The Off-the-Radar Currency Trades That 90% of Traders Miss

Transcription

1 The Off-the-Radar Currency Trades That 90% of Traders Miss By Sean Hyman, Editor, Currency Cross Trader My Favorite Way to Fire the U.S. Dollar Why We Trade Currency Crosses When you go to a restaurant, do you actually read the menu or order the first thing you see? Personally, I like to read the whole menu to see what the restaurant has to offer. After all, if you just glance at the menu, you might miss the best dish. The Forex market is just like a restaurant. It has a long menu, full of options. But unfortunately, most traders don t bother to read the whole menu. Instead, they just order what everyone else is ordering. In this case, that means dollar-based currency pairs. In fact, it s estimated 90% of all Forex trading takes place across the four dollar-based pairs (EUR/USD, GBP/USD, USD/JPY, and USD/CAD). But those trades barely scratch the surface of what s available. World Currency Watch 98 S.E. 6th Avenue, Suite 2 Delray Beach, FL USA USA Toll Free Tel: (888) Contact: Website: Copyright 2011 by World Currency Watch. All international and domestic rights reserved. No part of this publication may be reproduced in any form, printed or electronic, without prior written permission from the publisher, World Currency Watch.

2 In reality, the Forex universe is much larger. Like the equity markets, where you can trade thousands of stocks on exchanges around the world, the FX market offers over 60 different currency pairs for you to trade. As a Currency Cross Trader subscriber, you know not all these tradable pairs include the dollar, either. In fact, we find some of the best opportunities in non-dollar currency pairs, or currency crosses. In the next few pages, I ll explain why we trade currency crosses more than regular dollar pairs. I ll also tell you how these currency crosses enrich our trading strategies and improve our odds of success. So let s get started. 5 Reasons Why Currency Crosses Give Us More Bang for Our Trading Buck #1) Clearer Trading Signals Increase Our Chances of Success As a currency investor, you ve probably noticed that the U.S. dollar drives a lot of the movements in the currency market. That happens because the dollar serves as the reserve currency for the world s central banks. So when speculators are bullish on the dollar, capital will flow from most major currencies into the greenback. But if the sentiment reverses, the opposite will happen money will rush from the dollar. You see, changes in interest rates, major political moves, and global events in all corners of the world can send money rushing to (or away from) the dollar. For that reason, there is a lot of noise that makes trading more difficult when you re trading dollar pairs in the Forex market. Currency crosses, on the other hand, provide a clearer view of trends and price movement, because they re not susceptible to fluctuations in the dollar. By trading crosses, we place trades based on technical signals from the charts without worrying about surprising news from the U.S. that might move the dollar. #2) Greater Volatility in Currency Crosses Offers You More Trends to Profit From As traders, volatility is our best friend. The wilder a currency pair behaves, the greater the opportunities to trade and to maximize our profits. Some crosses can be more volatile than dollar-pairs, which means greater opportunities to profit. The graph below compares the volatility between different crosses for the last year. CAD/JPY AUD/JPY EUR/JPY GBP/JPY USD/JPY USD/CAD GBP/USD 1.27% 1.25% 1.24% 1.15% 0.95% 0.94% 0.85% It s pretty clear that cross rates are more volatile. For instance, the Aussie dollar trades an average of 113 pips a day

