The yen was very strong yesterday as stocks fell. The yen is the number one defensive currency right now and the dollar is the “2nd best” defensive currency right now. This can be seen when you directly compare the USD and JPY against each other in the USD/JPY pair. You’ll notice that it has still gone down even though the dollar and yen have both risen against most every pair. Yet against each other, the yen has remained the stronger of the two when the market gets defensive. So shorting “yen pairs” is typically better right now when the stock market tanks and currencies go on the defensive.

So what is going on today?  Well this looks like a bit more than the usual “flight to safety” trade.  Could this have something to do with the G-8 meetings taking place this week?  There have been rumblings about replacing the USD as the world’s currency.  Could this be telling us something about that?

Or is this foreshadowing for what may come down the pike for equities markets?

Stay tuned!

You know, when I was in the stock market, you would just see one thing being traded and quoted (ex. IBM, Google, GE, etc.).

However, when I came over to the currency market, I noticed that currencies were in “pairs” rather than just individually quoted and I always wondered why they were that way.

I came to learn that really, everything is a paired trade when you think about it. For instance, when you buy Google’s stock, it’s really like GOOG/USD. Why? Because you’re betting that Google will go up much more than just holding dollars or depositing your dollars in a savings account and earning the meager interest that it earns.

So if you felt that Google’s stock would perform better than your dollars in a savings account, then you’re exchanging your dollars for Google’s stock since you think it would go up more over time than your dollars and the outright interest that they earn.

In the same way, you value a currency by comparing it to what you think another currency is worth. After all, the dollar could perform one way vs. the euro (EUR/USD) and a totally other way vs. the Japanese yen (USD/JPY).

It’s Simple: Put your Money into the “Best Currency vs. the Worst Currency”!

It’s entirely possible that the dollar could lose value when compared to the euro but gain value when compared to the yen, for instance.

So the dollar’s strength is measured by its strength against another currency….OR…I could say it this way. A currency’s strength is determined by how much of another currency that it could buy at the time. If it can buy more today than it could yesterday, then it’s stronger. If not, it’s weaker.

Therefore, in the “pairing game”, what you want to do is buy the absolutely strongest currency and pair it against the poorest performing currency. As I often say, “If I could rig a fight, I’d want to put the strongest fighter vs. the weakest fighter and place my money on the stronger fighter”. Well, that’s exactly what we’re doing in currencies.

Some traders determine the “strongest fighter” by looking to the charts to see how well a currency is performing (trending) vs. other major currencies. Yet other traders will look to see which country has the best fundamentals overall and which has the poorest.

Either way you determine this, it’s important that you do so. You need to have an opinion. Not only that, you need to have a “strong opinion” on the pair you choose. That way, it will help to keep you in the trade when the pair goes bobbing all around and your account equity temporarily jumps around all over the place.

Find out which “Currency Camp” describes you!

Right now, there are “two camps” out there battling it out. One is the camp that thinks that the deflation out there still will carry on and that the central banks and governments of the world can’t possibly pull us out of it anytime soon. Those traders are the ones that feel their “strongest currencies” are the dollar and yen vs. most other foreign currencies (especially higher yielding currencies that they feel have the most to move down in interest rates like Australia or New Zealand).

In other words, they’d be short the AUD/USD, AUD/JPY, NZD/USD and NZD/JPY pairs since they feel that the deflation will draw people to the dollar and yen and away from the “high yielders”.

The “other camp” is the one that thinks inflation is returning and that the global economy is on the mend. They feel that we are past the trough of the global recession and we’re working our way out back into expansionary/inflationary mode and away from deflation and an economic contraction.

These traders are buying the countries with the highest inflation rates (again, like Australia, New Zealand and the U.K.) vs. the defensive plays of the dollar and yen. So they’d be buyers of AUD/USD, AUD/JPY, GBP/USD, GBP/JPY, NZD/USD and NZD/JPY for instance.

