Before I get into the analysis of individual price charts this week, let me remind you that I have an inherent bias against trading the markets from May through September, especially the FX markets.
That’s because there’s often a seasonality where we typically get very range-bound, choppy market behavior from May through September, especially when you look at November through to April in comparison. Those latter six months are almost always the most fertile time for trading.
For example, I've taken thousands of pips out of short USDJPY trades recently and thousands of pips out of long GBPNZD trades too. Big trades are what I look for, but unfortunately now is not the time for them. It may surprise you to know that I make most of my money on less than half a dozen trades per year.
This also emphasizes why it’s so important to take a patient and disciplined approach to trading, especially in environments like this which are likely to persist for the next several months.
Now I’m not saying I won’t be trading at all for the next several months. I’m pointing out that you need to understand the trading environment is as important as your trading setup. In the wrong environment, even the best setups often fail to deliver. Chart patterns that normally herald a major change in direction instead just fizzle out with a little real opportunity to profit.
EURUSD (the Euro versus the US dollar) is a good example. As you can see, EURUSD is getting into some very range-bound, choppy price behavior. This isn’t what I want when trading.
As regular readers know, I won't put on a trade unless I can see at least a 150 pip outcome and typically I'm looking for 300, 500, even 1,000 pips of potential profit.
That’s because I'm seeking significant directional bias in my trades. I certainly don't want to get into a boxing match where the market just goes sideways and movement becomes both arbitrary and random. In that kind of environment, you're duking it out with your broker to scrape out 20-40 pips here and there … if you’re lucky.
That’s not the objective of my trading and so there are various strategies I use to handle this environment which I’ll cover in a moment.
The first thing you should observe is what’s happening overall, which is that after a tremendous period of volatility in multiple assets due to the global health crisis, this volatility cannot be sustained and appears to be ebbing away.
This is consistent with what I typically see during the summer period.
The last six weeks of trading in GBPUSD (the British pound versus the US dollar) offers another example of this narrow, sideways market environment.
This represents a market where you can get chopped up financially and emotionally because you literally don't know where the market’s going to go. Not only are you losing money, but you’re also losing confidence and this can lead you to abandon an otherwise sound trading system.
My highly successful trading method involves looking at defined patterns and typically I won’t put on a trade unless I can see a 150 pip win. For that size profit, I'm normally looking to risk about 50 pips on the trade, meaning that I seek a 3:1 risk/reward ratio under normal circumstances.
But in environments like this, that’s just not practical due to all the choppiness and random noise. During summer months I reduce my risk/reward objective to 1.5:1 or 2:1.
I also lower my position size and trade with much wider stop losses. This reduces my risk significantly.
I also accept a much longer holding period before a trade pays off (or not).
And all that comes into play after I see a pathway for a given trade to work in my favor, of course.
Yet right now GBPUSD isn’t looking any more promising than EURUSD. It’s bouncing in a narrow range and it's inherently unpredictable. For the record, there’s a long-term downtrend in GBPUSD (bearish) and the pair has, in fact, caught some support (bullish), but the market needs to confirm either view with some appropriate price action.
Remember that after putting structures over the price action, you have to sit back and observe the market’s subsequent price action. Does it confirm the structures or not? Right now I could make the case for GBPUSD either way: either the downtrend is dominant or the possible double bottom is dominant. It’s just too ambiguous to make a decision yet.
So that’s why capital preservation is the best trade in situations like this. Sometimes sitting on your hands is the best choice. Now I realize this isn't the sexiest discussion because we all want to trade. We all want opportunities, but frankly, recognizing the environment and recognizing where the opportunities exist and where the traps exist is probably the most central thing to your trading over the long term.
So are there any opportunities at all right now?
Probably the best example I could give is this long-term view of the major trend in the USDJPY (the US dollar versus the Japanese yen).
On this chart, I'm looking at the 45-year history of USDJPY. It starts in the mid-1970’s where the yen was 350 to the dollar and runs through to today, where it’s 107 to the dollar.
USDJPY has been in a long-term downtrend and while it looks like it's been sliding sideways for the last couple of decades, it’s still been making a series of lower highs to form a descending triangle.
There’s nothing on this chart that suggests that USDJPY is going to reverse its long-term trend, so it doesn't matter to me what it does for the next one month, two months or three months.
That’s because the long-term move is obvious. In fact, I’m looking to add to my short position on any bounce because I believe that eventually, USDJPY’s going to break in the direction of the trend.
Now, of course, patience is required. I’m already short USDJPY from the 107 area and I'm looking to hold this trade for 3-6 months if necessary. I don't care if it just bounces around or if it goes back to 108 or 109 as I’ll just short more.
I believe that when USDJPY finally breaks down, building this short position will really pay off. At this point, I don't know when that will occur, but to my mind, it's not “if” USDJPY goes lower, it's “when”.
If you’re trading on 15-minute charts or the like, you’re probably going to just get cut up by this range-bound choppy environment. Instead, I suggest standing back and looking at the global long term view as I’m doing with USDJPY.
Once you understand what’s going on, then you can set your big trades accordingly.
The markets are interesting.
In some areas, the market conditions are weird and awkward. In other areas, there are some tremendous set-ups forming.
In this week’s video report, I share some of the big lessons from 40 years of trading that are directly applicable to today’s market conditions and share the “slam dunk” opportunity that is available right now.
- Why I have an inherit bias for trading markets from May to September (and my reasons for this based on 40 years of experience)
- Is now a good time or a bad time to trade? A breakdown of exactly what I look for before making a trade-in today’s market conditions
- Why do I reduce my risk/reward objective during the summer? All explained from 4.15
- Why recognizing the environment to find opportunities and traps is one of the most valuable long-term skills that you can have
- What the 45-year chart on the USDJPY says about what is going to happen next and why we’re on a huge downtrend (but my advice on what you should be looking for right now to profit long-term)
- Why there’s a tremendous opportunity on the non USD pairs, and the trades that you should be focusing your attention on right now
- My “go-to” trade right NOW where there is a long-term ascending broadening price pattern (and why this is a slam-dunk that will drop by 1000 pips) – watch from 18.05
- How to use a “Position Size Calculator” to understand your numbers and ensure you accurately manage your risk (especially in choppy environments)
- Why has the NASDAQ nearly recovered? Is this short-term? What is going to happen next? I share what I’m seeing from 28.01
- Plus much more
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