My system is quite simple, I trade daily charts or higher and have almost no indicators. I use trend lines, volume, 1 fib, and market swing statistics. My initial Stop Loss is 1 ATR (Daily) and I go for 200-500 pips profit, sometimes more. The rest is just understanding the fundamentals to identify new opportunities.
Anyways on to the topic of this post, Identifying market swings in the medium and long term. The reason why I wanted to discuss this is because this is the key to low risk / high rewards opportunities and has been the key to my success so far.
OK, so how do we identify market swings?
1. Show me the money! Understanding where money is flowing in different market conditions and why. Is there risk appetite or risk aversion? And why is money flowing into one market / direction and not the other.
2. Identifying what conditions need to change to change the money flow and what the new direction will be.
Simple as that.
Case in point: The USD carry trade
Here is a huge trading opportunity for those that know what they're doing. Carry trades have been traditionally funded using JPY when there is risk appetite in the markets. But after the financial crisis interest rates in the US have been at near 0%, in effect making USD, the preferred currency for funding carry trades. This has caused it to weaken against all currencies, commodities, etc. and one of the major reasons we've seen record prices in gold, oil and other commodities as well as big gains in AUD, NZD, CAD, Brazilian Real, etc.
1. So the money has been flowing out of the US into AUD, NZD, CAD, gold, oil, etc. The reason why is because of low interest rates near 0% in the US.
2. So what needs to change in order to change the flow of money? Simple! The interest rates in the US need to rise higher than the country with the next lowest rates, Japan at 0.1%. In order for this to happen we need to see inflation in the US high enough for the Fed to hike rates by 25 basis points.
Now keep in mind that the markets factor in future events before they happen so we don't need to wait for the Fed to actually hike rates, only that it can be anticipated by the market via improved economic data. So what we're seeing is that the JP economy is in serious trouble with record low interest rates, national deficit of nearly 200% GDP and the most telling fact: while all other countries are winding down QE, Japan is looking inject more ..... there are estimation that it will push the deficit to 250% GDP! It will take Japan at least 15-20 years to recover from this!
So this means that there is a very good chance that the US economy will recover faster than JP and that the Fed will hike rates before the BoJ. Anticipation of this will cause the USD funded carry trades to unwind and the JPY to dramatically weaken against all other currencies.
And for those that have done their homework, the USD has turned around after hitting bottom and is starting to reverse the down trend.
So what does this mean for traders?
To get an idea of what this means, look at AUDUSD, NZDUSD or USDCAD daily charts from March / April 09 to Nov 09. We're seeing the end of the 1st leg of the bull run. Now when the carry trade funding currency shifts then we'll see the next leg of the bull run move the JPY crosses more than any other pairs.
Whew! I guess what I wanted to show was how trend changes can be identified before they happen.
Sometimes I jump the gun a bit early and can often get in a few days before a trend change.
Does anyone else ever do this sort of analysis to get in on trends before they happen? And if so, how do you trade it?
Identifying Forex Market
