortunate to participate in a market that can break into strong, sustainable trends. It's during times like these when the greatest opportunities present themselves.
Until next week – happy trading!
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