World Currency Watch: FOREX Market, FOREX Trading BLOG

A Tale of Two Exotics

By Ashish Advani I want to take you on a tour today of two of the most popular exotic currencies in the Forex market. These currencies happen to be complete opposites in almost every way.

The first currency offers some of the most compelling long-term buying opportunities in the world right now with healthy balance sheets, wealthy benefactors, and a positive long-term growth story.

The second…well, let’s just say it’s a great shorting opportunity if nothing else.

In fact, the only thing these two currencies have in common is they’re both considered commodity plays.

Let’s start with the buying opportunity. To go there, let’s head to the land of Samba and Feijoada first. Yes we are in Brazil.

As I told you yesterday, the Australian dollar has leapt 15% since the beginning of the year (indeed, that’s one reason why the Aussie is my favorite currency over the next six months). But while the Aussie has climbed 15%, the Brazilian real has shot up 22.5% year to date. It is running hotter than all currencies against the U.S. dollar.

You can attribute a lot of this to the world’s insatiable demand for Brazilian commodities – especially the ones China and India are gobbling up. China’s influence in Brazil has reached such an extent that you could be buying a Brazilian stock as a China play these days.

In fact, a Chinese company recently granted a $10 Billion loan to Petrobas (Brazil’s largest oil company) in exchange for first rights to the oil that Brazil will drill at its new found reserves.

The theme that I introduced yesterday in Australia (China buying up the world’s commodity reserves strategically) is alive and kicking in Brazil too. As I have said before, as China continues its strategic grab for world power, Brazil will remain relevant in the global economy.

The Currency to Forget (Or Short)

I’ve heard traders say they wouldn’t touch the South African rand with a 10-foot pole. The reason?

For starters, South African does not have one of the more efficient economies in the world. There is far too much influence on economic policies by outside vested interests, which interfere in their ability to carry out true reforms. This is a major problem for South Africa.

The Central Bank policy and decision making is heavily influenced by vested interests who do not want decisions being made that hurt their business interests. This creates ambiguous messages from the economy.

Recession has taken a strong hold in the South African economy and is creating a major slowdown spiral, which will really hurt the future prospects of South Africa.

While the currency has not yet shown the effects of the slowdown of the economy, I expect that this will happen soon and the world cannot continue to sweep the problems under the rug forever.

I think it goes without saying that I would be very reluctant to invest in South Africa or in the South African rand for now. There is too much bad economic news that has not been factored in, which will create huge uncertainty in these markets.

We can effectively utilize our capital allocation around the globe without having to invest in South Africa and I would give it a pass for now.
I’ll be back soon with more insider looks at countries around the world. Till then…

Yours in FX Profits,

Ashish Advani

P.S. Currency Capitalist members, please be sure to check out your new issue online this weekend. I’ve uncovered a way to tap into one commodity-rich nation and grab a 9% yield! Please see all details in your August issue. Don’t receive our monthly newsletter? Click here to test-drive this next issue…completely risk-free.

Three Secrets to Higher Option Profits

By Sean Hyman As you know, I’m a Forex guy, through and through. I spend my days watching the Forex charts and skimming pips off my favorite currency pairs.

But before I was a Forex trader, I first traded stocks professionally and then later I traded options. So I’ve ran the gamut when it comes to investing.

In the years since I hung up my options trading hat, there have been some serious developments in the options market – especially when it comes to currencies. Specifically, the Chicago Mercantile Exchange and Philadelphia Stock Exchange (now known as the NASDAQ OMX) both offer options on specific currencies.

Since 2007, the Philadelphia Stock Exchange has offered a special type of currency option that trades exactly like regular stock options. This exchange now offers option contracts on 10 different currencies as of earlier this month.

Why does this matter? If you’re a long-term investor, then currency options are one of the few ways I’ve found that you can still shoot for larger profits. Currency option investors often hold contracts for weeks or months at a time. I’ve also watched option investors earn 100%, 200% even 300% on their contracts.

I’ve written about options here in FX University before, so if you’d like a little more background information on how options work, please view my last article.

But today, I want to take you one step further. I want to share with you my number one secret to buying currency options, so you can shoot for the bigger gains. In reality, the secret to successfully trading options all comes down to time…

The Critical Difference Between Time Value & Intrinsic Value

An option itself is simply a contract that gives you the right to buy or sell a specific asset at a specific price (known as the “strike price”). Options are known as “wasting assets.” This means they have an expiration date and options drop in price as that expiration date approaches.

