EURUSD – Critical Trading Habit Needed now

You may have noted that Van stresses repeatedly that good trading habits are an important factor in successful trading. At workshops, attendees ask me constantly what I think the most important trading habit should be. It is critical for trading success to follow good trading habits and my experience tells me one is very important over others — and you might not guess which one. As a new trader years ago, it’s not the one I would have said.

Which trading habit is most important?

I think the most important habit is also one of the most overlooked and understated — knowing when to “Stay out of the Market.” Reasons to stay out of the market are many and include:
•    You are not feeling well (e.g. due to an illness),
•    There is a special event in the market (e.g. Brexit vote or another important news item coming up) or
•    Most importantly — the market environment is not beneficial to your trading strategy (trend followers should trade charts that are trending).
Below there is a basic outline of Van’s Top Tasks of Trading.

As you can see on the bottom of the graphic, the task “Staying out of the Market” is across the spectrum of the framework of tasks. We will discuss each of the tasks at the upcoming Forex Workshop in September and during the simulated trading sessions, we will cover how to apply each one in practice. Of course, we will follow this process as well in the live markets during the Forex Live workshop.

Truly, all of the tasks are important to trading success but you should always be asking if you should be trading right now. And right now, the question Forex traders should be asking is if they should be trading the EURUSD pair. Staying out of the market at the appropriate times means you only trade when the market is in your favor. As such, you prevent draw-downs and you can still continue trading — but only when you should be trading.

Trade EURUSD or Stand Aside?

The EURUSD is arguably the most important currency pair in the world so let’s analyze it from a charting and macroeconomic perspective. The Euro suffered a lot during the last European crisis when the Euro lost significant value against the USD going from nearly 1.40 to below 1.05. That’s a 3,500 pip move (see 12 months after May 2014) which for a major currency pair is huge. Since May, 2015 (more than a year now), EURUSD has been in a tight sideways consolidation. See the weekly chart below.

This year-long consolidation can be seen as a clear trend continuation formation. Why? After the long and very strong downslide, the EUR has not been able to recover substantially against the USD. It was only able to form a shallow pullback (less than 25%). Over time, however, a consolidation range developed from 1.0471 to around 1.1423. Not being able to regain higher prices is a sign of weakness for the Euro. Quite a number of financial analysts are saying that we are seeing a bottom for the Euro but from a charting perspective, the pattern indicates pure bearishness and continued USD strength for a couple of more years. Once any price has made a strong trend move, it actually needs a “refresher” for some period of time. Price consolidations within a trend are times of pause that are required for the trend to regain strength again and continue.

I traded the EURUSD a lot during its drop into May 2015 but the last year has not been a time to trade the pair. In a price consolidation like this, you should be very cautious and stay out of the market if you are a trend follower. Trading is better with the favor of a trend on your side. Not to worry, sooner or later the EURUSD will be sufficiently “refreshed” and will continue its downtrend beyond par level into the target area of around 0.8000. A first signal would be the break of the last low at 1.0910 (see red support line under the blue arrow in the chart).

Fundamentals Also Support a Weaker Euro

The existing challenges in Europe (largely as a result of the GFC 2008) are increasing and new difficulties which are also broader in scope are coming up. Just to name a few:
•    Weak economic recovery
•    High levels of Sovereign debts
•    The UK’s “Brexit”
•    Migration/refugee challenges
•    State coup trial in Turkey
•    Potential Italian banking crisis

In previous years, the Euro weakened but these challenges translate into continued years of a weakening EURUSD chart. Why?

You can look at a currency’s price like an emergency valve that helps reduce the pressure. As such, a weak currency can support a weak economy to gain strength. A weak EUR helps European countries export products at lower USD prices. The tourism industry benefits as well when foreigners find European vacations cheap enough or cheaper than vacations in their home country.

The flip side of a weak currency, however, is it usually leads to an increase in interest rates. Any economy requires net capital inflows and this economic law applies even more with a weak currency. A weak currency, however, typically means investors want higher interest rates to offset the risk of any further weakening (devaluation) in order to make an investment in that country more attractive. The ECB’s Quantitative Easing (QE) program in Europe has forced interest rates to historic low levels (despite Europe’s challenging fundamentals). Is this situation sustainable? Most likely not as interest rates cannot be kept so low forever. Once the QE program ends, we might see rising interest rates and some market turbulence again.

Trade During Times of Opportunities

Turbulent times imply tremendous opportunities! The EURUSD is one such an opportunity that will materialize sooner or later. You should not shy away from the capital markets in difficult economic times but rather focus on the benefits they offer. I recommend avoiding reading too much news media and instead, focus on both the short-term charts and long-term charts. The charts tell you all you need to know!

And what do the charts say now? The EURUSD chart very clearly indicates some excellent upcoming opportunities.

I also recommend focusing on how to minimize your risks. There are several ways to reduce your risk of which include — trading with the larger trend, trading only liquid instruments, and trading short-term as well long-term charts (e.g. a 4h or daily chart). Forex traders have great flexibility in what timeframe to trade with the virtually continuous open market. I like taking the best trades in whatever timeframe that might be.

Forex trading offers excellent ways to minimize your risks — you can always find trends (150 tradable pairs, many uncorrelated), you can always enter or liquidate a position, very rarely you are exposed to a gap or slippage in price. FX is the most liquid market and it is open 24 hours. These are edges other markets do not offer. Apart from the EURUSD, there is enough opportunity to benefit from. You pick the time frame that fits you best.