Forget the economic calendar, forget market sentiment and forget technical formations. In the currency market there is one other theme that matters most when you trade: risk or no risk. Understand that and you’ll understand the motivation behind 90% of the speculative flow.
In FX this is reflected in a specific dynamic, at times often called the carry trade. When traders feel comfortable assuming risk they buy the currency pair which typically means shorting the yen and the swissie against the high yielders.
What exactly makes traders comfortable? Stocks. If equity markets are rising that generally means that investors are optimistic about the economy and are happy to be long risk. If, however, if equity markets become gripped by fear, carry gets thrown to the wolves and risk aversion trades reign supreme as the carry gets unwound.
This concept can be used under all sorts of time frames: it works for you when you are a long term trader but also when you are a day trader or even a scalper. Keeping this idea in mind let’s put this into practice in our live trading. Assume you are a short-term trader and say the stock market in Japan rallied during our nightly sleep then it’s risk-on and usually you will notice that the Yen will be under pressure. However if the markets in Europe open weakly then risk-off will suddenly kick in and often the Yen may reverse its losses.
As a short-term trader we may use the morning volatility to position ourselves for a good trading opportunity. Several factors need to be taken into consideration when trading volatility but unfortunately we often rely too much on lagging indicators. Looking at gyrations and pre-open predictions of the stock markets is therefore a very important but often forgotten leading indicator in our trading weaponry.
Rudy – Professional Forex Trading Mentor
+27 82 926 6855
wipe out your fear, failure is not an option
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