An option’s expiration date affects its pricing. When any options are priced, they have two main components to their pricing. 1. Intrinsic value and 2. Time value.

First let’s take a quick look at intrinsic value. This is simply the amount that your option is “in the money.” By this, I mean your option has already reached its strike price. Any amount past the strike price is called the intrinsic value.

Here’s an example just to be clear. Let’s say you thought the euro would rise in price. So you bought a euro call option with a strike price of $0.50. However, the price is now up to $0.75. Since your call option is over the strike price (or “in the money”) by $0.25, this means your option has an intrinsic value of $0.25.

Now that’s only ONE piece of the option’s pricing.

Another major component is your option’s time value. This one is easy because it’s simply the cost of your option minus the intrinsic value.

Let’s stick with that previous example that has a $0.25 intrinsic value. If you paid $2.00 for your option and $0.25 of that price is intrinsic value, then the remaining $1.75 is the time value.

What’s the basic thought behind “time value” that makes the price what it is? Frankly, it’s a complex formula, but the premise is pretty simple…

What You Need to Know Before You Buy a Single Option

Say you’re about to buy a call option. You have two different choices…

1. You can buy a call option with a strike price of $50, and a current price of $40 that expires next month.
2. You can buy the very same call option with a strike price of $50 and a current price of $40 too, BUT your option expires six months from now.

Which option should you choose to buy? Answer: The ones that give you more time.

Here’s why: You have to look at what’s more likely to happen. Is it more likely that your call option will gain $10 and earn more than its strike price in the next 30 days, or anytime in the next six months? Of course the latter…so that’s why a longer expiration date carries a higher “time value.”

Side note: Your option’s price erodes as your option gets closer to its expiration date. That’s the “time value” portion of your option’s price. That’s why many traders will buy option contracts far away from the expiration date so the “time value” erodes slowly. This way, they get more bang for their buck then by buying an option that’s about to expire.

So the “time until expiration” is one of the components of how the “time value” piece of the equation is priced. Another aspect of the option’s price is of course the volatility that the market expects out of the underlying financial asset.

The More Likely to Hit Your Strike Price, the More You Pay

Here’s another truth you need to learn about options: The greater the chance you’ll hit your strike price, the more you pay for that option.

Also, the higher the volatility, the higher the option’s price because there’s a greater chance of you exceeding your strike prices than if you were buying a low volatility option.

Therefore, GBP/USD would have a higher premium generally, than the USD/CAD because it doesn’t normally move as fast (isn’t as volatile generally) as that of GBP/USD.

This is why you shouldn’t necessarily choose an option because it is “cheap.” Cheap options are a “shot in the dark” and that’s why they are cheap.

Expensive options are that way because they have a huge likelihood of actually making it well past their strike prices.

Bottom line: Options are a very savvy way to buy currencies over the long run, but pay attention to their pricing. Just because they’re “cheap” doesn’t necessarily make them a bargain.

Happy Trading!
Sean Hyman, aka Professor FX

P.S. Get the inside track on which currency options you should be buying over the next six months. Click here for details.

Why Any Housing Bottom is Bad News for the Buck

By Chris Gaffney Currency traders dumped the dollar once again yesterday. The reason? A report came out yesterday that showed new home sales rose the most in eight years.

New home sales in the U.S. climbed 11% last month to a 384,000 annual pace. This was substantially higher than economists predicted, and the most since November. The report also showed the number of houses on the market dropped to the lowest level in more than a decade. The housing numbers seem to confirm that the housing market may be approaching a bottom.

But housing prices continue to fall, and more data is needed before I’m convinced the worst is over. Also, many of these homes have been sold to first time homebuyers taking advantage of government programs. If unemployment continues to climb, housing sales are not likely to rise quickly.

UBS: “Get Set for a Weak Dollar”

But the housing news was music to investors’ ears. Those who parked money in the dollar for ’safe haven’ purposes began looking for other places to invest. Many feel the worst of the global recession is over, as global data seems to be turning positive.

Adding to the good feeling on Wall Street, analysts raised their profit estimates for U.S. companies for the first time in two years. The new optimism has many investors searching for higher yields and accepting higher risks.

During the mid-morning trading, the dollar index touched the lowest level this year, dropping to 78.315 before gaining back some of its losses late in the day as U.S. stocks retreated from eight month highs.

