FX Trend Trading

We are living through interesting times on the FX side right now. I really enjoyed Volar’s EUR sentiment update yesterday and still have a hard time wrapping my mind around those extreme readings – something’s got to give. And it will eventually but that doesn’t mean we can’t climb to even higher extremes – as Volar already said: Never try to catch a falling knife.

The EUR/AUD is not usually a pair I follow but as señor Cabrera has been going on about it I decided to take a look. And boy – have I been missing out on a kick ass trend trade! Which is why I decided to make it the theme of today’s post. Now, who knows what’s going to happen over there in Euro-trash land and whether or no the ECB is going to take the game below the psychologically important 1% mark. You guys already know that I don’t really care about all that – only the charts are my friends.

However, what really stands out on the above chart is how oversold conditions can get once a slide catches momentum. This makes the very point of many trend traders, which is inverse to most trader’s mental framework:

Buy high – sell low!

Say again, Mole? Are you off your meds again? I thought the expression is to ‘buy low – sell high’!

Yes, true that. But not for trend traders. See, trend traders are happy with losing eight or nine times of out ten. But the one time they are right – boy, they are really really right. A comprehensive overview of trend trading principles is far outside the scope of this post but in essence the idea is to catch an acceleration or inflection point that delineates a strong and prevailing medium or long term trend. The EUR/AUD shown above tells that very story – it could have reversed once it touched those two lower Bollingers but it decided to continue downwards – and it’s been a sea of red ever since.

Now what I really find interesting is how those old Net-Lines are actually quite useful in showing us the prevailing strength of the trend. One could use all kinds of indicators here (e.g. some moving average) but many of them wind up catching reversals way too late. What I like about those Net-Lines is that they are directly price based and that there is no smoothing. Observe the fact that for weeks now not a single NLBL has been touched. Even better – there has been an almost constant distance between those Net-Lines and any highs. Now when I see something like this a little bell in my head starts ringing as I wonder if there isn’t an edge in extracting that delta (i.e. NLBL – high of the day) and putting it into some trend trading engine. What do you guys think? Hey, I should be charging for this kind of stuff 😉

Anyway, I have no idea when this beast turns but if I was trend trading this thing I would be out as soon as I would get a touch or a close above a NLBL. Quite a bit faster than many reversal indicators I see used out in the trend trading universe – and rest assured I’m going to look into this matter a bit more.

More FX madness for my subs below:

Everything on the NZD/USD is pointing up right now and I really liked that NLBL breach and successful retest. I would be long here with a stop a few pips below that NLBL at 0.7905.

USD/CHF – running into a lot of resistance here. Yes everything is pointing up as well, so I decided to not be biased and to let that NLBL be my ultimate judge. If it breaches above then I think it’s got a good chance of continuing higher – if not then be short. But be ready for gyrations – this thing is not going to move like the EUR/AUD 😉

And last but not least the AUD/JPY – our canary in the coalmine for equities. So far that NLBL has been holding – I also noticed that the hourly upper 100-day BB line roughly matches that double glazed NLBL window near 79.5. AND we have that upper 25-day BB line as well – imposing additional resistance. I don’t have a trade on here but when gauging equities I would closely watch for a breach either way here. I have not extended that diagonal but we are sitting on it right now – also be mindful of that 25-day SMA currently tacked to 78.68.

A word to the wise – since we may see some ECB fueled FX madness I suggest you play things small for a few days. No sense in getting caught up in all the interest rate manipulation games. Enough said – you have been warned – happy trading.