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This is a Guest Post by Tom Cleveland from ForexCharts.net
Financial Markets are Tense, But the Fate of the Euro Hangs in the Balance
Financial markets are presently in a “stuck place”. Nearly every index from stocks to commodities and even to currencies has been hovering in a tight trading range for the past several weeks. Traders have been frustrated, as volatility has also remained low. There is opportunity in chaos, but not when prices are jerked back and forth in “whip-saw” like movements. Treading in these waters often results in being sliced to ribbons in a heartbeat.
Ranging markets, however, eventually morph into meaningful trends. The timing is the only issue to resolve, and, in circumstances like these, the best approach tends to be to take a longer-term outlook and try to draw insights from this broader perspective. This type of analysis combines basic fundamentals with technical data to form a basis for projecting near-term prospects. The “EUR USD” currency pair has become the current focal point for the trading community. Its fate will dictate the direction for stocks, instead of the other way around, but it presently floats at levels that seem to defy gravity.
The following diagram of the Euro versus the Greenback paints the recent “picture” for our analysis:
The hourly pricing behavior of the “EUR/USD” is presented for the past ten months, together with several indicators and other technical information. The “Ichimoku Kinko Hyo” indicator system is often helpful at longer timeframes where “noise” levels are lower and pricing patterns are more predictable. The “Kumo Cloud”, represented by the Aqua/Blue shaded regions on the chart, is the most distinctive aspect of this system.
Here are a few technical insights from the above diagram:
- The Euro has been trending downward for months within a defined channel, depicted by the parallel red lines;
- The Euro, to the consternation of all, has rebounded from the lower trend channel line on two occasions during this period. The explanation for this source of strength has been threefold. Foreign exchange reserve managers around the world have shifted their portfolio allocation back to Euros after the crisis was reduced. Central banks have also stepped in to ensure adequate liquidity in the region. Lastly, banks and corporations have repatriated foreign earnings to prepare for the oncoming recession in the region;
- A pronounced “Head-and-Shoulders” pattern has recently formed, but the “neckline” has been tested on several occasions to no avail. Traders would expect an abrupt fall down to the $1.24 level based on this pattern alone;
- The “Ichimoku” indicator speaks to two issues. The “Kumo Cloud” has mirrored the upper trend channel line, and the Euro has had difficulty each time it has attempted to penetrate the cloud. Secondly, all moving averages and current prices have converged within the cloud, uncertain as to their next move.
Basic software trading platforms provided by currency brokers can be used to create this same analytical picture. From a fundamental perspective, Europe is headed for another business downturn. Bond yields for weaker member states are rising. Iran is adding uncertainty to the oil market. China is ratcheting back its growth in response to less demand from the West. Lastly, the U.S. recovery appears to be losing steam and bringing back memories of last year’s failed recovery rally, but the possibility of a “QE3” program from the Fed has bolstered the strength of all currencies versus the Dollar.
All signs point south for the Euro. Currency experts have forecasted its fall for months, some down as far as parity. Its gravity-defying act will have to conclude at some point. The question is not “if?” but “when?” Only time will tell.
Gold Prices have been moving up for the past year. With a bounce off a recent retracement, the price of Gold is likely to keep moving up.
Take quick look at the 1 Year Gold Price chart in USD:
If you’re familiar with Forex Sailing the same concepts apply to Gold. You can see that we’re now in the III-IV phase of the wave, which would project us up to as high as $2,400 an ounce within the next year. If you don’t understand this sign up for your FREE Forex Sailing course here.
Weak Dollar = Strong Gold Prices
The long term downtrend of the US Dollar has a positive impact on rising Gold Prices (see US Dollar Index image to the right). The US continues to create new money by raising debt, causing the value of the dollar to decline and the price of Gold to rise.
A similar situation is happening in Europe with it’s own debt crisis, which also has a positive impact on Gold Prices.
A Gold Store on Every Corner
Have you seen all the Cash For Gold Commercials on TV? The Borders bookstore that closed in my local mall is now a “We Buy Gold” store. There’s also a kiosk in the same mall buying Gold. If you’re not happy with their offer, there are 3 new Gold exchanges within 5 miles of the mall.
