Jump to content

Welcome to the new Traders Laboratory! Please bear with us as we finish the migration over the next few days. If you find any issues, want to leave feedback, get in touch with us, or offer suggestions please post to the Support forum here.

  • Welcome Guests

    Welcome. You are currently viewing the forum as a guest which does not give you access to all the great features at Traders Laboratory such as interacting with members, access to all forums, downloading attachments, and eligibility to win free giveaways. Registration is fast, simple and absolutely free. Create a FREE Traders Laboratory account here.

RichardCox

Playing Strong Currencies Against Weak Counterparts

Recommended Posts

One common mistake that is made by most technical analysis traders is to completely disregard all fundamental aspects of the assets being traded. This is clear in the regular assumption that chartists do not even need to know the identity of the asset before placing a position. The rationale behind this is that all of the necessary information is contained in the price action itself. But if we are truly trying to gain an edge on the market, it is important to have at least some fundamental information about the assets being traded. At the most basic levels, forex markets require the ability to pair strong currencies with weak ones. This allows the trader to capture the biggest possible moves at any given time.

 

Another mistake that is commonly made my technicians is to focus on one or two pairs, and then to look for new opportunities in those markets exclusively. For example, traders might believe that technical patterns tend to work best in the EUR/USD, or GBP/JPY, and then regularly monitor those patterns in isolation. This approach does carry with it the added advantage of being most familiar with the historical price data present in those assets, and with the general behaviors (such as high volatility, or a tendency to trend) that are expressed by those assets. But it also means that there might be better opportunities in other pairs that will be missed, and, on the whole, it will be very difficult to pair the strongest currencies with the weakest currencies.

 

Relative Values

 

It is true that in any market, we are always exchanging the value of one asset for another. If you buy a stock, there is an implicit suggestion that the trader believes the value of that stock will rise, more than the value of the original currency. But these relationships are more apparent in forex than in any other place, as it is much easier to structure both sides of the buy/sell relationship. If we are long in the AUD/USD, we are buying the Aussie and selling the U.S. Dollar. It is implied that we expect the relative value of the Aussie to overtake that of the U.S. Dollar. While this information is obvious to some traders, it should be understood that there are many active participants in the market that fail to appreciate these relationships.

 

In order to get the most “bang for our buck” in any position, we need to identify which currencies are on the verge of extreme moves. The first question any trader should ask is: Which currency is most overvalued, and which is the most under-valued? Once we have an idea of this, we buy the asset that is excessively cheap, and sell the currency that is overly expensive. One way of doing this is to look at the trending behavior. Currencies that are marked by long-term downtrends can be paired with those that are caught in a long-term uptrend. When using indicator readings, oversold currencies can be bought with overbought currencies. The main point to remember here is that forex trading is a constant “tug of war” battle, and the way of making the most money in any one trade is to identify points of extreme weakness in one area, and strength in another.

 

Identifying Strength and Weakness

 

In the charted example, we look at the three majors: EUR, JPY, and USD. For the sake of argument, let’s assume that these are the only three currencies that exist. Which is the strongest? Which is the weakest? Which trade makes the most sense? The third question here, of course, is the most subjective and will depend on your general strategy approach. For example, a trend following trader would have a very different answer when compared to a contrarian, or swing trader. The first two questions, however, are much less subjective and can be answered relatively easily.

 

In the USD/JPY chart, we can see a clear rally on the charts. Many technical will stop right here and say the identity of the assets is meaningless. But knowing that we are looking at the USD/JPY carries with it some clear advantages -- especially when we compare these moves to our other two charts. A rallying USD/JPY denotes a strong Dollar and a weak Yen. The second chart shows sharp declines in the EUR/USD (again, a strong USD, and a weakening EUR). The third chart shows a modest rally in the EUR/JPY. All of these charts are taken on the same time frame (hourly perspective).

 

In order of relative strength, this tells us that, in the current environment, the US Dollar is the strongest currency, followed by the Euro, while the Yen is the weakest. This is because the Yen is falling against all counterparts, which the US Dollar is rising against all counterparts. The Euro splits its relative strength and weakness down the middle.

 

The Basket Approach

 

In some cases, it will be easier to identify one side of this equation (a currency ready to make a big move either upwards or downwards). It might be easy to determine which currency is strongest, but not which is weakest (or vice versa). In these cases, it might make sense to split your positions. In these cases, traders might want to take a more diversified approach, and play a few different currencies for (or against) the currency that is showing the clearest tendencies (either toward strength or weakness. When this is done, however, it is important to scale down leverage levels, as multiple positions for or against a currency will equally magnify the potential for losses.

 

Sentiment Indicators

 

Another approach is to watch sentiment indicators, such as the Commitment of Traders (COT) report, which shows the number of open positions in a given currency. In addition to this, many forex brokers will offer similar data, showing the number of bullish or bearish traders active in the market. These numbers are often given as a percentage, so a 50/50 reading would suggest the number of buyers and sellers in the currency are equal. When sentiment becomes extreme (i.e. above 80% or 20%) for a certain currency, trends are likely to reverse. This is because there is a small number of available buyers or sellers left in the market, and little reason to suggest that the current trend can find new reasons to continue.

 

All too often traders make the mistake of catching onto a trend as it is reaching its mature levels. A famous example of this can be seen in the tech stock bubble of the late 1990s, where many inexperienced traders bought-in at the highs, thinking there would be no end to the bull rally. In cases like these, it is important to see how the majority of the market is positioned, as this will give you a good indication of whether or not the market needs to correct itself.

