The forex market is never the same as what is happening today, it does not mean that the same thing will happen tomorrow. The market may grow relative to positive economic data today, but may collapse next week after the same numbers are released. How many times have we seen this over the years? The answer is too often.
We know that forex trading is a tough business in the best of times, not to mention the times when the market is irrational and the opposite for every reason. So what do we do? Well, we can’t change the market, we can just follow. As the saying goes, “ours is not why – it is ours to do or die”. The number one cause of death for forex accounts is trying to fight the market. But how do we follow the market, how do we know when we will continue the trend, or how the trend has changed against logic? The following examples show how to understand the market and answer these questions.
Trading in an Irrational Market: The right strategy for an irrational market – Forex trading strategies
USD / CAD
The USD / CAD has been on a long-term upward trend since 2011 and picked up in 2014 and 2015. This is justified because the U.S. economy has improved since 2011, and the Fed has entered a cycle of monetary tightening with the completion of the QE program and is planning to raise interest rates. The Canadian economy, on the other hand, is weakening and inflation is close to zero. Over the past year, monthly economic data have suggested that the economy has been in recession several times. In addition, falling oil prices have played a role in further weakening Canada, which has the world’s third-largest oil reserves. So this USD / CAD uptrend makes perfect sense.
But from mid-January this year, the pair turned around and fell about 23 cents in a few months. This move is completely contrary to reason, as the flow was detrimental – but we must always go hand in hand with the flow. By mid-February, the market had given three big signals that the flow had shifted from bullish to bearish, at least in the short term. What were these signs?
1. The first sign of the shift was the bear absorbing candle in the third week of January. After two big bullish candles, we had an even bigger bearish candle in the first two weeks of the month. This tells us that some large market players have closed their long-term buying positions, or worse, that they have opened large selling positions.
2. The market gave us a second signal in the first week of February. Sometime during the week, the price reached 1.3630 from a peak of 1.47 in mid-January. That’s an 11 cent (or 1110 pip) move in just over two weeks. Such a big downward movement thinks that something very important has changed in the forex market.
3. The market gave us a third and final signal in the second week of February. We know that the Canadian dollar is quite dependent on the price of oil and the USD / CAD is closely related to it. However, in the second week, oil prices were at their lowest point, in the $ 26-28 / barrel region, while the Canadian dollar was about 1,000 high. How can this be? No sense in telling you now – we didn’t go down without explaining myself first. The lack of USD / CAD didn’t make much sense, but we had to follow the market and the market signaled us with signals. At this point, as a forex trader, all we had to do was read the signals and follow the flow.
EUR / USD
The second example is a little easier to understand. On the second day of March this year, the ECB cut REPO interest rates from 0.05% to 0%, reduced interest rates from -0.20% to -0.30% and raised their monthly QE asset purchases from € 60 billion to € 80 billion. . . The logic says that when a central bank pours a lot more money into an economy and forces tier two banks to increase lending, the price of that currency will usually fall because currencies are still seen as commodities than the rest. The euro fell 200 points in the first moments after the statement was published, but turned it around and closed the day 400 points higher. By the end of the day, everyone was shaking their heads.
The next day, all sorts of speculation surrounded the market, such as (1) now that the ECB has taken these steps, they are no longer intervening; (2) the ECB is now left without any protection, or (3) the market sees this as a long-term positive signal for the euro area economy. Neither was true, but whatever the reason, you just can’t ignore the market.
Looking at the daily chart of 20/20 – in retrospect, the market wanted to go up. There is a big bullish daily candle, and despite bearish funds, the market hinted that its bias was bullish. And as always, the market should be your guide. The market told us to buy, so the best place to buy was to go back to the previous resistance level of 1.1050, which has now become a mainstay. Although slowly, but this pair reached nearly 600 pipettes.
The market suggested that the bullish trend was about to begin
As mentioned in the introductory paragraph, the forex market can often be very irrational. But if we keep our heads clean and see the bigger picture, it always gives signals as to which direction you want to go. These signs lead us. Funds may point out in one way, but the forex market does not always follow this analysis. We’ve seen quite a few of these irrational market behaviors lately. Sometimes the best forex strategy has no strategy at all, or at least puts the strategy aside until the forex market comes to its senses.