With the exception of last week's volatility in GBPUSD, trading in USD correlated pairs continues to be a no-win game of chance. That includes precious metals.
However, there’s a potentially very interesting development in the NASDAQ to talk about, plus some selected FX trades worth trading if we’re patient (I’ll explain the special mentality required for trading at this time in just a moment.)
First, we can see that the U.S. Dollar Index is trapped in the lowest volatility and its narrowest trading range since 2014.
This constriction has lasted six months already, and the bottom line is that the USD continues to play chicken within a narrow trading band. Whether (and when) USD is likely to break the past several months of gridlock remains an uncertainty. I’m also uncertain which direction it’s most likely to go as there have been key reversals off both sides of the trading band in recent months.
So what do we do in situations like these?
During periods of low volatility and side-ways trading bands, it’s ever more incumbent on us traders to maintain our discipline. The best ways to do this include:
a) trade less frequently
b) home in on the most favorable risk/reward trade set-ups when we find them
c) set wider stop-losses, and
d) reduce position size
In my webinars I’m struck by how many traders have fundamental misconceptions and are confused by fundamental risk and lot-sizing principles.
Many traders believe they can’t capitalize on big moves, and that they must use tighter stop losses because they have a small account. For some reason, many traders feel that too wide a stop will cost them too much to trade.
This is a complete fallacy.
Remember that a 0.5% risk on a $500 account is the same as 0.5% risk on a $50,000 account. It’s still 1/2 of 1% risk on both!
This wrong-headed notion comes from the mistaken belief that a tighter stop loss somehow reduces one’s risk on a trade or (equally as wrong) will increase their chances of making money since they can increase their position size.
Here’s the solution: an experienced trader understands correct trade position sizing. The contract size (i.e. the number of lots) traded determines the risk per trade, not the stop loss number of pips by itself.
So the correct position size (lot size) is what determines how much money you’re risking per trade as a percentage of your account.
Use this position-size calculator to set your risk appropriately:
Another issue I want to highlight: many traders tend to overtrade.
They make too many trades and only a few of those trades have a good risk/reward profile. Putting on more bad trades doesn’t make you a better trader. It just means you lose more, draw down your account, and get discouraged to the point where you often miss the good trades that are actually worth taking.
You want to be highly selective with your trades, not indiscriminate.
And that goes double in slow, range-bound trading environments like the one we’re seeing right now.
Let’s use EURUSD (the Euro against the dollar) as a good example of what I’m talking about.
The head and shoulders pattern is bearish and EURUSD should drop.
But instead it keeps rebounding off the neckline and sliding sideways. If you keep trying to anticipate the breakdown to lower levels here – while setting a small stop – you’re going to keep taking needless losses while EURUSD churns sideways for who knows how much longer.
For now, stay out of any pairs where you see this kind of sideways action. It simply isn’t worth it at this time.
Now onto the British pound where there’s a lot more action …
Notwithstanding the "ostensibly" bad news of the failure - at second attempt - of a resolution to the Brexit conundrum, the Pound Sterling (GBP) rebounded substantially against most other major currencies last week.
As you can see here, GBPUSD (the British pound against the dollar) is currently at the high end of its trading range after making a large, bullish key reversal last week.
Normally I’d be very interested in going long here. But given the environment we’re in now, I’m inclined to wait for a genuine breakout. I’m particularly strict about waiting for a move that looks strong enough not to be a false breakout (otherwise known as a bull trap) with real momentum behind it.
The best way to play such a move right now is to wait patiently for that initial breakout when it comes. Then wait a bit more. Buy when it retraces to preview resistance (which would then act as support).
At that point we have the best chance of catching a major move up, if it happens. I’ve scribbled a line on the GBPUSD chart to outline the particular price action I’m waiting for.
That means there’s nothing to do in GBPUSD right now.
In the meantime, I’m far more interested in the trading action in two other GBP-related pairs.
At the risk of sounding like a broken record, I am confident that the prevailing long-term bull price patterns in GBPNZD (and GBPAUD) will generate the momentum to continue their inevitable stair-step actions higher.
However, trading in these pairs is not without a huge amount of volatility and risk. To succeed over the long term when trading in these pairs, you need to give these trades enough time to play out. Use a wide stop loss and reduce your position size accordingly.
Use this position size calculator to ensure you’re not taking on too much risk. Here it is again:
Now let’s examine GBPNZD (the pound against the New Zealand dollar).