A report from UBS, the world’s second largest currency trader, predicts the dollar will continue to drop during the next month amid a revival in risk appetite. “Our near term bias is for further U.S. dollar weakness,” a UBS analyst wrote.

Everyone seems to be jumping on the carry trade again, which should give a lot of strength to the higher yielding currencies of Aussie dollar, New Zealand dollar and Brazilian real. This will likely be the ‘popular’ trade for investors over the next few months.

Geithner: Bond Salesman Extraordinaire (We Hope)

The positive news for the global economy couldn’t come at a better time for U.S. Treasury Secretary Timothy Geithner considering he just began talks with China. Geithner and Secretary of State Hillary Clinton will host two days of meetings whichmeetings, which many predict will focus on the state of the U.S. economy.

Secretary Geithner will be wearing his bond salesman hat as he tries to convince the Chinese to keep buying Treasury bills, notes, and bonds.

This week the U.S. Treasury will attempt to unload $235 billion in Treasuries, so Geithner will certainly have his work cut out for him. The U.S. debt sales will include $130 billion of T-bills, $42 billion 2-year notes, $39 billion 5-year notes, $28 billion 7-year notes, and $6 billion of TIPS.

I find it odd that the U.S. government isn’t trying to sell more bonds out in the longer-term durations with rates being held down at these incredibly low levels. Does anyone expect U.S. interest rates to remain at these low levels for an extended period of time?

Why wouldn’t the Treasury department take advantage and try to sell more longer-term debt now, instead of selling most bonds on the short-end of the curve? I guess Geithner realizes selling all this debt will already be difficult. Getting foreigners to agree to purchase longer termlonger-term maturities would be next to impossible.

Let’s hope Geithner is a first class salesman, considering our economy depends on the Chinese continuing to buy our debt.

The New Bond Salesman…

Unfortunately his boss isn’t making his job any easier, as the deficits continue to rise. The nonpartisan Congressional Budget Office (CBO) estimates the annual deficits under the administration’s spending plans will never drop below $633 billion over the next decade.

The CBO forecasts we’ll see another $9.1 trillion added to the debt held by the public. That’s the amount Geithner has to finance with bond sales.

Publicly traded U.S. debt – which excludes deficits the government owes to itself in Social Security and other trust funds – stood at 41% of the total economy in 2008. It is projected to climb to 82% of the entire economy by 2019.

The official line after the first day of meetings stuck to the pre-arranged script. Geithner pledged to rein in the U.S. deficit to a more ’sustainable’ level by 2013, and China agreed to try and stimulate more internal consumption.

China “Manufacturing” Their Own Customers

Speaking of Chinese consumption, I heard a story driving home on NPR last night whichnight, which talked about how China is spending their stimulus money. While the big infrastructure projects have grabbed most of the headlines, they have also used a large amount of their stimulus money to stimulate consumer buying.

For instance, the Chinese just issued vouchers to individuals living in lower income rural areas. These would-be buyers can trade the vouchers for consumer durables, including cars, appliances, and TVs. The increase in demand by the emerging Chinese middle class has actually caused a price jump for the panels used to make flat screen TVs.

Critics of the China growth story have said the Chinese economy couldn’t grow without a strong U.S. consumer. However, both my colleague Chuck Butler and I have pointed out that even a small increase in personal wealth spread across the millions of Chinese consumers could offset some of the loss from U.S. consumers.

What we predicted seems to be coming true, as the Chinese automobile market has become the largest in the world, and markets for other consumer products like flat screen TVs seem to be following suit.

This also plays into our theory that inflation will likely spike up after the global economy starts to recover. Inventories are extremely low, and once demand starts heating up in the western markets of Europe and the U.S., orders will again start flowing back into Asia.

But demand in Asia will be competing with these new orders from the West, so prices will likely jump.

Also, commodity prices have already started rebounding, including industrial metals and crude oil. This means inflation is definitely lurking, and investors need to protect their holdings against a possible spike.

To recap quickly: This week, we’re seeing the dollar falling on the good news coming out of the housing market (the jury is still out on that “good news” as far I’m concerned, but it is moving the markets this week). Meanwhile, Treasury Secretary Geithner is doing his best to market our debt all over the world, while the Chinese are pumping up their internal consumption.