I say…You can count on governments to “print their way” out of a global recession causing inflation!

It will be a while before we see which side wins. Personally, the way I see the fundamental data tilting, it’s all tilting towards the latter crowd rather than the former crowd.

However, either way you feel, if you have an opinion about where the world is headed economically (inflationary or deflationary), then you have an opinion on which currency pairs to look towards.

Never pair “medium strength” players together though. Always, “rig the fight” by putting your strongest candidate against what you feel is your “worst candidate”. By doing this, you will have a pair or two that you feel the most strongly about and you will find that you hold up better when your P&L is bouncing around all over the place.

[B]However, if you tweak your RSI settings to where they are set to 9 periods…then you will find that the RSI gets wider swings which will trigger more RSI signals at or very close to the 30/70 levels when the 14 period didn’t even come close.[/B]

See my chart and you’ll see what I mean. Copy/Paste this link into a new browser and you’ll be able to see the chart. http://www.forextradingblog.com/wp-content/uploads/2009/07/rsi-14-9.JPG

[B]Note:[/B] In downtrends, it’s best to ONLY take sell signals for your entries. In an uptrend, it’s best to ONLY take buy signals for your entry signals.

I’ve circled many of the signals below that triggered on the 9 period RSI that didn’t trigger on the 14 period RSI setting. This would allow for a lot more potential trading opportunities on this chart with that one small “tweak”.

Try it out, mainly when your 14 period RSI isn’t generating enough signals often enough. See if you like it.

Sean Hyman

The worst performers this morning? USD/CAD and AUD/CAD. So since CAD/JPY is the strongest and these others are the weakest…it shows that there is CAD strength across the board this morning, dominating many currencies out there.

The unusual thing about this? Canadian banks are closed today for a holiday. Normally that makes a currency very “dull” more times than not. So in this case, there must be enough speculative volume out there to push this currency around in the absence of the big bank volume. Interesting!

U.S. ISM Manufacturing will be out shortly this morning. So be on the look out for that and what it comes out at. You can get that info at www.dailyfx.com .

Sean Hyman
www.forextradingblog.com

First, you should pull up a daily chart that goes back in time at least a year (even more time is even better). Then place a 200 Simple Moving Average (SMA) on the chart. That’s the line that I’ve got the arrows pointing to on the chart below. The SMA can be found under the “Studies” or Indicators” section of most any charting package.

Let the 200 Day SMA be Your Guide

One of the most widely used indicators in the world is the 200 SMA. I even catch purely fundamental traders putting it on their charts. Why? Because everyone needs to be able to tell which way the long term trend is headed, even pure fundamentalists.

I’ve charted the EUR/USD pair on the daily chart going back several years in time.

The 200 SMA Smoothes out the Trend and Points the Way to Trade

Towards the left of the chart we can see that the “average” price moves upward over time. So while the price may be jagged and spiky at times, they moving average smoothes all of this out so that we can tell if the price is headed up overall or downward overall. To the left of the chart, the price continues to climb higher, so it’s in an uptrend at that point. However, on the latter part of the chart (right side), then trend turns downward and the longer term trend is then downward. You want to define the trend’s direction and trade with it because that’s where the higher probability trades lie. Low probability trades would be shorting an uptrend or buying a pair in a downtrend. You will notice that the price tends to trade at or above the 200 SMA in an uptrend and in a downtrend the price dips below the 200 SMA and holds at or below it.

How to know when a New Longer-Term Trend is likely Beginning!

Therefore, we’re alerted to a “new long term trend” emerging when the price makes this shift. We can see that in August of 2008 when the price fell below the 200 SMA. At that point, the long term uptrend ceased and the “new” downtrend emerged. Then in May of 2009, the uptrend re-emerged for the EUR/USD. As long as the pair can hold above this 200 SMA, then it’s still in its longer term uptrend. Once the pair drops back below the SMA and holds below it, we know that the uptrend has likely ended. So let the 200 Daily SMA on the daily chart be your guide as to whether you should be looking for “long” (buying) entry opportunities or whether you should be looking for “shorting” (selling) opportunities for your entries into a trend. Using this as your guide will enhance your trading performance. No matter how much you get tempted…don’t trade against this trend, but stick with it. Oh sure, you can take profits if you wish, once it trades way away from the 200 SMA…just don’t counter trend trade against it. Be patient and wait for a re-entry back into the trend once the pair retraces back towards its 200 SMA once again!