 

Conclusion: Identifying the Weakest and Strongest Currencies Makes the Most Profitable Trades

 

It can be easy for technical traders to view certain markets in isolation, and miss opportunities that can be found when relative comparisons are made. The surest way to make the most profitable trades is to pair the weakest assets with the strongest, as your gains will always depend on the relative valuation of the assets you buy and those you sell. Here, we have strategies for making these determinations, and this information should always be considered (even by the most “purist” of chart technicians).

1122.PNG.f06aa874c859439a281b8f642f03e505.PNG

USDJPY.PNG.819e20de8c29c5afa9612401e7626d2c.PNG

EUR.PNG.3bd1f0d30dbc05c0118bf569b86de1be.PNG

EJ.PNG.13c7d4749eb6959aa3e461d2d9bcf0f5.PNG

Share this post


Link to post
Share on other sites
I agree with the article overall....however, taking in account COT is one things, but should consider the fact that data is not generalized.....it only belongs to that respective broker

 

Good point, but this data is often indicative of what is happening in the broader market as well.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.


  • Topics

  • Posts

    • NFLX Netflix stock, with a solid top of range breakout, from Stocks to Watch at https://stockconsultant.com/?NFLX  
    • NFLX Netflix stock, with a solid top of range breakout, from Stocks to Watch at https://stockconsultant.com/?NFLX  
    • It depends. If you have lots of money that you can buy a house without a loan and if you don't have any parents to sponsor then it is a good idea. Otherwise it might be a bad idea depending where in Canada you are heading to. I earned a good middle income in my home country and I migrated to Vancouver 5 years ago at the age of 35. I had to start right from the bottom, lowest of the low.. Now i am finally earning a middle income in Canada but I still cannot afford to buy a one bedroom apartment. Having left behind friends, family and home, most of the times I think it is not worth it.   In short, do not migrate if you already have a good life in your home country and you are happy. Only migrate to Canada if you really have to leave your home country say there is a war or something really bad. Discrimination still exists here and its really tough for newcomers unless you are super rich. Good luck. David Chong, Quora  
    • This is bigger than the internet. Bigger than mobile. Bigger than social media.   While everyone was distracted by stock market fluctuations and political theater…   Most people have NO IDEA what just happened last week with ChatGPT.   Their new memory feature allows ChatGPT to remember EVERYTHING about you across all your conversations.   Think about that for a minute...   While most tech companies have been collecting mere breadcrumbs about you - your likes, your clicks, your browsing history - OpenAI is now collecting the most valuable dataset in human history: your complete psychological profile.   This is Zuckerberg x 5,000.   The more you use ChatGPT, the more it understands you, becoming a supercharged reflection of yourself that improves at an exponential rate.   Are you a regular ChatGPT user?   Consider whether it’s time to turn off the “you can train on my information” feature. To prevent your data from being used for training while still using the memory feature:   Disable Model Training: Navigate to Settings > Data Controls. Toggle off "Improve the model for everyone". Manage Memory Settings: Go to Settings > Personalization > Memory. Here, you can: Turn off memory entirely. Delete specific memories. Use Temporary Chat for sessions that won't be saved or used for training. Now the investment implications…   Why This is Bigger Than You Think Consider this: the relationship between humans and ChatGPT is evolving beyond a mere tool.   People are now treating these AI assistants as friends, confidants, and even romantic partners.   I'm not making this up - there are already documented cases of people ending real human relationships to pursue “connections” with their AI companions.   A viral Instagram meme shows a person going through life with a glowing, featureless humanoid figure - representing ChatGPT - as their companion.   The post has over 1.1 million likes and comments like "Bro ChatGPT is like my best friend. Ain't even ashamed to say it" with 25,000 likes.   But here's where things get really interesting for investors and entrepreneurs...   Three Things to Watch For starters, hardware is the next big thing for the big players.   The iPhone form factor is dead.   It hasn't meaningfully changed in nearly a decade. The next evolution in hardware will be designed specifically to interface with these AI companions.   OpenAI is already working on hardware with Johnny Ive, the legendary designer behind the iPhone and iPod. But you can’t ignore Elon Musk’s edge here.   So what does all of this mean for you?   The companies that control the personal AI relationships will be worth trillions. OpenAI and Elon Musk will have the coziest moats. We're witnessing the birth of a new internet - one built on agents that can communicate with each other across platforms. Google's new agent-to-agent protocol allows AI agents to work together without sharing internal memories or tools. The hardware companies that create the perfect interface for these AI companions will dominate the next decade of technology. And almost nobody is talking about what this means.   My prediction? Within five years, most people will have a personal AI that knows them better than anyone else. And they will interact with it in ways that seem foreign today.   (And, yes, it will almost certainly have dystopian elements.)   In the meantime, the biggest gains won’t come from household names. And, right now, James is seeing a prime opportunity to invest in the most under-the-radar plays in AI…   For dirt cheap. By Chris C. Source: https://altucherconfidential.com/posts/use-chatgpt-protect-yourself-now
    • KBH KB Home stock, nice day and rally off the 50.82 support area, from Stocks to Watch at https://stockconsultant.com/?KBH      
×
×
  • Create New...

Important Information

By using this site, you agree to our Terms of Use.