How To Add Conviction To Your Forex Trades
I received an email from
an Australian colleague of mine the other day who trades stocks
domestically. He was echoing some of the same rumblings you hear from traders
here in the States, “pockets of volatility, but difficult to isolate.” We went
back and forth and and discussed what each is doing as a way to counter that.Â
Towards the end of the conversation I mentioned that since our last
conversation, FX had become a pretty integral part of my trading, and given that
I used much longer time frames for FX, much the way he did with stocks, I
thought it would be a good fit. He agreed, but was hesitant due to the off the
cuff comments than many a Central Banker may make from time to time that destroy
a perfectly good technical setup.
It was not until a few hours after we spoke that
I realized that as much as I love to read a great deal of FX commentary and
research each day, ultimately the chart has told me in advance, the story simply
adds something more tangible to the trade. So while there are the one off
remarks from time to time or BoJ intervention, you learn how to roll with it.Â
Let’s review some recent developments regarding the EUR/USD both from the chart
pattern and also from a macro/political viewpoint.
During the recent down/sideways movement of March
the EUR had already broken down in late February but was now trying to
stabilize. The data out of the US was showing signs of improving, but
ultimately it was the creation of jobs that traders needed to see in order to
create another trade. For all of March the EUR was really not tradable unless
you were really drilling down in terms of time frame which is rather challenging
with FX.Â
We now have a solid job picture developing here
in the states and the EUR has now sold off down to the 200 ema. More positive
data here and continuing weak data there will ultimately allow that 200 ema to
get broke. Now, let’s factor in some other new swirling around the EUR and the
ECB. To me, this news simply lends more conviction to establish short in the
EUR on this minor counter trend bounce/consolidation.
^next^
“There are also
signs of growing tensions amongst Euro-zone officials, with an in-house spat at
the ECB (at least, according to yesterday’s Telegraph) now accompanying the
growing disharmony between the latter’s Governing Council and Euro-zone finance
ministers. Indeed, such is the growing dissatisfaction with the ECB’s
intractable defiance of the consensus view on interest rates, that the Telegraph
reports speculation that Mr. Welteke’s alleged financial ‘impropriety’ may have
been revealed to the Press to punish his reported collaboration with other noted
ECB officials to block a rate cut (see Press Digest). Political machinations of
this sort (if they are true — see below) are hardly conducive to raising
investor confidence in the authorities’ aptitude for guiding the Euro-zone
economy through its current quagmire. Indeed, it would be fair to say that the
ECB’s brand of monetary policy has seldom inspired any degree of confidence and
ECB Vice President, Lucas Papademos’ statement is only likely to reinforce this
point given that he seems to have abdicated responsibility for stimulating the
Euro-zone’s demand growth to the US Federal Reserve.”
Source:Â Bank of New York
The last thing investors/traders want is
uncertainty. With the recovery in Europe growing weaker by the day, political
upheavals over monetary policy and mud-slinging are the last thing the EUR bulls
want to see.
Another case in point was the price action in the
Swiss Franc yesterday. I had a small position (short USD/CHF) late last night
based on the chart. The trade played out nicely. As it turns out there was
solid bid in the Swiss Franc due to more terrorist concerns and this mud
slinging at the ECB. Again, the chart got me in, the news was secondary. The
difference is that the CHF trade was that, a trade, not a “Position” that I am
seeking to have play out over several days or weeks. The potential trade in the
EUR, as discussed above will ultimately play out on a technical level, but you
can bet that all this news, data and “gossip” will play a large role in how
effectively I manage that trade as it plays out. I know there are many traders
who could care less about fundamentals, great, I completely respect that
approach. If at the end of the day you made money, who can argue. I mention
fundamentals because it is something I use with FX and I have found it to be
helpful.Â
As always, feel free to send me your comments and
questions.