Click on the chart to enlarge it.

Glad I had my entry order in, waiting on it. I woke up the next morning and I was filled on the order and was up over 260 pips! That’s huge for a pair that typically moves about 80 pips in any given 24 hour period!

Check out what intervention looks like on the 5 minute chart below. Click on the chart to enlarge it.

You can see why it’s important even for technical traders to pay attention to the comments of central bankers. When they speak, they’re usually not bluffing. They will send out some warning signals to the markets ahead of time generally, as they express their disgust for where the currency is…however, if that’s not heeded by traders, they will soon put them in the “House of Pain”.

Of course, since I was long the pair as I anticipated the intervention, I’m loving it. But imagine the guys on the other side of my trade that had 260 pips of loss in about an hour! Whoa! That’s huge!

It appears that the Swiss have successfully reversed the downtrend in the EUR/CHF pair. This will cause them to gain the support of “trend following” systems that the big hedge funds run. That’s one reason why the Swiss sold francs furiously yesterday, to ensure they got above the “downtrend line” on the daily, 1 year chart.

This is a monumental moment for the Swiss! Now, if this trend reversal sticks…it will bode much better for their economy going forward.

Want to learn more about fundamentals and technicals? Sign up for an inexpensive, only forex course today and we’ll show you how: http://www.mywealth.com/currency-trading.html

Also, get a free, real time demo trading station here: http://www.fxedu.com/practice-forex-account

Sean Hyman

www.forextradingblog.com

Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

Now here we are, a couple of weeks later, and what was formerly short-term support has now become resistance!  Let’s have a look… (click charts to enlarge)

As you can see from the charts, the area right around the neckline that had formerly been support has now become resistance and has held on two different occasions. This occurs often and is something that technical traders should be aware of.  Short-term traders who like to trade “the range” can enter short positions below resistance with a stop placed just above.

Get ready for the FOMC announcement, just about an hour away!

This comes a day after every member of the ECB committee said that rates were “appropriate” and that they were committed to keeping it unchanged throughout the rest of the year.  Whether or not they will be able to maintain this stance is anyone’s guess but this wouldn’t be the first time that the ECB has caved to external pressure.

Stay tuned!

Want to learn more about fundamentals and technicals? Sign up for an inexpensive, only forex course today and we’ll show you how: http://www.mywealth.com/currency-trading.html

Also, get a free, real time demo trading station here: http://www.fxedu.com/practice-forex-account 

Sean Hyman

www.forextradingblog.com

Selling short is when you are going into the market by INITIATING a sell order FIRST,expecting the pair to trend downward and thus gain money in your account equity that way. As the pair falls, your account appreciates in value. Then when you think the downturn is over, you can close out the “short sell” by buying back to cover. This is simply done by clicking on the buy quote and placing a buy for the exact number of lots that you’d shorted. 

Just as a sell closes out a regular buy order….so does a buy order close out the sell (sell short) order. So when you initiate a sell to get into the trade (to enter the trade)…you are shorting (selling short). 

Want to learn more about fundamentals and technicals? Sign up for an inexpensive, only forex course today and we’ll show you how: http://www.mywealth.com/currency-trading.html

Also, get a free, real time demo trading station here: http://www.fxedu.com/practice-forex-account 

Sean Hyman

www.forextradingblog.com

Want to learn more about fundamentals and technicals? Sign up for an inexpensive, only forex course today and we’ll show you how: http://www.mywealth.com/currency-trading.html

Also, get a free, real time demo trading station here: http://www.fxedu.com/practice-forex-account

Sean Hyman

www.forextradingblog.com

To answer that question, I think the guys at “Chart of the Day” give a good visual of this: http://www.chartoftheday.com/20090612.htm?T

You will see from their chart of the length of recessions, that there have only been about 4-5 recessions last as long as the one we’re in now…going back to 1900!

