The market has a funny way of proving you right … and wrong. Especially when you least expect it.
What happened with the GBPNZD (British pound against the New Zealand dollar) pair was a bit embarrassing — but it proved something rather interesting about my analysis and how I use it to predict the next big moves in the market.
I’ll tell you all about that in just a moment, but let’s celebrate what could very well be the end of the ‘Summer Lull’.
The infamous lull — infamous to Pattern Trader followers, anyway — is a period where historically the volume and volatility dips much lower than normal. July and August represent a dead zone where trends are more difficult to start or maintain. As a result, most pairs slide sideways during this time.
The good news is that now we’re into September. And typically the month of September represents a return of liquidity and the return of momentum. Sometimes it takes until October for robust, trending markets to restore themselves, but September is often a good time to begin our profit seeking for the remainder of the year.
The US Dollar Index (USDI) is a good example of this.
USDI finished the week on a strong note, but dollar trading remains a mixed bag. That’s because USD remains strong against AUD and NZD, while showing signs of weakening against CHF and JPY.
It remains stuck in a trading range for now. And it may be a couple more weeks to go before we break out of that range and some real trading action occurs in USD.
I expect the direction of that breakout will be “up” based on history prior to the summer doldrums, but we need to wait and see.
In the meantime, AUD (the Australian dollar) and NZD (the New Zealand dollar) are looking very interesting already.
Let’s start with AUDUSD …
The double top that finished forming early this year indicated the next direction was going to be down. We’ve definitely seen a bearish move since then.
Last week was particularly harsh as AUDUSD closed at the low. And right now the pair is sitting at or near its two year support area. It’s possible we might see some backing and filling before the neckline is broken, but then again next week might very well be the breakdown.
I expect AUDUSD to move sharply lower once that neckline is breached, probably all the way down to the lows shown on that weekly chart and possibly even lower than that.
AUD is on a weak trajectory against USD and most of its counterparts as it’s weakening across the board.
So is NZDUSD.
We’re also seeing a double top here, except this time the neckline has already been broken.
Note that NZDUSD also had a key reversal and is primed to drop lower in the weeks and months to come.
In fact, AUD and NZD are weakening relative to most of their major trading currency counterparts. As these countries depend on a robust Chinese trading relationship and economy, it raises questions about China. Is the relative weakness in AUD and NZD an early warning sign of an impending slowdown in the Chinese economy?
Time will tell on that score.
Another pair I’m keen on shorting — and have been for the past couple of weeks — is USDJPY (the dollar against the Japanese yen).
This pair is once again at the trendline of its recent descending triangle. This area has posed serious resistance in the past and I think it’s going to do so again.
That coupled with the small key reversal we saw last week suggests USDJPY will soon drop from current levels to the neckline … and below.
Meanwhile, for the past 18 months I’ve firmly been in the bull camp on GBPNZD and GPAUD based on their underlying double-bottom and triple-bottom price patterns, respectively.
But last week — after 8 months of sideways, listless trading behavior in these pairs — my bullish resolve in these pairs began to wane. In fact, just last week I was considering short positions after many months of unrelenting bullishness.
So what happened?
Well, in true market fashion — and just as I let down my guard — these pairs came roaring back to life. Both GBPNZD and GBPAUD were up about 500 pips in last week’s trading. Once again this validated the philosophy to which I ultimately abide – the MARKET IS ALWAYS RIGHT!
See for yourself with GBPNZD:
Just as I was ready to give up on it and throw in the towel, last week GBPNZD closed within 300 pips of new multi-year highs. Based on the robust price action, this suggests….
If you’re NOT long GBPNZD, you’re wrong.
After going sideways all that time, the double bottom and rounding bottom in this pair proved their long-term worth and I expect to see new highs in GBPNZD sooner rather than later.
One question I get asked a lot is how to calculate position size for some of the larger stop losses I use for these types of trades.
While there are several on the web, I’ve found the one on myFXBook.com to be particularly easy to use and understand.
In the screenshot below, I’ve shown you how large a position you should take for a $5,000 account risking 1% ($50) with a 500 pip stop loss. Bear in mind my profit targets are often that far away and even farther.
The results look like this:
… so you should trade just 1510 units (or 0.015 lots) — that’s the right trade size for a trade with those parameters.
Go ahead and play with the myFXBook calculator yourself to see how the numbers work. It’s easy to use and you’ll never take on too much risk as long as you stay within the recommended position sizes.
And that concludes this week’s analysis. Consider shorting AUDUSD and NZDUSD as well as USDJPY too.
And look to go long GBPNZD (my long-time long favorite once again).
Are you interested in learning more about how to make trades like these?
Remember, the exact same profitable patterns show up in FX as well as in the stock market. Once you learn them, you can trade anything profitably.
So I’ve put together my 21 most powerful Forex strategies for you.
The key point is that once you learn the ideas and concepts, they’re with you forever.
So if you’re interested, just check out that link.