All of this news is definitely causing dollar weakness this week. I recommend a combination of precious metals, or commodity based currencies to protect your holdings.

That’s it for today! Have a Terrific Tuesday,
Chris Gaffney CFA

FX 101: How Many Lots Should I Trade?

By Sean Hyman Remember: In the Forex market, you define your leverage by the type of “lots” you trade, so the type of account you trade determines whether you’re buying standard lots so the type of account you choose is very important.

I see so many novice traders try to open trading accounts with lot sizes that are way too large for their balance. And if they err to one side, they usually err to the aggressive side.

Chances are your broker won’t tell you which account you should open. Most industry market makers will allow you to open up any type of account, whether it will benefit you or not.

However, here are some general guidelines that I’ve found will help you to open up your first trading account. In my opinion, you should only open a “standard account” if you plant to fund it with around US$50,000. If you’re using your standard account, you should only trade one standard lot for every US$50,000. (As I said above, one standard lot controls 100,000 units of currency).

In my opinion, traders should have at least US$5,000 to open a mini account. Of course, you can trade with less. But if you’re planning to trade often, I suggest a US$5,000 mini account. Then only trade 1 mini lot per US$5,000 in your account.

Following the rules above will actually solve three problems at once:

1. It gets you into the proper account type from the beginning.
2. It ensures your account is well capitalized.
3. And it ensures you’re trading with the right amount of lots for your account balance.

All three of those are huge components of risk management, which I would say is just as important as picking the next winning trade – because if you do pick winners, but fail to control your risks properly, then you won’t be trading very long.

Happy Trading!
Sean Hyman, aka Professor FX

A 180-Degree Turn, a Chance to Profit

By Sean Hyman If you’re a news junkie, then you’ve probably heard the traders on CNBC talking about buying on “pullbacks” and selling on “rallies.”

Sounds simple enough right? You’re supposed to buy when a stock (or in our case, a currency pair) just dropped in price, so you can buy at a bargain. You’re also supposed to sell when the price rises, so you’ll get the biggest return on your investment.

But how do you know when to buy or sell? How can you tell if you’re seeing a pullback or a rally?

Easy. You look at “retracements.” They are the counter moves within a larger trend.

You see, whenever you see a trend in the Forex market, you’re really seeing the collective emotion in the Forex market. In fact, most trends are based on human emotion. When a currency pair shoots higher or lower, you’re really seeing how the majority of traders “feel” about that currency pair. In market-speak, you’re looking at the “sentiment” in the markets.

Of course, emotions can get out of hand – even in the markets. Emotion-driven trends get out of hand all the time. Trends temporarily run too far (upward or downward) and need to correct a bit. In fact, traders are constantly overshooting certain currency pairs.

In response, the trend must do a U-turn and head the opposite direction. That’s why retracements happen.

Let’s talk about how to spot a retracement. What do they look like? Check out the U.S. Dollar Index below and you’ll see what I mean.

A Trend Can’t Hold Forever…

You see, the trend above is upward (as noted by the green uptrend line). However, trends never go straight up. They advance (rally) and then they pullback (contract or retrace a bit). Then they rally further, etc. until the trend finally comes to an end (which is where the green uptrend line finally breaks).

Did you know there is a tool out there that will let you measure the depth of retracements and their “likely” stopping/turning points? It’s called Fibonacci Retracement Levels (or “Fib levels”). I’ve talked about it here in FX University before.

But I want to talk about how to use Fib levels to spot a trend. The most common pullbacks within a trend happen at 38.2% of a trend, 50% of a trend, or 61.8% of a trend.

These are the levels when a currency pair is most like to turn back around from its retracement and head back the other direction. When you enter at the likely retracement levels that hold, you set yourself up for a good risk to reward scenario.

In other words, you’re looking at the best time to enter a trade – when you’ll have the highest probability of success.

Let’s take a look below and see what fib retracements look like in an uptrend. When you’re looking at an uptrend, you can choose the fib retracement tool from your charting package (most charting packages include Fib tools for free) and then draw from the very bottom of the trend to the tip top of the uptrend.

Then it automatically plots the retracement levels of that trend.

Fib Levels Predict the Future – and Reveal the Best Entry Points

I’ve accentuated these levels after the trend in green so you can see where I’m talking about. You’ll notice that the daily chart of EUR/USD recently retraced to the 38.2% level, held at that level and then bounced higher.