When many of those happened, keep in mind that there was no SEC or regulatory oversight. Anyone could leverage stocks 10 to 1 at a whim. They could trade off of inside information, etc. It was a “wild west” back then…where almost “anything goes”.

However, today we live in a different day with the FDIC, SEC, CFTC, NFA…an established Federal Reserve, etc. This helps to keep many of those instances from being in “modern day” and it’s why many of those long recessions were in the “pre-World War II” era.

Since then, for the most part, recessions have been shorter in duration. However, we did have quite a bit of “excesses” that got out of hand on many fronts (housing, lines of credit, derivative trading, the way mortgages were packaged, etc.).

Now, there was one much longer than what we’re in right now…the 1929 recession which turned into a depression.

The government didn’t know then what they know now (not that they know much now, hehe!). In that recession, they actually RAISED interest rates and RAISED taxes and imposed tariffs. These are all wrong moves when you are in an economic slump/recession…so it just aggravated the problem. (By the way, tariffs are wrong all the time, in my opinion).

In this recession, there were stimulus packages, lowered payroll taxes, and rate cuts way early on. This is why I believe it will not be a repeat of 1929.

This is why I also believe that we are actually out of the recession now but the data won’t show it for months to come.

Keep in mind that EVEN WHEN a country comes out of a recession economically, unemployment remains high for a period and job losses can continue. This is because corporations are “skittish” about hiring and they have been used to the “belt tightening” mode. They would rather err to the side of caution than to move prematurely. Therefore hiring ALWAYS lags an economic recovery just as FIRINGS always start AFTER the economic slump has begun and employers don’t realize it at that point.

So the “odds” (from the link above) are in our favor…but more importantly, I believe that we’re coming out for many other reasons.

1. Look at the price of oil. It has gone from $33 to $72 a barrel in a short time. How can that happen with huge supplies above ground on tankers all over the place? Increased demand…spurred by an economic recovery that doesn’t show up yet in the lagging economic data numbers.
2. China is recovering. China’s numbers have perked up lately due to an economic stimulus package that has been successful and also because of some tax breaks/cuts and subsidies. Their growth is now starting to spill over into places like Australia and New Zealand, as they expand and need goods from these countries. It won’t be long before there’s a “ripple effect” as those
3. Commodities are recovering. These only recover because demand is being put on the supply. So there’s more demand out there right now than many think. Demand only comes from growth and expansion, not retraction.

Therefore, I believe we are entering times that are more favorable to foreign currencies like the Aussie dollar, Canadian dollar, New Zealand dollar and next, the Pound and Euro..and probably in that order too. The dollar will likely suffer, as will the Japanese yen and likely the Swiss franc too (vs. these former currencies mentioned).

Sean Hyman

www.forextradingblog.com

This morning the US dollar is showing the most strength, up sharply against the commodity currencies.  USD/CAD (+1.9%) to 1.1228 and AUD/USD (-1.45%) to .8078.  Predictably, oil is down and the US equities futures markets are showing signs of weakness.

We know the fundamental story of the commodity currencies, particularly the Aussie dollar as Sean Hyman so eloquently laid out in yesterday’s blog.  But let’s take a look at the technical picture of the AUD/USD:  (click on chart to enlarge)

It looks like we’re seeing a potential double top at .82 for the AUD/USD pair.  As we can see, the trend has been up and this pair has had a nice run so far.  The fundamentals haven’t changed, but there is a lot of rumbling coming out of the US that the government plan of borrow/spend and keeping interest rates low to inflate away our debt is facing some opposition.

