Classic Fx Strategies

Written by JS T Alexander | 09 May 2010

With Majors on a Wild Ripple Effect
Short re-cap:

As the troubles of Greece debt problems have spearheaded a wider negative sentiments in spite of the USD110B bailout plan. These have made investors more confused specially with a more than volatile market last thrusday prompting a lot of traders to capitulate most retail positions.

The spillover of these came true with the down grading and possible ripple effect that the market saw with Spain, Portugal, Italy and the rest of the EU communities have obviously pinned the market spiraling on the downward direction. Not to mention the British Hung parliament from the election process have also contributed to the GBP loosing its value down nearly back to its previous low. The contagion effect have reached the US Stocks breaking nearly 1000 points in a short period of time. Computer glitches and a trader's mistakenly placing or typing an error as reported added to the dismay of the market where almost all were amazed of what was happening. Again, the overall view of the economy recovering with a general set of good figures from the reports but a slight correction on the USD after the NFP came out with slight dent that led a corrective move lower on the closing for the week of May 07, 2010

A lot of investors, from retail forex to institutional have been caught flat-footed as the market direction suddenly changed towards the mid-sessions and broke lower where the EUDUSD plunged to its over-extended price levels of 1.2503 as pure negative chaos of what was happening rippled from the stocks to the foreign currencies all at the same time. With all modesty, we did expect market volatility from our May 03 blog and market view analysis not to discount the possibility of the EURUSD to touch 1.2580 and even went for its extensions on the same trading session.

Prompting the same case scenario with the USDJPY to 87.95 slightly below last months low of 88.10 from a channel line break at 93.70. Meanwhile the USDCHF held its ground at the 1.1083 corrective price from a high at 1.1246. there would still be enough room for the USDCHF to move higher to its original 1st resistance price of 1.1380 until the chaos started to happen. This has been what we have been trying to emphasize as the contrary directional movement of the two pairs until now. For some who has never experienced getting caught between a crossfire of market movements; I'm certain that these past two days of volatility would have been a good one. Trend following the CHF,JPY & the AUD plus the cross rates would be only to one's advantage and could be used as part of an arsenal of strategies whenever markets like these wild swings occur. The long wick or tail down from the candlestick bar particularly the USDJPY, EURGBP,EURJPY, AUDUSD,the NZDUSD and the GBPCHF mid-range closing with both up and down wick tails would be clear evidence that such trades from both sides of the trade have had to settle or simply investor/traders capitulated from these wide and wild swings.

As indicated on a weekly chart for the USDJPY above is also a clear classic example major players had taken advantage of the extreme market swings specially the USDJPY earlier buyers were caught with this movement unless an arbitrary hedge position was in place like a USDCHF which we have emphasiczed that contrary market direction as occured from time to time as shown on the weekly chart above vertically looking at the USDJPY vs.the USDCHF.

As some would now say that it is in a reversal pattern for the USJPY; but be weary of a buyers trap which they have pulled the prices at the 87.95 levels. And thereafter retrieved its mid-range loss. The same can be found on the GBPUSD except a divergence on the low price of 1.4474 after penetrating the 1.4770 would have touched the next support at the 1.4375; 100pts. off that target. With one trading day left of the week; the elasticity of extreme extensions will snap back with rapid action as most have seen in the major market place including the Stock market's thursday closing.

As for the cross EURJPY would now be considered a confirmed reversal from its symmetrical triangle after penetrating the important price of 123.85 only becuase of the much affected USDJPY movement vs. the CHF JPY cross slightly on top of the previous trendline serving as a resistance from a low of 78.70 levels.

Classic Examples where market capitulation occurs during wild fluctuations:

Avoiding this tragedy can best be solved with some real due diligence and setting up an effective trading plan. As we have explained time and again that knowing and being one step ahead of the market can be to one's advantage whenever executed properly. A more sequential process of trading will be most effective in using leverage positioning to equalize and minimizes the risk of loss. The consistency of applying such methodology through constant practice of spreading an offsetting transaction would simply create this effective cushion to absorb such wild fluctuation and be able to buy enough time ( figure of speech ) deciding which strategies that is available to the traders / investors to use to maximize the markets potential on both sides of the directional trend.

As most of our Forex video presentations clearly focuses on paying ever more closer attention in offsetting transaction, hedging majors with cross rates and hopefully for others to be able to use secondary market instruments to actually do some serious strategies where the real money of trading the Foreign Exchange Market comes from. And these is also where the revenue stream of almost all institutional, banks, hedge funds and sophisticated investors make their money from.

We would like to suggest to please review and pay more attention as to why such strategies were used in trading and how such currency pairs were chosen compared to simply choosing one, as some has always claimed that it is the simplest currency to trade. Boy are they mistaken!

A certain process of deduction and elimination takes place even before a final choice of currency pair would be traded. We also understand that one has to be comfortable with their choices and strategies they use while trading. With all due respect; as long as the trade one applies in the market are delivering the goods then do continue, but if not strategy change and procedure needs to be considered. Therefore, pls. choose widely!