3 versus the U.S. dollar (AUD/USD). The British pound/new Zealand dollar pair (GBP/NZD) trades around 230 pips a day on average. That s why currency cross traders love pairs such as the GBP/NZD, which trades about 80 pips more per day than a major pair like EUR/USD. And the crosses featured here are only a small sample of currency crosses. Other crosses, such as EUR/NZD (euro against the New Zealand dollar), and the GBP/AUD (pound against the Aussie dollar), also have dramatic swings in price on a daily basis. The more radical movements in such currency crosses will give us more opportunities for extreme profits in shorter timeframes. We can trade currency crosses for just a few days and earn the same profits it takes to earn with standard dollar pairs in a week. #3) Steady Decline in Trading Costs Results in More Profits in Your Pocket As traders, it s easy to overlook an important aspect of Forex trading: the cost of placing trades. Remember that every time you place a trade your broker will charge you a spread as a transaction fee. The good news is that spreads are narrowing for currency crosses at an increasing rate. There was a day when you could only find reasonable spreads in major currency pairs. That s no longer the case. Many cross rates have spreads between their buy/sell quotes that are half of what they were just a few years ago. As volumes increase in these crosses, spreads will narrow even more. What once was a roadblock is no longer a problem. # 4) Crosses Allow You to Better Diversify Your Trades If you have other investments, you know the importance of diversifying your portfolio. But most traders don t realize they can use the same principle to reduce risk in their Forex trades. For example, if you believe the U.S. dollar will lose value, you might decide to open several trades against the dollar. You might think that you re opening several diversified positions, but in reality, you re making one huge bet. And that can be very dangerous. What do you think will happen if you re wrong? Let s look at an example. Imagine you were ready to place a trade on May 4, 2011, right before the announcement of U.S. employment numbers on May 5. At the time, the unemployment numbers was supposed to remain unchanged and economists expected the U.S. to add jobs. From this positive outlook, you expect traders will take long positions in riskier currencies. You want to get in on that action too, so you decide to open three trades against the dollar. You buy the Australian dollar, the Canadian dollar and the euro, right before the good economic news is scheduled to hit the wires. Pretty reasonable strategy, right? One problem: during the day, oil prices plunged 8%, stocks sold-off on Wall Street and traders got antsy that perhaps that job data wouldn t be quite as positive as expected. Suddenly, the sentiment changed completely, and traders flocked into the dollar for safety. The graph on the next page shows the results for major currencies in that single day:

4 Several Trades May End Up Being One Huge Risky Bet Against The Dollar British pound South Korean won South African rand New Zealand dollar Mexican peso Canadian dollar Singapore dollar Swiss franc Australian dollar Euro Danish krone Swedish krona Norwegian krone So what was your profit for the day? Well, you lost 1.57% in the AUD, 0.78% in the CAD and 1.94% in the EUR. Ouch! That s a huge loss for only one trading day! Indeed, playing different dollar crosses at the same time is not the best idea. It s like being in a poker game where you go all in, only to find out that the other player had the best hand. You ll notice that in Currency Cross Trader, when we trade an occassional dollar pair, we usually trade one at a time. Otherwise, it comes down to one question: is the dollar going to rise or fall? And if you don t have the right answer, your trading account will be crushed in no time. Trading crosses offers more of a diverse trading portfolio than just trading EUR/USD, GBP/USD, USD/CHF, and other major pairs. If the dollar moves in a huge way, it s going to affect all those pairs, even though other foreign currencies are involved. But if you have EUR/USD and GBP/JPY, a dollar event will drive a move only in the first pair. The second pair won t be affected as much. And this is the way you can reduce your risks in FX through diversification. Besides that, rather than placing only bets against or for the dollar, you can use particular information about two different economies to generate more profits. And that brings me to my next point #5) Crosses Expose You to a Whole New World of Trading Strategies By trading currency crosses you can easily expand your arsenal of trading ideas. You will no longer depend only on the dollar movement to seal the fate of your trades. The following are some of the more commonly traded crosses: 1. EUR/JPY (euro vs. Japanese yen) 2. EUR/CHF (euro vs. Swiss franc) 3. AUD/JPY (Aussie dollar vs. Japanese yen) 4. NZD/JPY (New Zealand dollar vs. Japanese yen) 5. GBP/JPY (British pound vs. Japanese yen)

5 But these are only the most common. As a Currency Cross Trader subscriber, you will discover the potential to trade pairs. The diversity of pairs will allow us to develop several trading strategies depending on the currencies and countries involved. To better understand the power of currency cross trades, let s take a look at a few examples. Some currencies have well defined historical correlations with certain commodities. If they have a positive correlation, they tend to move in the same direction of the commodity. On the other hand, if the correlation is negative, they tend to move in the opposite direction. Trading currency crosses is a great way for us to use these contrasting correlations to boost our profits. For example, if I think the price of oil is going to rise, I might recommend you buy a currency that will benefit, and simultaneously sell the currency that will suffer from higher oil prices. This situation specifically applies to the Canadian dollar and the Japanese yen. Canada is a major exporter of oil, so when the price of oil goes up, the Canadian dollar normally appreciates. Japan, on the other hand, imports almost all of its oil. That s why the Japanese yen depreciates as oil rises. Now, let s say we expect the price of oil to rise. Based on this expectation, we have three alternative trades to consider. We can go short USD/CAD (buy Canadian dollar, sell U.S. dollar), go long USD/JPY (buy U.S. dollar, sell Japanese yen), or we can buy the currency cross CAD/JPY (buy Canadian dollar, sell Japanese yen). Let s take a look at how a change in oil s price has affected those crosses in the past. In this particular example, the price of oil went up roughly 15% in less than a month. Here s a comparison of the performance of those three alternatives during that time: Using fluctuations in commodities is only one of many strategies we can use to profit from currency crosses. Often we will find situations where you expect two currencies to behave differently against the dollar, with one appreciating and the other depreciating. Let s take a look at another example that involves the British pound and the Japanese yen. For most of August 2009, the British pound came under pressure because of its rising public debt. At the same time, new government elections in Japan and other economic factors led to a stronger yen. At that time, we would have had three alternatives to profit from these developments: buying yen against the dollar (selling USD/JPY), selling the British pound against the dollar (selling GBP/USD), or buying the yen against the British pound (selling GBP/JPY).