There are also rumblings that the Fed may have to begin to raise interest rates to satisfy our creditors and to quell commodity (paricularly oil) inflation.  What will actually happen is anyone’s guess.

So keep an eye on USD as we could be seeing traders anticipating a potential Fed move.  If you do decide to short this pair (not advised- trade with the trend!) then keep a tight stop just above that .82 level.

And pray that the Fed knows what they’re doing!

The superior fundamentals alerted me to this trade long ago and I’ve been “technically trading” this far superior currency for quite some time now against those with “crappy” fundamentals. Crappy…that’s a technical term, you know. He-he!

Which currencies have horrible fundamentals at the moment? While there are many actually, I’ve focused on the U.S. and Japanese yen. Australia is up over 12% on the calendar year while then yen is down about the same! Click on the chart to enlarge it.

So I look for technical buy entries into the uptrends on AUD/USD and AUD/JPY predominately.

Since any chart can be technically traded…if you focus on the ones with superior fundamentals, you’ll find that your technical trades work out more favorably over time and that the moves that you get are larger at times than if you’d just taken “any buy signal” on any other pairs.

When I speak of fundamentals, I don’t mean a news event…or news event trading. I mean that I look at year over year (YoY) numbers on CPI, GDP,…I look at interest rates, jobless rates, etc. to put together the fundamental pieces of the pie. Then I also do this to see who belongs at the bottom of the list as well.

When I pair the “good looking fundamental country” against the “ugly fundamental currency”, I have my top pairs to trade.

Then, from there…I look for technical entries on the charts to enter these trends that the fundamentals produced.

Want to learn more about fundamentals and technicals? Sign up for an inexpensive, only forex course today and we’ll show you how: http://www.mywealth.com/currency-trading.html

Also, get a free, real time demo trading station here: http://www.fxedu.com/practice-forex-account

Sean Hyman

www.forextradingblog.com

However, while that’s technically correct, I think that it’s called the “Loonie” because it’s kind of “bi-polar”. Ha-ha!

You see there are two major “pulls” on the Canadian economy. One of them is the “pull” that commodities have on their economy. On the other hand, the other “pull” is based off of how their biggest trading partner is doing: the United States.

The tough thing to determine when trading the Canadian dollar is when the focus is on the commodities side and when the focus is on the U.S. side.

As you know, the U.S. had led the world down into the latest recession. This was a horror story for Canada. After all, when the U.S. slows down, it doesn’t consume as many goods and it doesn’t need nearly as much (quantity wise of) commodities. Therefore, as the U.S. economy slows, so does their use of oil, timber and other commodities that Canada exports to their larger neighbor.

You can see this easily on the visual below. Click on the charts to enlarge them.

You can see by the GDP chart above, as the U.S. went into negative GDP growth (-2.5%), that Canada ended up in the same boat (-2.13%).

However, on the other hand, the Loonie can also do well when commodities do well. So how does one figure out this currency?!? I’ll tell you how I do it by the chart below.

If you have to say which side of the equation has more strength, I say it’s the side that assesses how the U.S. economy is doing. Why do I say that? The chart above shows which side has more strength.

In 2006 and most of 2007, commodities (like oil) and U.S. stocks (like the S&P 500) were going up…and the Canadian dollar (FXC) “ate this up”.

Note: As FXC goes up, you would want to be short the USD/CAD pair in the forex market to have the equivalent direction.

However, towards the end of 2007, you know what happened to U.S. stocks….they peaked! You can see this in the top of the chart above. However, in the very bottom of the chart above, you see that oil rally on for another 6 -9 months, yet the Loonie didn’t even notice it!

That’s why I say, when U.S. stocks are doing well (and especially when both U.S. stocks AND commodities are doing well), it’s time to be a buyer of the Loonie.

HOWEVER, even if commodities continue to head higher… IF U.S. stocks start to slump and the U.S. economy starts to slow down, it’s time to bail out of the Canadian dollar trade.

