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Dollar Case of study

Written by A Forex View From Afar on Monday, August 11, 2008

The dollar had not really got going in posting its gains before analysts from the most important banks were starting to speak about the end of the new long dollar trend. On Friday, the dollar closed the trading session after gaining a whooping 320 pips on the euro, the biggest one-day gain in the last 8 years. Soon after that analysts from the Bank of America, Morgan Stanley, Barclays Plc and Credit Suisse said that the moves were unsustainable, as the markets had overpriced the possibility of a rate increase from the Fed, and that the US economy does not show signs of major improvements over the next quarters. It is very interesting that these analysts foresee the dollar stronger by the year-end, but now right now it seemed that it was just too much, too soon for the big boys.

The technical stochastic indicators, including the relative strength index (RSI) and the stochastic oscillator are way into the oversold line, showing a retrace of the previous move may be possible, but that will not at this stage be initiated by jawboning and headlines. Maybe the big boys did not get there toys out of the sand pit before the dollar moves happened. Maybe they needed a reason for the market to pull back so that they could get on the new trend, and once they were actually in it, the new headline would be; “Dollar sustains mighty break-out, economics look fine”.

We should not trade headlines, we should read headlines, and trade charts. Over a long time of chart reading we develop an understanding of what the charts actually build from, and the layer that is behind them. Experiencing the yearly swings, and the sentiment drifts enables us to more comfortably sit in a trader's skin. It is not about knowing it all, it is about knowing a little of what really matters, and ignoring headlines is one of the first steps to a successful career.

It may just be that the euro has a very hard week ahead in regard to testing fair value, with the real test probably being on Thursday when the economic schedule is fully loaded with important releases from both sides of the Atlantic. No headline, just a warning that the fundamental driver of the Eur/Usd may force the big boys back into the sand pit on Thursday.

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Fundies and Trading
There is a constant question from some traders as to why anybody would ever need to consider the ‘F’ word when trading. Fundamentals: what is so damaging at looking at both Technical charts and having a Fundamental filter to gauge how many Lots to put on? Why is it that accepting that Technicals give us price points to trade, but Fundamentals determine the direction that we travel is so difficult for some traders to accept? Without a Fundamental Filter very few pure Technical traders would have seen this Dollar move coming today.

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