6 The graph below shows the results: By simply determining which weak currency we would like to pair against a stronger one, we would have made considerable gains as much as 20 to 50% more per trade. And all in a matter of days or weeks. I want to give you an example of how we will be using crosses in the days and weeks to come. Putting it All Together: A Currency Cross to Protect We When Stocks Fall The Australian dollar is the most stock-sensitive currencies in the market. On the other hand, one of the most defensive, risk-adverse currencies out there is the Japanese yen. So when you pair up one of the riskiest, market-sensitive currencies with one of the most defensive of currencies, you have a pair that really tracks stocks quite well. Therefore, the next time stocks are about to tank, one alternative we have is to short the AUD/JPY pair in the Forex market. As stocks fall, the AUD/JPY will drop like a rock and our trade will profit. You can see an example of how well AUD/JPY tracks stocks on the chart on the next page. The top chart is AUD/ JPY and the bottom chart is the S&P 500. Take a look at the red lines and you will see that stocks peaked and fell just as the AUD/JPY did the exact same thing. Simply shorting this pair can put us in the best position to profit. As you know, short selling is much easier in the currency market. Unlike in stocks, there are no uptick rules or margin clerks to call to see if there are shares to borrow. With AUD/JPY, we simply click the sell market order button and watch the order fill much quicker than in the stock market. It s just as easy to short in the currency market as it is to buy. So if the S&P 500 rallies and then tanks, we can short AUD/JPY and help protect the rest of our stock portfolio as stocks start to fall. I ll let you know when it s the best time to dive into this pair. But if you d like to trade this pair on your own, be sure to set a stop-loss for this trade and only risk 5% of your overall account on this or any Forex trade.

7 AUD/JPY Rose & Peaked When Stocks Rose & Peaked! Remember, we don t want to settle for ordering the first thing on the Forex menu especially when currency crosses offer endless (and tremendous) opportunities to profit. As a Currency Cross Trader, you re already set up to make this happen.

8 World Currency Watch 98 SE 6th Avenue, Suite 2 Delray Beach, FL USA USA Toll Free Tel: (888) Website: Legal Notice: This work is based on what we ve learned as financial journalists. It may contain errors and you should not base investment decisions solely on what you read here. It s your money and your responsibility. Nothing herein should be considered personalized investment advice. Although our employees may answer general customer service questions, they are not licensed to address your particular investment situation. Our track record is based on hypothetical results and may not reflect the same results as actual trades. Likewise, past performance is no guarantee of future returns. Certain investments such as futures, options, and currency trading carry large potential rewards but also large potential risk. Don t trade in these markets with money you can t afford to lose. Sovereign Offshore Services LLC expressly forbids its writers from having a financial interest in their own securities or commodities recommendations to readers. Such recommendations may be traded, however, by other editors, Sovereign Offshore Services LLC, its affiliated entities, employees, and agents, but only after waiting 24 hours after an internet broadcast or 72 hours after a publication only circulated through the mail. Also, please note that due to our commercial relationship with EverBank, we may receive compensation if you choose to invest in any of their offerings. (c) 2011 Sovereign Offshore Services LLC. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This Report may only be used pursuant to the subscription agreement. Any reproduction, copying, or redistribution, (electronic or otherwise) in whole or in part, is strictly prohibited without the express written permission of Sovereign Offshore Services, LLC. 98 SE 6th Ave, Suite 2, Delray Beach FL