By the way, if the central bankers have it right…and we’re past the worst and “green shoots” are starting to pop up once again, then one should be a buyer of the Loonie once again. And this is exactly why investors have poured back into it. Because BOTH stocks and commodities have stabilized.

As long as that theme continues, then shorting the USD/CAD pair will be just fine. If, for some reason, U.S. stocks lose their momentum and start to head south again, then it would be time to bail out of your USD/CAD short position, in my opinion. Get a FREE, REAL TIME demo account to trade, here: http://www.fxedu.com/practice-forex-account

Sean Hyman

(click charts to enlarge)

The chart  on the left is yesterday’s chart of EUR/USD identifying the head and shoulders pattern with the neckline at 1.4127.  I mentioned that if the the body *not the wick* of the candle broke the neckline, then that would be a good short opportunity.  Well take a look at the chart on the right!

The body did in fact break the neckline at 1.4127 and I entered a short position.  As you can see from the chart, there was quite a bit of activity during the release of the NFP and once the market digested the number, it picked the direction it wanted to go.  I am now comfortably sitting in a nice short trade with over 100 pips of profit!  I am trailing my stop and will probably get out of this trade before the close today as I do not want to be in a position over the weekend.

To learn more about how you can identify winning trades like this one, check out the currency course or visit www.fxedu.com.

This event draws traders like bugs to a light.

However, it’s not always the most prudent thing to trade, especially for newer traders. Why? The volume can be thin before and during the event and even up to about 30 minutes to an hour or so afterwards. 

You see, the big banks usually stop making new trades in the marker WELL BEFORE the NFP announcement because they don’t want to put on their huge trades (usually a billion units or more, no lie) right before an “unknown” like this. The pros aren’t much on gambling on what they don’t know and can’t quantify.

No, they want to know what they are facing before placing trades. So since the “big boys” are out of the picture, so is a lot of the “huge” fx volume that we’re all so accustomed to most of the time. 

Why the huge draw to NFP? Because, since the volume is thin and the numbers can routinely come out well off of expectations, it set up an environment for huge pip moves. Take a look at the last NFP for EUR/USD. This pair normally moves an average of 180 pips over 24 hours right now. However, upon the NFP announcement, it moved well over 215 pips. 

If you dare to trade this event…be aware that you should trade FAR FEWER lots than you normally trade…and stops would have to be wide. Be comfortable with the potential dollar loss that could happen and make sure it is no more than 5% OR LESS of your account equity. Get a demo to trade, here: http://www.fxedu.com/practice-forex-account

Sean Hyman

Because you can get caught off guard if you’re not careful and a pair will spike very hard within minutes and you wouldn’t know why. 

Take for instance, as of this writing, the Non-Farm Payrolls for the U.S. are expected to come out. They come out at 8:30am EST typically on the 1st Friday of the month. (A few times a year it’s the 2nd Friday of the month). This is probably the most widely watched news event out there. Thus, it can be one of the biggest “market movers” all month long. So you can see where you’d want to be aware of this. 

How can you know what other events are important to be aware of? Check out Forex News | Forex Trading News | Currency Trading News and go to their calendar page. Then look for anything marked “high”. That means there is a high probability of it being a “market moving” event because it’s high in importance. That way, you don’t have to be a pro to know what news may be important to the currency market. You can simply scan for the “high” events and be aware of when they come out. This way, you can avoid a new entry right before an event if you want to…or you can close out all or part of your order ahead of the event…or you could simply tighten up your stop a bit more around these times.

Any of these could be ways to defend your account equity right before these events come out. You see, while technicals on the charts do take into account ‘all knowns”…data that is unknown can’t fully be factored on. Once the data is known, the technicals can factor them in quite quickly. However, by that time, damage could have already been done to your account balance. Click on the visuals to enlarge them.

