Certainty in Currencies

Recent times in both the index markets and normal shares trading have proven to be “interesting”. A slight air of uncertainty is creeping in especially when one looks at the financial press. The different political agendas in a number of the world’s major countries coupled with the ongoing tensions in the known hotspots, have only added to this overall feel. With many markets moving a little sideways at the moment you may be forgiven for sitting back and taking stock. If there is any certainty in these times it is that currencies will be moving, this means opportunity for the skilled trader.

Reviewing some of the major currencies we see some great ABC trading in recent times. David Bowden mentioned that if he had to trade only one market it would be a currency because they trend strongly and are constantly moving. As all eyes are mostly focussed on the US dollar DX-Spotv I will start there. It’s important to remember the charts below are for the futures contracts over the currencies and not to be confused when trading the foreign exchange market. The major portion of currency futures trading occurs in the US on the CME (Chicago Mercantile Exchange).

Since the February lows of this year the US dollar has bounced and the three ABC long trades that have been signalled, have all been profitable. The first two long trades reached the 100% milestone with the third moving to the 75% milestone.

The Swiss Franc was one of David’s preferred markets and one of the exercises in the Smarter Starter Pack is based on trading this market. The chart below shows the potential to trade the ABC strategy on the short side. I have covered before the inverse relationship between the US dollar and the Swiss Franc SF-Spotv in a previous article, so it's no surprise that short trading is proving to be more profitable.

The chart below shows the April period of this year with three short trades and recently one long trade. All would have provided a profit as long as the appropriate strategies for entry, exit and stop loss were followed. I have also circled a strong signal for ABC trading, when the point C is becoming the next Point A a strong trend is likely to be in effect. This can often be a good sign in supporting your view of the trend.

The Euro currency has fast become of the most favoured markets to trade by many of the Safety in the Market students. I have spoken to a few recently who have made good use of the recent bearish move as seen in the chart below. Two short trades were recently signalled and again proved to be profitable. A potential long trade exists in the market if a higher top and bottom can be confirmed.

The Aussie dollar is of course the one that most people are interested in as this defines many aspects of everyday life especially when it comes to travel and companies that do business overseas. There has been a pullback from the highs at around 80 cents in February this year. Five short trades have been signalled since the February top. Three of the trades have been profitable; one is currently still active and the other exited at a small loss.

In the chart below the Gann retracement tool is run from the September 2003 low to the February highs this year. The circle highlights the importance of the 50% milestone at 71.58. A good sign would be to hold above this price if a bullish move is likely. The opposite applies as well, if the dollar falls below the 50% and closes below consistently, more ABC short trades could be expected.

I also use the resistance cards that are explained in the Number One Trading Plan. The lows card is useful in this case when we look at the major bear cycle low of 47.74 in March 2001. Applying this lows card and doing the maths gives us a pressure point of 71.61. I have noted this line on the chart below and put a square around the price. It is remarkable how pressure points in price cluster and help with support and resistance on the bigger picture.

Due to the nature of the strong trends, currencies prove fantastic markets to trade when you have the strategies to structure your entries and exits. On the Aussie dollar, we may see some upside if it can hold above the price cluster I mentioned. Failing that, get your short trading tools geared up.

Good Trading

Aaron Lynch