One of the reasons I love trading currencies is that they have little correlation with stocks.
Foreign exchange (forex) is also the deepest market in the world, with trillions of dollars changing hands every day. That means you can readily enter and exit markets around the clock.
But while forex trading can be very lucrative – and has been throughout my 40-plus-year career – some traders ignore it. That’s a major mistake.
Interest rates, inflation, Treasury yields, geopolitics, and oil are all pulling in different directions right now. That’s exactly the kind of environment where currencies offer great opportunities. In fact, we recently took advantage of another one…
We closed out a long EUR/USD position for a 189-pip profit. That equates to $1,890 for anyone trading one standard lot.
To be fair, the forex trade didn’t immediately go our way. But by being patient and sticking to our strategy, we can find profitable trades in highly uncertain times…
“Market Wizard” Larry Benedict is revealing his favorite strategy for helping American catch up and prosper in today’s America. Two simple rules are all it takes. Click here to see the rules and prosper.
For a limited time, Larry has put together a special offer for his highest level of membership. This membership comes with a whole host of benefits… But we’ve recently added a new bonus that’s especially exciting. In short, when you join today, you’ll receive a complimentary membership to Larry’s newest research service, Prediction Profits. The only catch? Because of the deal you’re getting, the enrollment period is very short. Details here.
The key to understanding forex is that you are anticipating one currency will strengthen against another. And there are several factors that determine which currency comes out on top.
One of the biggest is interest rates. If rates (or expected rates) are higher in one country than another, global capital often flows toward that currency, chasing a higher return.
Economic performance matters too. A strong economy can attract foreign capital trying to take advantage of that growth. Note, though, that if growth becomes too strong and drives up inflation, the country’s central bank could be forced to raise rates – adding a tailwind to the currency.
Then there’s political (in)stability, government policy, and geopolitics. As we’ve seen repeatedly this year, changes in any of these can cause enormous amounts of capital to move very quickly.
And that brings us to our latest trade…
A big interest rate differential between the U.S. and Eurozone had seen the euro steadily fall against the USD this year – pushing EUR/USD lower. A strong U.S. economy had added to the move, while Europe’s heavy dependence on imported energy created drag on the euro.
But that move had become overdone…
The pair had fallen far below its 50-day moving average. And the Relative Strength Index (RSI) – a momentum indicator – hit oversold territory. That’s happened only five times in two years.
So we opened a long position to capture a mean-reverting move higher. Check out the chart…
EUR/USD Spot Price
Source: eSignal
As you can see, initially, the trade moved our way. But around mid-July, EUR/USD started pulling back, moving against our position.
Yet something important was happening beneath the surface. Although the pair was struggling, the RSI (orange line) was making a series of higher lows. That meant buying momentum was gradually building even though that wasn’t fully reflected in the price.
That was one reason we remained patient rather than bailing out of the trade. (Note, though, that we also had a hard stop-loss level.)
Eventually, the fundamentals gave us the catalyst we needed…
The initial move came following the Federal Reserve’s July meeting.
Markets had gone into the meeting expecting Fed Chair Kevin Warsh to reinforce the case for higher interest rates. And while the Fed’s statement certainly wasn’t dovish – three officials dissented in favor of an immediate 0.25% hike – it wasn’t as hawkish as markets had anticipated.
That’s an important distinction.
Markets don’t move simply because news is good or bad. They move according to how that news compares with what investors have already priced in.
With traders heavily positioned for a stronger USD going into the meeting, the moderately hawkish message was enough to trigger some unwinding of those positions. The dollar began selling off, pushing EUR/USD higher.
Then came another catalyst the following day.
Japan’s Ministry of Finance (MoF) intervened in the currency market to support the yen. The MoF sold dollars and bought yen. That put selling pressure on the dollar across the board – including against the euro.
That helped EUR/USD push decisively higher and through its 50-day moving average (MA, green line).
Oil also pulled back from its July 23 peak. That cooled inflation worries – and took away one argument for higher U.S. rates.
Importantly, this wasn’t necessarily a story about the euro suddenly becoming much stronger. It was primarily about the market repricing the U.S. dollar.
And that’s another important lesson with forex. You don’t necessarily need the currency you’re buying to become fundamentally stronger. Sometimes you simply need the currency on the other side of the trade to weaken.
With EUR/USD finally moving strongly in our direction – and uncertainty beginning to build again – I didn’t see any reason to get greedy. So we decided to take our profits off the table.
I know currency trading can seem complex at first. But when you break it down into its parts – interest rates, economic expectations, geopolitics, and what the technicals are telling you – the picture becomes much clearer.
And importantly, it gives us another market to trade when opportunities elsewhere are harder to find.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