Sean Hyman

www.forextradingblog.com

Every morning when I begin my day, I look at all of the currency pairs I intend to trade in as many time-frames as possible.  I am looking for discernible patterns that I recognize that will give me a clue as to which way a pair may be moving that day.  Once I have a few patterns that I like, I then check for news or information which may give me a clue as to why a certain pattern is forming.  Here’s one I found this morning:

 (click chart to enlarge)

As I was flipping through my charts, I came upon EUR/USD and saw this beauty on a 3-hour chart.  A near-perfect head and shoulders pattern!  If you look at the chart, you can see both shoulders (marked by an ‘S’) and the head (marked by an ‘H’).  This is a reversal pattern and tells me that if the BODY *note not the wick* breaks the neckline, then its going to be a pretty good short opportunity.

If the candle does not break the neckline, then I can consider getting long and using the neckline as support, placing my stop just below that area.

Upon checking out the news, I know that the ECB had a rate meeting and that ECB President Trichet made some comments.  Now I’m not going to pretend to be able to know the effects of his comments or actually even what he said for that matter, but I will let the market tell me.

By using a technical set-up to get into a trade, I can sport low-risk entries for what I’m hoping will be profitable trades.  To learn more about how you can spot patterns like this one, check out our currency course.   Just think, if you learn just one set-up from our course and you make a profitable trade, then the course has paid for itself!

The chart on the right side is the daily chart of the AUD/USD pair.  As you can see, the trend is clearly up.  Which means that you want to be long, and brings us to the theme of the day, that you can be in opposite positions on the same pair at the same time!  This is known as “hedging”, and can really help add to your profits and help limit your losses.

Recently the NFA (National Futures Association) outlawed this practice here in the US, but this is still allowable abroad. If you would like to learn more about hedging or how you can open a hedging trading account with a broker abroad, email us at: sales@fxedu.com.

Just click on “Practice Account” or “Live Trading Account”.

Also, investors are betting on inflation coming in the future and are positioning themselves ahead of time. To do that in currencies, there’s no better picks than these commodity currencies vs. the buck. It’s a “double whammy”.

The dollar gets pummeled when commodities and inflation rise while at the same time the Aussie, New Zealand and Canadian dollars get the “wind to their backs” when this happens.

So the AUD/USD and NZD/USD long and USD/CAD short get “blessed” doubly during these times like we’re experiencing now.

Recently, some of the moves that have taken my account to new highs have been plays on the Aussie dollar vs. the U.S. dollar and yen (being long AUD/USD and AUD/JPY).

Australia is one of the clear fundamental winners even amongst the commodity currencies. The trends have been clear and they’ve been strong.

Of course there will be pull backs along the way, and they could be volatile and violent. However, look for the uptrend to resume each time these huge pull backs happen.

Sean Hyman

www.forextradingblog.com

How do I know they are so “long” USD/CHF? Look at Dailyfx.com ’s SSI reading and you will see: http://www.dailyfx.com/docs_pdfs/research/FXCMSSSI05282009.pdf

Want to take advantage of this? Then you can open up a demo account here: http://www.fxedu.com/practice-forex-account

Or a live account here: http://www.fxedu.com/live-forex-account

Need to learn more about this market first? Go here (http://www.mywealth.com/currency-trading.html)to get started in an inexpensive online course that’s available 24 hours a day…no matter where in the world you’re at…you have live instructors there to answer your questions anytime 24 hours a day Sunday evening through Friday evening.  

Sean Hyman

www.forextradingblog.com 

I learned a long time ago that when a currency “defies” its news and does otherwise, then go with what the currency IS doing and not theoretically what it SHOULD be doing.

Now, why in the world would it be rising when all of the news is so bad?

1. The pound tends to do well when stock markets stabilize. For the past few months, that’s exactly what we’ve had. So that’s supportive of the pound.
2. The pound gets “pushed up into the clouds” when times are good (ex. 2.11) and it gets “pushed into the ground” when times are bad (ex. 1.35). Both extremes are usually wrong.
3. The worst case scenario has already been priced into the pound.
4. Technically speaking, it’s broken a downtrend, sideways range…put in “higher lows and higher highs” and has held above its 200 SMA. So what more does a technical trader need to buy the pound? Nothing!
5. The dollar is now in a downtrend (according to the daily chart of the U.S. Dollar Index). Therefore a “falling dollar” can make the pound rise too.

