Who says you can’t have the “best of both worlds?”
I say you can – at least when it comes to trading foreign currencies.
For years, traders have debated about whether fundamentals or technicals drive foreign currencies. The “fundamental guys” say you should just watch fundamental data like a country’s unemployment, GDP numbers, and overall debt to choose the best currency plays.
The “technical guys” say you can learn everything you need to know about a currency by watching the charts.
Traders on both sides act like you have to choose one or the other. However, I’ve always said that there are benefits to both, so why not use both in your trading?
In my own analysis, I’ve always found that I make better trading decisions when I have more information. So I study fundamental data and technical charts to pick my best trades.
But I’ve found technical analysis really shines in times like these, when markets start to topple…
How Technical Analysis Has Saved Me Through the Years
Technical analysis has saved me for the past 20 years. It’s the reason I’ve never taken a huge dent in my stock or my currency portfolios – even during the recession in 2008.
Why? Simple. Several indications on the charts tell you when the market may have far more downside potential than upside potential.
(And remember, stocks and currencies fall faster than they rise. So if you catch those huge down moves, you can rack up some decent profits.)
I’ve found that technicals reign during these downturns because no one focuses on fundamentals when everything seems to be crashing and burning.
You see, logic tends to disappear when markets start to fall. Fear takes over and investors simply react. Fear will trump fundamentals every time because fear is a much stronger emotion.
That leaves most “fundamental traders” scratching their heads.
Fortunately, currency traders who check charts (or “technical traders”) have several tools at their disposal that can tell you when it’s time to sell your stocks. That’s a simple way to avoid all bear markets.
Coincidentally, it’s also an easy way to make a killing off foreign currencies as they fall, because you can lock-in profits and start buying up more defensive currency positions.
Even better, they’re all pretty easy to spot…
Secret #1: Draw a Trend Line
The first tool is extremely easy to use. You simply draw a trend line on any chart.
Once that trend line notably breaks and you see a currency pair close below that trend line, you know it’s time to sell. You can see that on the chart below.
Trend Line Breaks show the Change of Control
from the Buyers to the Sellers!
This works with both stocks and currencies. With stocks, you can tell when the whole market is about to turn, if you look at big stock indexes. Take the real-time snapshot of the Dow Jones Industrial Average below for instance…
Secret #2: Here’s One Even New Traders Can’t Screw Up
Besides drawing trend lines on your charts, one of the easiest things that even new traders can do is place two major moving averages on your chart.
These averages are called the 50 day Simple Moving Average (the blue line) and the 200 day Simple Moving Average (the red line on the chart above).
When the blue 50-day SMA is above the red 200 day SMA, then stocks are climbing. When stock prices fall below the 50 and 200 day SMAs and the two averages cross over, it’s a big flashing “sell” signal. It tells you to take your profits and go sit in cash for a while because a downturn is coming.
All of these things are a foreign language to some currency traders. It’s why pure fundamentalists struggle during downturns.
It’s that Time Again…When the “Strong” Currencies Are Falling
You should know that Dow chart is from earlier this week. This means we’re already approaching another downturn.
This stock index has broken an uptrend and has ceased to produce “higher highs and higher lows” anymore. The major moving averages have crossed and the index is now getting very volatile. In other words, look out below stock traders.
As I have written here before, the “fundamentally strong” Australian dollar will be one of the first currencies to fall when stocks fall apart again.
So I recommend taking evasive action right now. If you own the Aussie, take your profits now. If you’re a trader, look to short the AUD/USD pair in your Forex account.
While I can’t say that the huge sell-off starts tomorrow, it’s probably very close. Make sure you’re prepared.
Have a Nice Day,
Sean Hyman, Editor
Currency Cross Trader