The Demand for Gold is rising. Gold is typically bought up during times of economic uncertainty. With more Gold being bought up by all these Gold Buying Stores, Gold Prices are likely to continue rising.
An Extremely Safe Asset
Thousands of different currencies have come & gone throughout the ages. But Gold has always been an extremely safe asset that holds it’s value. Unlike paper currency, Gold can’t be manufactured artificially through an act of Goverment causing it to lose it’s value through inflation.
Gold is not only rare, it’s useful. Gold is used in electronic circuits, computers, jewelry and was one of the world’s first currencies. It’s a safer place to put your money than the stock market.
Consider Adding Gold to Your Portfolio
It’s a good time to consider buying Gold as part of your investment portfolio. I trade a portfolio of currencies, which allows me to benefit from the wild fluctuations in price caused by the actions of Goverment & Economies. I’m also lookig to expand my Gold position.
Gold Prices may rise to $2,400 an ounce within the next year. Even if they don’t rise that far, Gold is still a safe asset to hold. One that will maintain it’s value & be safe from inflation.
A normal part of online forex trading is drawdown. It’s not often talked about because it isn’t “sexy,” but drawdown isn’t something you need to be afraid of.
Drawdown is when your trading account equity moves down in value. Forex traders want their balance to go up, so periods of declining account equity are typically feared, but they shouldn’t be because drawdown is normal.
Eliminating drawdown completely would require you to accurately & consistently pick the HIGHEST price & LOWEST price in every trend. This is almost impossible due to variation in prices, known as volatility in financial markets. Nobody on earth can accurately get the highest price & lowest price on each trend. We can get good prices, but there’s always a better price we could have got.
Close Enough for Profits
As a forex trader you can correctly guess the trend direction. If prices are likely to go up, you buy. If they are likely to go down, you sell. But once you buy/sell to open a position, it doesn’t mean prices will turn around the moment you place your order. Moments after you open your trade, a better price is often available. When this better price is available, you are experiencing DRAWDOWN…
This is ok.
Sometimes better prices are available DAYS after you opened your position, resulting in a larger drawdown. You don’t want to panic, because you still may be correct about prices going up over the longer term. You can also benefit from periods of drawdown.
Larger Profits with Drawdown?
A period of Drawdown is a windup for better profits.
Let’s look at a trade where we buy (long) 1,000 units of EUR/USD @ 1.3100. Prices expected to rise to 1.3300. Wait to 1.3300 to sell.
Look at these 3 scenarios:
Scenario #1 – No DRAWDOWN: If prices go from 1.3100 straight up to 1.3300, we make 200 pips on this trade. This is the ideal case as we won’t experience any drawdown.
Scenario #2 – Moderate Drawdown: If prices go from 1.3100 down to 1.3000, we are at 100 pips of DRAWDOWN. This is a point where some traders get nervous, start feeling sick and start to doubt what they’re doing. But there’s also an opportunity. We could buy another 1,000 units @ 1.3000. This brings our average open price to 1.3050. Now, when the price rises to 1.3300 we make 500 pips profit! This is 250 pips per 1,000 units traded.
Scenario #3 – Severs Drawdown: If prices go from 1.3100 down to 1.2900, we are at 200 pips of DRAWDOWN. This would tempt many traders to panic, but it’s also an opportunity to increase profits. If we buy another 1,000 units @ 1.2900, we make 600 pips profit when we reach our target at 1.3300. This is 300 pips profit per 1,000 units traded!
As you can see, larger drawdown gives potential for higher profits. The key is not to confuse drawdown with trend reversal. As long as you still believe you are right about trend direction, drawdown is really just a difference in timing between you & the market…a difference that can earn you higher profits.
Avoid Drawdown Denial
There are times when you should cut your losses and prevent drawdown from wiping you out. There is a point where drawdown turns into devastation. It’s a line you need to walk carefully. It’s not something to fear, it’s something you need to understand how it fits within your trading system.
With portfolio hedging, drawdown is automatically accounted for & used to grab higher profits when the drawdown turns into a huge UPSWING! To receive the benefits of a well planned money management system that uses drawdown as an advantage (and avoids drawdown as much as possible), check out the rapid forex hedge report today.