These are the reasons why I believe that the British pound is defying the news lately. Hope this is helpful to those traders out there who have been scratching their heads and wondering why.

Sean Hyman

www.forextradingblog.com

However, the biggest traders out there aren’t so much “news event traders” and yet they are still fundamental traders. 

How? Because they keep in mind where interest rates and CPI are heading in the given countries. They watch the GDP growth to see how the country is growing, etc. They rank the ones that perform the best fundamentally and pair them vs. some of the worst fundamentally. 

That gives them their pairings, no matter what time frames they look for entries into that fundamental direction. 

So let’s say that they think the Aussie is one of the best fundamentally sound countries out there (and thus its currency too). And let’s say that they think that the U.S. is very fundamentally flawed and is one of the worst performers when it comes to their fundamental data overall. Then they’d want to look for buy technical entries into the AUD/USD pair. That could be on a one hour chart, 4 hour, daily, 5 minute chart, etc.

No matter their holding time length…they buy the best and sell the worst. That’s how many big institutions look at fundamentals and technicals. They technically trade in the right fundamental direction on the best pairings.

They continue to defy U.N. warnings against such activity. So they will undoubtedly suffer sanctions from many countries of the world.

I’m sure what they hope for is the ability to sell weaponry to other evil governments that will help to offset the strain that the sanctions put on them.

Then, once again, they will probably do like before and “promise to be good boys” while they have their fingers crossed behind their backs.

You can’t “reason” with evil and therefore you can’t reason with Kim Jong Il.

He’s a confused puppy. He wears glasses that only Elton John could love…and wears his hair like Elvis! He tries to poof his hair up as much as he can to help to compensate for height.

So if Obama, the U.N. or any others think they can “truly” reason with him and bring about long term change, they are kidding themselves.

Therefore, expect for there to be surprises in the currency market here and there as they point missiles towards Japan and towards South Korea. Expect it to gyrate the yen and won from time to time.

However, ultimately, his effect upon currencies will be temporal and not long lasting…thankfully!

Stay tuned to this saga and see where it goes, because it could gyrate things in the mean time and money can be made off of something you or I can’t control…which are the actions of this “mad man”! Click on the pic to enlarge it. 

(click image for larger view)

Click Image for larger view

For instance, the German DAX has been “perking up” lately. It broke a recent downtrend line and has also recently come back up above its 200 SMA (which is more than most U.S. indexes can say right now). When big institutions start to see this, they start to funnel money into that market. So not only do Europeans invest in the DAX but foreigners to that market do too.

When they want to invest in that market, they have to “sell” their home currency and “buy” the home currency of that market. In this case, that would be euros. Since Americans have become such huge international investors, I look to the EUR/USD pair.

Americans would have to sell their dollars and buy euros before they can purchase a stock priced in euros. This helps the EUR/USD exchange rate to head higher as the DAX improves. Also, as their stock market improves, so does the sentiment for their country and therefore their currency overall too. This is another reason why it would cause the euro to prosper. 

General Exception to this Rule: Many times, the dollar will do THE OPPOSITE of its stock market. Therefore, as the U.S. stock market recovers, the dollar historically plummets and as their stock market tanks, traders run into the “safe haven” of the world’s reserve currency….the dollar. 

This effect really adds to the EUR/USD trade as both the DAX and U.S. stock markets perk up. So if you are new to currencies and are still “getting your feet wet” there, but have strong opinions on where the stock market indexes are going….then maybe you have a much better grasp on where currencies are going and you just didn’t know it. 

Cick on the chart to enlarge it.

Sean Hyman

(Click on the image to enlarge it)