Lessons from the Pros


Where Are We in the Big Forex Picture?

Hello traders! This week’s newsletter will examine some long term charts of some of my favorite currency pairs to offer up a different perspective from what I’ve heard on financial television.

Occasionally a financial professional will come on television and make a prediction on where a financial instrument will be going, perhaps even giving a time frame for this to happen. One of the more entertaining aspects of hearing these calls made is the fact that their time frames are often so far out there. Have you heard them say “our three-year target is such and such” or “our 18 month expectation is…”? Personally, I’m rarely in trades for more than a few weeks let alone a few years!

Free WorkshopIn my humble opinion there are three main reasons for these time frames. The first is that if the call is wrong or way off the mark, no one will remember the bad call made 18 or 36 months ago! Do me a favor and try to remember back in February of 2012 all the market predictions that happened and how many of them worked out. The second reason these calls are made so far out is the highly profitable percentages that are made sound terrific to people who aren’t experienced in the third why these calls are made. If a prognosticator says, “The current price of XYZ is $10 and in three years we expect it to be at $20,” the “home gamers” hear that they can double their money in a few months and run out and buy this recommendation. Rarely is anything mentioned about where the stop loss goes, if TODAY is the right day to buy, if XYZ might go to $5 before $20, etc. The third and final reason is that this prognosticator is often “talking their book.” This has several possibilities. If they say they like XYZ and they believe it will go up in price, they want you to buy XYZ. Now, do they OWN XYZ and want you to help push it up higher? Do they want to sell XYZ to exit a long trade and they need buyers to come in? Perhaps they want to sell it short to actually go against the long term call made!

How about on the other side of the coin, where they tell you that XYZ is going to $5 from $20? Apply the same reasoning as above. Perhaps they want to buy it cheaper, or are already short and want sellers to come in and push XYZ lower.

As you probably know, many of our currency pairs have been making strong moves recently. While most retail traders choose to go against the trend, trying to buy bottoms or sell tops, the most profitable traders I know choose to trade with the trend, “ride the wave” if you will. As has been said numerous times, they don’t hand out a medal to the trader buying the bottom in a downtrend or selling the top in an uptrend! If you are lucky enough to buy the bottom, congratulations, you’ll probably never do it again, pat yourself on the back.

The following pair of charts are monthlies of both the EURUSD and GBPUSD. One reason I like to look at monthly charts is to help me understand where we are in the really big picture, plus to recognize if the current volatility is unusual compared to previous strong moves. I’ve drawn in a couple of turning points in the past, and also turned on the Average True Range which helps measure volatility. As you can see, the ATR has been increasing for the past few months yet isn’t anywhere close to the highs seen a few years ago. While I believe that both pairs will continue their current trend, expecting around .97 for the EURUSD and 1.42 for the GBPUSD, we obviously have to wait for price to rally into supply to join this trend.

lftp 20150203 fig 1

This next pair of charts shows the AUDUSD and USDJPY monthly charts. Again, in this time frame the moves don’t seem so unusual! The ATR is increasing but looks to still have room to go higher. The prices of these two pairs have moved quite a bit recently; but looking at this historical data there is still plenty of room for these to go!

lftp 20150203 fig2

Last but not least I’d like to mention the US dollar index. I’ll let you take a look at your own charts to see what it looks like to you – go on, I’ll wait. Ok, what did you see? After a strong move up, you can see that there is plenty of room left, and the volatility measured by the ATR still has a lot of room left to go up before we get to historical highs! Sound familiar?

So, what is the main takeaway from this week’s newsletter? Whenever you find yourself in a market that seems unusual (moving very fast in one direction, for example, take a look at a bigger picture chart to see how truly “unusual” this current price action is). Very often, something similar or even crazier has happened just a few short months ago. Relax, use the core strategy and pull out those pips!

Until next time,

Rick Wright

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.