Once you see what level appears to hold, then you can buy and place a stop below the next lowest fib level.

Okay, so that’s how retracements look in an uptrend. But what about downtrends? After all, there have been tons of downtrends lately as financial markets and certain currencies have fallen all around the world.

Here’s what they look like below.

Follow the Trend Down…And Profit Along the Way

In a downtrend, you would start buy drawing from the highest point of the downtrend and follow the trend’s direction all the way down to the very bottom of the trend.

Then once we let up off of our left mouse click button the retracement levels are drawn. You’ll notice that the numbers reverse, because you’ll retrace 38% of a downtrend first obviously before you’d retrace 61% of it.

As you can see from the daily USD/CAD chart above, so far the 38% level has been the one to hold here as well. You’ll notice both of these currency pairs held at the 38.2% level, but honestly, that’s not always the case. So you should never assume that it will be the Fib level that holds. Make sure your currency pair holds for at least 2-3 candles before diving in.

Once this level held, you could short the downtrend.

Don’t Make These Same Mistakes!

I’m not going to lie. Fib levels are not an exact science, and traders can make mistakes when using this Forex tool. The good news? You can avoid these mistakes if you know what to look for…

When it comes to Fib levels, traders make one of two mistakes. They either don’t allow a trend to complete and make sure to wait for a top or bottom. Or they jump the gun and assume a certain level will hold rather than waiting to see how the market deals with each level first before entering.

To avoid these mistakes, take it slow. Watch your trends develop. You can track them on any charting package.

So just to recap: Retracement levels can give you high probability re-entry points back into the main trend. They are quantifiable through the use of Fib retracements. Since different trends will have different retracement depths, see which fib level/zone tends to hold: 38.2%, 50% or the 61.8% level. THEN enter into the trade as the main trend resumes its direction.

In an uptrend, place your stop BELOW the next lower fib level. If it’s the 61.8% level that holds then pick a recent significant low for your stop. If in a downtrend, place your stop ABOVE the next higher fib level.

If there isn’t a higher fib level (meaning it’s already at 61.8%) then pick a recent significant high point and place your stop slightly above that level.

And as always, take it slow, wait for your trends to develop. Let the market prove you right…it will always pay off in the end.

Happy Trading!
Sean Hyman, aka Professor FX

P.S. Fibonacci levels are a professional trader’s bread and butter when it comes to picking their next winning trades. My colleague Ashish Advani and his entire Exotic FX Alert team constantly watch these levels to choose their next winning exotic trades. (That’s how they grabbed returns of 135%, 227% and 381% for their subscribers.) Could their strategy work for you? Click here to find out.

Option Envy

Part I: The Easiest Way to Crossover to Currency Options Trading

By Sean Hyman Back in the day, when I first started playing options, I thought that all you had to do was “call the right direction” and you would make money on your options trade.

At the time, I was already a successful stock trader, and I just assumed I would add some leverage and quickly become a successful options trader. Easy right?

Boy was I in for a rude awakening. On my first options trade, I called the right direction and I actually LOST MONEY on the trade!

Now, how in the world can that happen?

Well, here’s how. There are actually several dynamics to an options trade and only one of those factors is “calling the right direction.”

Here’s the good news: There are couple easy steps you can take to cross the bridge to successful option trading…including learning how to call the right direction on trades.

Once you do, you can invest in not just stock, but currency options. And if you’re not interested in Forex trading…currency options trading is the next best choice for grabbing those double- or triple-digit gains off the foreign currency market.

And get this: Currency options have a longer investment timeframe. This means you can grab 200 or 300% off single currency trades…while only placing two or three currency trades in a single quarter if you wish.

But I’m getting ahead of myself. Let’s get back to the nuts and bolts of option trading so you can try it out for yourself…

There Are Several Pieces to the “Options Puzzle!”

Let’s start at the beginning. When you buy an option, you’re buying the right to either buy or sell a specific stock or currency at a specified price. To simplify things, let’s just focus on currency options for a moment.

So let’s say you buy a currency option on the British pound. You believe the British pound will rise in value over the next few months, so you buy a September call option (call just means “buy”) on the British pound.

What you’re really buying here is the time for the British pound to rise. You believe the British pound will rally soon, so you buy an options contract that expires in September. This contract gives you the right to buy the British pound at a specified price (known as the “strike price”).

This option will expire in September, but well before then, you want your option to rise in price above your strike price so you make money on the trade.

