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What You've Been Missing Out On The Forex Markets

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What You've Been Missing Out On The Forex Markets

Post by Sean on Sun Oct 26, 2008 4:36 pm

Break into the Forex Market!
My Top Five Profit Triggers
Tell You How…Part I
By Sean Hyman

Good Day Currency Traders! Very Happy

Many first-time currency investors assume you need a complex, involved trading strategy to actually make any money. But that’s just not the case.

On the contrary, I watch only a handful of easy-to-follow indicators to create my overall trading strategy. In fact, both my long-term investing and short-term trading strategies are pretty simple. study

With that said, I want to share with you my top five indicators that I watch to place my currency trades. You can think of these indicators like “profit triggers” to tell you when to place your trades in the Forex market. I’m guessing you’re already familiar with all these indicators, but perhaps you never thought to use them to trade currencies.

For starters, I pay attention to where the U.S. dollar is heading. If you can figure out where the dollar is heading, then you know where the major currencies (“majors”) are likely to go. Basketball

After all, five of the most commonly traded currencies are paired up against the dollar. I’ve listed these dollar-based pairs below…


EUR/USD (euro vs. U.S. dollar)
GBP/USD (British pound vs. U.S. dollar)
USD/CHF (U.S. dollar vs. Swiss franc)
AUD/USD (Aussie dollar vs. U.S. dollar)
NZD/USD (New Zealand dollar vs. U.S. dollar)

Golden Rule: How to Tell Where the Dollar Will Go Next
If you figure out where the dollar is heading, then you have a huge edge in the currency markets. You’ll be able to call where most dollar pairs are heading.

So let’s look at my first profit trigger that gives me an idea about where the U.S. dollar is going. The first weapon in my arsenal is gold (symbol $GOLD at stockcharts.com). Check out the chart below. I’ve plotted the U.S. dollar with a black line and gold with the red line. king


Gold & the Greenback Trade in Opposite Directions Over Time!

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You see, gold is priced in dollars, so it tends to trade inversely to the dollar. So if I believe gold is heading higher in price, then by default, the dollar will probably head in the opposite direction (down) during the same time period. This will lead me to sell the dollar against another currency.

Assuming the dollar is heading lower, I could play this trading theme either by shorting the USD/CHF pair for instance or by buying EUR/USD or GBP/USD. In either scenario, I’m shorting the dollar against another currency.

I’ve traded off this gold/dollar theme recently. While the stock market was scaring most investors out of the market affraid , I had my eye on gold to see if it would soar higher. Frankly, all these stock market collapses would usually cause gold to soar. In fact, gold had every excuse in the book to rally back up to US$1,000 an ounce or even higher.

But the fact is: That didn’t happen. Gold stayed relatively flat during what should have been a perfect investment environment for all precious metals. This told me that gold was weak relatively speaking and I should buy the dollar against other currencies.
cheers
Looking at the dollar alone, I didn’t have a strong conviction about which direction it would head. However, when I saw how gold was responding to the market environment, by default, I formed a strong “tradable” opinion about the dollar. Sure enough, the pro-dollar trade was wildly profitable for me.

Oil and the Euro Could Be Siamese Twins!
The entire world watches my second profit trigger, yet we watch this trigger for different reasons. It’s the price of oil. Joe Plumber just watches oil prices because it directly influences how much he’ll be paying at the gas pump. However, as a Forex trader, I watch oil prices because oil is priced in dollars. Therefore, oil tends to trade opposite of the dollar as a result. geek

You know what else trades opposite the dollar? The euro. In fact, traders often call the euro the “anti-dollar.” It gets this name because when traders want to run away from the buck, the euro is one of the most liquid places traders can dump large sums of money. So when the dollar is in the doldrums, the euro tends to rise. sunny

Since both the euro and oil both trade opposite the dollar, it also means they must trade in similar directions. Check out the chart below and I think you will see what I mean. Oil is the black line and the EUR/USD (euro) is the red line. (Note: Oil can be tracked at stockcharts.com using symbol $WTIC.)

Where the Euro Goes, So Goes Oil bounce

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When oil cost over US$145 a barrel, oil was acting like an enormous “tax” on an already struggling global economy. When you have to pay more at the pump, you have less of your paycheck to spend on other things. That’s why it acts like an extra tax on your overall earnings. pale

Earlier this year, I believed this tax would be the nail in the coffin for the global economy for the time being. I also believed that as the global economy took it on the chin in the short-term, economies would slow and so would the demand for oil.

I was able to translate this strongly held opinion into a trade by selling the euro against the dollar. After all, oil tends to trade opposite the dollar and right along side the euro. So it made good sense for me to trade this pair. Sure enough, it all unfolded as I predicted. Oil suffered and guess what? So did the euro.

See how these simple concepts can translate into profits? This doesn’t take a rocket scientist…just an investor with an opinion strong enough that it becomes tradable in the currency market.

Sean

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