Friday, September 22, 2006

Expectation vs. Reality

Before I get into the "meat" of this post, let me "appetize" you (get it?) by re-capping the trades I've been talking about. First the bad news. My AUD/CAD trade went to crap and instead of going the way I wanted it to, I ended up getting stopped out at breakeven. I still ended up losing a little on this trade because if you remember, I was initially short when the price nipped my entry before reversing to the long side. So in total, I lost about 70 pips on this one. Bummer!

The good news is that my USD/CAD trade is doing well now. I exited a third of my position today at 8:00 am EST when I woke up to find a 90 pip profit per lot on this pair. I still have 2/3 of my position still open with my stop now at breakeven. Price has retraced a little but it could just be some profit taking and I still see momentum favoring the short side. I'm going to continue to hold my remaining lots until I see a momentum shift. Besides, I can't lose on this trade so I'll rest easy this weekend :)

EUR/USD trading was pretty dead today (no Alba trades) seeing as there were no economic reports out but I'd still like to talk about this pair. Yesterday I talked about how we could be seeing a fundamental shift now swinging towards the Euro's favor, and although I still think the Euro will gain against the dollar, it's important to still remain cautious. I think a reason for the big move yesterday is that the market sentiment is ready to see the dollar weaken. Interest rates were already being held steady before this last meeting, but economic reports were still not giving enough reason for traders to give up their dollars. With the big drop in the Philly Index yesterday, traders finally got the catalyst they needed to finally pull the trigger and go short on the greenback. The thing is, yes it was a weak US economic report and dollar negative, but the job market is still relatively strong and with oil prices remaining low, it seems like the US consumers are still doing ok. I'm not saying this is a cause for the Fed to raise rates, but the movement we saw yesterday is an example of how the market's sentiment over-reacts to what is actually happening in reality. Traders were just looking for a reason to sell the dollar and yesterday, they got that reason.

The point is, market sentiment is a strong trading tool. Even if the US economy may doing better than traders' think, the dollar will still plummet if the expectation of the dollar is for it to weaken. This is a quote I pulled from Jack Crook's Black Swan Currency Currents: (This is a great daily read by the way)

"And presently, it seems, the crowd expects the dollar to crumble; on the view of slowing US
growth (yesterday’s manufacturing data and continued housing fears), a Fed that is done (with a subtle but growing chorus of “next move a cut” on R-word fears), a European Central Bank that will hike (on inflation fears as evidenced by ECB banking hawks) and the European economy is gaining momentum (as evidenced by French consumer spending today)."

So the moral of the story is don't try to fight the masses. If the expectation is for the dollar to get weaker, then don't try to fight it. Instead look at how you can make money from it. Another day, another lesson learned. Happy trading and have a great weekend!


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