Here we will look at a simple method anyone can understand and use and a potential opportunity shaping up right now that could yield big gains with low risk for any forex trader. Lets discuss this forex trading method and give you an example, shaping up right now.
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This article is being written on Thursday November 1st.
Fundamentals + Investor Perception = Price.
Its a fact that currency markets move in line with the fundamentals but its not as simple as just looking at the news - in fact if you try and do this you will lose.
The reason for this is the markets are a discounting mechanism.
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News is discounted in a split second in todays world of instant communications furthermore; humans have to decide what the facts mean and their not logical or sensible!
They are influenced by greed and fear and a host of other inputs.
Prices Have Gone to Far a Turn Coming
The fact is throughout history humans spike prices away from fair value when greed and fear take hold and then prices return back to fair value.
If you look at news and its influence on price and then use forex charts to spot prices being pushed to far from fair value, you can get some great contrary trades - now lets look at a specific example.
If you have read my previous articles you will have seen how bullish I have been of the commodity currencies and with the Aussie and Canadian dollar making new multi decade highs we have cleared 1,000 pips - thats right, a 1,000 so, not a minor profit! You can see the reasons we used in our other articles.
The above was not doing anything complicated just following the long term trend but now if you look at the news - the bullish news has pushed prices too far - heres why.
Yesterday we had FOMC and they cut rates by 0.25% - this was expected and discounted but there was some bullish news the market ignored.
First, the Fed tempered the view that they would cut rates further but the most interesting bit of news was..
The economy expanded by 3.9%, versus calls for 3.0% GDP growth and up slightly from the previous quarter at 3.8%. This is the strongest growth since Q1 2006.
The short Term Bearish Scenario Is Peaking.
Of course, this doesnt mean that the dollar is out of the woods long term - but short term the market bearish news has peaked. Many investors were looking at 3.0% in terms of GDP and 0.5% in rates so we could see a turn.
Non farm payroll on Friday could be it at expected levels or better and the dollar could rally.
The market has pushed to far from fair value and the fundamentals and a short covering rally could be on the cards. There are a huge number of speculators long, making money and the market will flush them - its just a question of when.
Watch The Following:
Lets take the Canadian dollar as an example.
Were long but we can see the warning signs that it could turn and there is also another factor with this currency - Crude oil.
Crude has made a huge rise and many are talking of $100 a barrel maybe we will get one but only as a spike. Fact is there is no shortage of oil, this spike is pure emotional trading and a retreat to the $80.00 level could come any day and longer term $60 - 70, looks fair value.
With the Canadian dollar were looking closely at oil for a top which should add weight to the fall as Canada is a major exporter.
What are the charts saying?
Pull up a daily chart of the Canadian Dollar and you see new highs and no warning signs of a top - but pull up a monthly or weekly chart and you will see the wood from the trees, a spike that needs to correct.
When will it come? No one knows but the odds are the daily chart will show signs in the next few days on the Canada and a low risk high reward correction will occur.
There an old saying...
If you can hold your head when others are losing theirs you probably havent hear the news
In this instance it is simply you have heard the news - but you are stepping back from the majority view, getting your forex charts out and seeing the reality - a profit opportunity.
Watch action after non farm payroll and see what happens - dont jump to soon, prices will tell you what to do.
Good luck and good trading!
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Forex Trading - a Simple Method to Target 100% Gains