On balance, this has been moving higher despite the ongoing media negativity about the pound.
Here we see a double bottom followed by a rounding bottom that shared a common neckline with the double bottom at 1.80. Resistance became support.
And most recently we had a bullish key reversal while the price remains trending up in a bullish channel.
Everything is bullish. So far so good.
In the current trading environment, the way to play GBPNZD is to place a buy stop above last week’s high and a stop loss below last week’s low. That’s a very wide stop, but it will keep you in a good trade with the potential to move many hundreds, even thousands of pips in your favor later this year.
Again, the key to this trade is patience as GBPNZD loves taking three steps forward followed by two backwards at the moment. But patience should pay off as long as we remember the bullish reasons we got into the trade in the first place.
Now here’s USDJPY (the dollar against the Japanese yen).
As with GBPNZD, we want to keep our focus on the longer term patterns driving the current (bearish) price action.
The double top forms the head of a bearish head and shoulders pattern. See how the price couldn’t hold above the neckline even after a valiant climb from July 2017 lows? It’s been all downhill again since that point.
And we’re now at the top edge of a bearish descending triangle. An inflection point, if you will.
We previously saw a false breakout (a bull trap) above the trendline for this pattern. Prices then crashed 600 pips during the Christmas holidays.
Could the same thing happen again?
Well, the week before last we had a bearish key reversal. Then last week was an inside bar which represents a coiling of energy. Think of how a compressed spring reacts when the pressure is released.
When the energy unleashes from an inside bar, price tends to move violently too.,
I think the energy will be released to the downside within the new few weeks and USDJPY will roll over.
OK, another pair that’s been excruciating to watch but which should still descend based on recent price action is EURGBP (the Euro against the British pound).
Multiple failures to rise higher from the 0.90 – 0.92 leveled to descent below 0.86 with a bearish key reversal last week. That should set the stage for even lower prices.
I think the next target is 0.83 but expect a bit of back and forth action on the way there. Be patient, use a wide stop, and mind your position size to keep your risk within acceptable levels.
So what’s up in precious metals?
Unfortunately, they look to be about as exciting as the U.S. dollar at the moment.
Even though XAUUSD (spot gold) broke out of a long-term symmetrical triangle price pattern, recent price action once again saw the yellow metal turned back at the 5-year resistance level between 1340 and 1360.
Combine that with very bearish price patterns currently prevailing in XAGUSD (spot silver), it looks like a follow-on down move is in store for XAUUSD.
Let’s look at spot silver first: XAGUSD looks unlikely to go higher in the foreseeable future. In fact, it looks a lot more likely to do the opposite.
Silver’s never recovered from its double top which ended back in 2013 and has been on a decline ever since. The most likely target for silver is at the lower end of the descending triangle which is just below $14/ounce. This is definitely not the kind of chart I want to trade. Until silver comes to life again, there are no “big trades” in the offing here.
Now for gold itself …
In contrast to spot silver, spot gold is showing an ascending triangle instead. Therefore it looks a lot more bullish than silver.
However, it’s looking increasingly like the breakout from the longer term symmetrical triangle was a bull trap as you can see here:
At best, gold looks set to trade between the 1340 resistance area and a possible 1270 support level. The failure to break out from that 1340-1360 level was crucial to gold’s near-term prospects.
In fact, gold has been a narrow trading range for the last several years and right now it’s in an even narrower range than ever. As with the USD, we should just sit back and wait for significant price action in either direction.
Fortunately, there’s something much more interesting in the U.S. stock market.
Last week, U.S. stock indices punctured the upper levels of critical resistance levels: 1.7500 in the Nasdaq - QQQ (ETF), and 2800 in the S&P500. Penetration above the indicated resistance levels implies the long-term bull market in stocks remains intact.
Let’s take a close look at the NASDAQ100 weekly chart:
Last week’s action was very important as the market not only traded but also closed over key resistance levels. Resistance should become support.
So the bull market appears to be intact, at least in the NASDAQ100. It shouldn’t be long before we get some very interesting setups in QQQ (the ETF proxy for the NASDAQ100) and certain bellwether tech stocks such as Apple and Facebook too.
In the meantime, be patient and conservative with your trading.
P.S. I believe there are 2 currencies that are about to crash. Check out the link below to find out which currencies.
I wish you a very healthy and prosperous trading week.
Mark "PoundPrevails" Shawzin