2 Euro Set-ups from Opposite Ends of the Spectrum

Amid resurgent volatility, Kaye Lee of StraightTalkTrading.com presents a pair of very different Euro set-ups, one a trending long entry in EUR/AUD and another a potential reversal in EUR/USD. 

Markets had been reacting somewhat haphazardly of late. That is, until this swift and sharp decline in world equities has begun to roil currency markets as well. It’s a result that is neither surprising, nor especially undesirable for currency traders given that times of great momentum and volatility also produce the highest potential for gains. The question that is worth asking, therefore, is where renewed opportunities in forex are actually occurring?

Although this article is primarily about currencies, it is also important to keep an eye on world equity markets, as they are all inextricably linked to one another. As the below chart (Figure 1) shows, the major stock markets of the US, Germany, and Japan are all moving down with a vengeance on the weekly charts. Those who are looking for longs here would likely be better advised to step aside until this momentum climaxes, as buying now would be like the proverbial act of trying to “catch a falling knife.”

Figure 1: US, German, and Japanese Equity Declines (on Weekly Charts)1

Although all three of these markets are at levels of support, momentum is likely to completely overwhelm these zones, or at least make it difficult for bulls to stage an equally sharp and sudden reversal. Thus, it is better to be patient until bottoms form, or at least until downside momentum shows signs of fizzling out.

In light of that warning, however, traders may be able to catch a potential top in EURUSD, and for starters, this is why: Unlike equities, EURUSD has been moving up with far less fervour, a point which can be readily seen on the below weekly chart (Figure 2).

This point is likely to have been missed by those who are focussed on the lower time frames, but it is a point of utmost significance, as it suggests that although the equity and currency markets are linked, the correlation is not functioning perfectly at this stage.

Figure 2: EUR/USD Momentum Is Far Less Convincing2

In periods of increased uncertainty, the usual flight is to the safe-haven currencies like the US dollar (USD) and Japanese yen (JPY). If that were true this time as well, then GBP/USD and AUD/USD (and indeed EUR/USD) would be headed in the same direction. Currently, however EUR/USD is up, GBP/USD is up to a lesser degree, and AUD/USD is decidedly down. In other words, the reaction in the US dollar, which is usually consistent, is not congruent in this instance (see Figure 3 below).

Figure 3: A Traditional US Dollar (USD) Correlation That’s Failed3

In addition, USD/CAD (shown above) and USD/CHF (not shown) should be inversely correlated with those currencies, and behaving like one another, although neither is happening right now. To sum it up, the markets are confused, and in confusion, there could be profitable opportunities.

There are two strategies to consider:

Pursue trending opportunities, the most notable of which is now occurring in EUR/AUD. For all time frames lower than the daily (shown in Figure 4), the strategy should be to buy dips on trend continuation patterns. The sheer momentum on the daily chart should ensure that the market is likely to be lenient, even on less-than-perfect entries.

Figure 4: Buying Dips on EUR/AUD4

The second strategy is not for the faint of heart. It follows the logic that if the USD reaction is inconsistent, then the market’s confusion will resolve itself at some point, and most likely sooner than the equity markets.

Actually, the mere fact that EUR/USD is headed higher is somewhat suspicious by itself. Afterall, a drop in equity markets should more than likely produce a flight to safety and dollar-based assets. Thus, we will be looking for signs of a reversal in EUR/USD, back down from the Blue Box (see figure 2 above) at 1.1680-1.2078 once it is breached, an event that should occur within the next few days.

Trades will mostly likely be based on four-hourly chart reversal patterns. This is the lowest time frame that’s viable for reversal trades since going any lower will likely result in stop-outs while the bears struggle to control momentum.

By Kaye Lee of StraightTalkTrading.com

You’ll be Shocked when You See How to Trade…

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As my own skills improve over time, I have noticed a very interesting trend amongst my clients: The more I simplify and boil things down to the essence, the more they try to complicate things!

In the past, this was never an issue, as several factors had to be considered and new clients were suitably impressed with how intricate the markets are. However, once these factors were simplified to their very essence, traders began to doubt that it really could be so straightforward (which is not to say easy).

Trading comes down to this:

1. Pick the direction of the market or instrument you wish to trade.
2. Avoid instruments that aren’t giving clear signals.
3. Choose the price or location that you wish to trade at.
4. Wait for confirmation.
5. Trade manage and control risk.

It really isn’t that difficult. What shocks traders is that it can be that simple. Increasingly, I see clients scramble to add seasoning to the methods they are being taught without even assessing the original method. “What about this? What about that? Do you consider that?” The answer is, “If it’s not in the rules, I don’t consider it. If I thought it was worth considering, it would already be in the rules, don’t you think?”

The response to this response is usually another email that says, “Okay, thanks. What about this then?” ARGH!

That said, I can understand – if I had been shown how simple it was when I was a newbie, I would probably have done the exact same thing: Try to complicate matters! Instead, I took years to boil down all the complexities.

Moral of the story: Don’t complicate the trading rules you paid to learn before you even learn them.

Perhaps giving the very essence away immediately is not helpful, even if it is the most profitable way to trade. Some of my more experienced clients think that I should complicate matters to impress newbies, and that I should make them do more hard work starting from basics. What do you think?

With best wishes for your trading,

Kaye Lee
Private Fund Trader/Head Trader Consultant
www.straighttalktrading.com
“We take your trading seriously. You should too. Make It Pay.” 
– Due to the demanding nature of personal attention required to provide trading success, only a few personal mentoring spaces are made available. Nothing personal – our own trading comes first, and if we commit to helping you, we want to do our best. Enquire via the website form (bottom of page). First come, first served.

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