Thursday, August 27, 2009

Forex: Don't Trust Your Trading to Headlines

When I first saw this news headline this morning (Aug. 25), I had to read it three times before it sunk in. See if it stumps you, too:

FOREX-Dollar dips on upbeat U.S. data, Bernanke news
NEW YORK, Aug 25 (Reuters) - The dollar weakened on Tuesday as generally upbeat U.S. economic data and Federal Reserve Chairman Ben Bernanke's reappointment encouraged investors to take on riskier trades.

You can understand my confusion: the U.S. economic data was good, but the USD lost anyway. In all fairness, the article gave a very plausible explanation: the U.S. economy is improving, so there is no further need to rush into dollars for safety, so the buck loses.

But let me ask you this: Had the USD gained on Tuesday instead, can you imagine headlines reading something like this?

FOREX-Dollar gains on upbeat U.S. data, Bernanke news

Sounds just as plausible, doesn't it? If anything, even more so. But think of what you just did: You have successfully used the same news story to explain a bearish and a bullish action in the same market. So let me ask you.

If another positive U.S. economic report comes out tomorrow, will it be bullish or bearish for the dollar? The euro? If the news is bad instead -- will you go long or short the EUR/USD? I wouldn't know what to answer, either -- if the news were my only strategic resource.

"Fundamental" indicators can change with the wind because they apply only to what has already happened. It's easy to "explain" past market action. There is a better way -- you can predict currencies markets instead, by using technical analysis.

Elliott wave is all about pattern recognition in charts. Right now, the daily EUR/USD chart shows a potentially completed 5-wave Elliott wave pattern. (Chart modified; copied from Elliott Wave International's intensive Currency Specialty Service):

This potentially completed 5-wave Elliott wave pattern likely portends a major opportunity straight ahead in the EUR/USD. And it has nothing to do with good or bad economic news -- just crowd psychology of forex traders.

Get complete details inside EWI's intensive Currency Specialty Service now.