But here’s the thing: JUST because the British pound rallies doesn’t necessarily guarantee you’ll have a homerun trade here. Other factors are just as important including…

1. Time - You must call the direction right on your options trade in the right span of time or your option value will erode away even though the trade is going in your direction. It’s called time erosion.

You see, an option contract erodes away very slowly at first. The loss of value is almost unnoticeable at first. Once you start getting even remotely close to the expiration date, the option’s value starts dropping like a rock.

Why? Because it’s harder to resell that option back into the market. As your expiration date gets closer, traders have less and less time to sell the option for more than its strike price, so there’s less buying going on in the contract. In other words, fewer traders want your option as it reaches its expiration, so it’s worthless.

A Time-Sensitive Quick Fix

Options market makers have sophisticated computer models to help them to price a contract to factor this time erosion problem into their trades. But of course, as an individual trader, you don’t have such perks. So how do you remedy this?

First of all, give yourself plenty of time on any options contract. Buy your call options (or put options, aka “sell” or “short-sale” options) far out in time. In other words, don’t buy a contract that expires in 30-60 days.

Oh sure, contracts are cheap when they’re about to expire. However, they’re cheap for a reason. It does NOT mean they’re bargains! If so, the smart money (i.e., hedge fund managers and big institutions) would be bidding those options higher and they wouldn’t be cheap any longer.

However, the pros know that time erosion can work against you so fast when a contract is 30-60 days from expiring. That’s why they work furiously to avoid these long-in-the-tooth options. In fact, they’ll sell their contracts even if their option has been heading in the right direction the entire time they’ve owned it!

To remedy that, you should buy a contract that is at least a few months out from expiring on you. Some even go so far as to buy contracts even further out in time just to counteract the erosion effect as much as possible.

These contracts get more expensive, the more you go out in time…but they’re also more likely to work out in your favor too. In the end, that’s what matters.

I’ll be back tomorrow with another trick to use in your currency options trading. Until then!

Happy Trading!
Sean Hyman

Buy Currencies for Weeks, Months, Even Years

This Long-Term Profit Trigger Reveals How

By Sean Hyman Plenty of Forex traders get caught up in the daily price action in the markets. But the truth is you don’t have to trade currencies minute-by-minute, or even daily.

You can use several investment strategies to invest in currencies for weeks, months or even years. But to buy currencies for the long run, you need to know how to identify a longer-term trend in the currency markets.

So how in the world do you know how to spot the long-term trend in the Forex market? Well it’s really simple.

First, you should pull up a daily chart that goes back in time at least a year (or even longer is better).

Then place a 200-Simple Moving Average (SMA) on the chart. On the chart below, the grey line is the Simple-Moving Average (the one with the arrows). The SMA can be found under the “Studies” or Indicators” section of most any charting package.

Let the 200 Day SMA be Your Guide!

The 200 SMA is one of the most widely used indicators in the world. I even catch purely fundamental traders using the SMA in their charts. Why? Because everyone needs to know where long-term trends are heading, even pure fundamentalists.

Above, I’ve charted the EUR/USD pair on the daily chart that goes all the way back to mid-2006. That’s a HUGE chunk of time when we’re talking about currencies.

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

Towards the left side of the chart, you can see that the “average” price moves upward over time. So while the price may be jagged and spiky at times, the moving average smoothes this all out so that we can tell if the overall price is headed up or down.

To the left of the chart, you can see that the price continues to climb higher. This tells you that the EUR/USD was in an uptrend at that point. In other words, the euro moved higher vs. the dollar overall.

However, on the latter part of the chart (right side), the trend turns downward and you can see the euro fell vs. the dollar overall.

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 Tell When a New LONG-TERM Trend Is About to Begin

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.

Watch for the Euro to Dominate Over the Dollar

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, you’ll know that the uptrend has likely ended.

So let the 200 Daily SMA on the daily chart be your guide. You can use it to tell whether you should be looking for “long” (buying) entry opportunities or “shorting” (selling) opportunities.

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. Trade profits along the way if you like, but don’t bother trading against the trend.

Be patient and wait to reenter the trend once the pair retraces back towards its 200 SMA once again!

Happy Trading!
Sean Hyman, aka Professor FX

P.S. My colleague, Ashish has already recommended the perfect long-term play to take advantage of this long-term EUR/USD. Get all the details here.