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My Personal FX Profit Trigger-How I know When to Buy and Sell…

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My Personal FX Profit Trigger-How I know When to Buy and Sell…

Post by Sean on Fri Jun 05, 2009 10:30 am

As a currency trader, I still choose my currencies based on fundamentals, then figure out when to buy based on technicals. Only instead of watching a stock’s earnings for fundamentals, I watch a currency’s inflation.

So if I can identify the countries that have higher inflation and ones that are likely to have inflation rise even higher, I have my “basket of currencies” to look to.

As you know, currencies trade in pairs. Therefore, as a currency trader, you need to pair the winners with the losers. Personally, I love to bet on unfair fights. I pair my champion currencies against the underdogs – the currencies with the really horrible fundamentals.

High inflation tells me AHEAD OF TIME what central banks may have to raise interest rates sooner than others to tame their inflation.

Strong GDP growth tells me how well (and how quickly) an economy is expanding, which will also tell me a lot about the sentiment for that country at the same time.

Then, I also know that the “big money” is a group of “yield seekers.” So I also like to find countries that have high rates relative to the others but also are likely to go higher too. That’s where the final column to the right comes in.

Now, as I glance over those three columns for common denominators, I see that Australia is at or towards the top of the pack across every category. They have the next to highest inflation, the ONLY positive GDP growth and the very highest interest rate right now too. So that’s a no brainer. Also, I see that New Zealand ranks high too. So that could be a second best pick.

Then I look to the bottom of those charts for common denominators and I see that Japan and the U.S. are low on the list, if not the last on the list in some cases.

Therefore, I know I ought to keep an eye on AUD/USD, AUD/JPY, NZD/USD and NZD/JPY as four top currency pairs to watch. So this tells me “what” to buy. However, it DOESN”T answer the question of “when” to buy them.

I don’t subscribe to the pure technical trading Forex philosophy. On the contrary, I always look at a currency’s fundamentals first, so I know which currency pairs are best to “technically trade.” It’s the easiest way I know how to weed out the best five or six pairs to trade out of the 30 or so possibilities.

Right now, you know we weeded down the list to AUD/USD, AUD/JPY, NZD/USD and NZD/JPY based off of the best fundamentals vs. the worst fundamentals.

Now to know when exactly to buy, it helps to check out these pairs’ charts. Remember, Australia ranked the highest on my fundamental list and New Zealand made a good “stand in” if Australia didn’t look like a good trade from a technical standpoint.

So I’d look to AUD/JPY and AUD/USD first. If those look good on the charts, then I’ll trade them. Case closed.


How I Weed Out the Unwanted Charts…
When I compare their hourly, 30- day charts to each other I can readily see that AUD/USD is near its accelerated uptrend line but AUD/JPY is still far off from its accelerated uptrend lines.

Also, AUD/JPY just got a MACD sell signal while AUD/USD is far past its MACD sell signal and much closer to its next buy signal than AUD/JPY.

Therefore, I’d be a buyer of AUD/USD firstly and wait on AUD/JPY to produce its next buy signal later on before investing in it.

The AUD/USD chart also is much closer to a stochastic buy signal than is the AUD/JPY pair at this point too. (A stochastic buy signal indicates that the pair is ready to buy. You can see this on the chart, when the lines go down to the 20 level or below and cross and then come back up above the 20 level.)

Even the price action looks better on AUD/USD vs. AUD/JPY. For instance, the AUD/USD has spent more time heading higher and less time in a sideways consolidation than AUD/JPY. In other words, AUD/USD has been in a cleaner, more obvious uptrend.

So as you can see, there’s even ways to rank which pairs to buy and sell based on a technical stand point as well.

This is how I’m able to take a list of 30+ pairs down to a handful of pairs and then know which one may have the best odds of moving in a sustained direction.

Therefore, at the time of this writing, I’d rank AUD/USD as my first buy and AUD/JPY as my runner up. Then afterwards, if I wanted more diversification, I’d look to NZD/USD and NZD/JPY and do the same “technical comparison” with them.

In the end, it’s all about odds and how well you play them. I hit it from both the fundamental advantage AND the technical advantage. Then on top of that, I look for ways to cut down my risk factors on each trade, so I can choose consistent winners. Then I make sure I manage my risk in the trade properly by risking only a small percentage of my capital on the trade…and that’s what gives me an edge and success over time.

I hope this has helped you to crawl into my mind to see how I pick trades. There are many ways to trade Forex, but this is the easiest way I know. You may find that it helps you in your trading too.

Sean

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