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Lock in Profits on EUR/USD Short Trade

Posted By Jason Fielder On October 11, 2011 @ 5:00 am In Alternative Investing,Articles,Featured,FOREX,Forex options,Jason Fielder,News,Trading Forex | No Comments

[1]The last few weeks, we have talked about the Euro debt crisis and how it is spilling over to every other part of the world economy. The speed at which the EUR has lost value has been surprising; this means we must reconsider our previous trade position.

Concerns about the Euro debt seem to be easing. News reports show stocks rising as investors’ confidence in European banks recovers. Is the Euro debt issue resolved? Does this affect our current trade? These are questions of the serious Forex traders trading any currency pair with the EUR.

The stock markets in both the US and Europe gained momentum from two main sources. One is the early report that the US economy grew in September.  The other is growing confidence that European banks will be supported than we’ve seen in the past. A renewed commitment to keeping nations like Greece and Portugal away from default is helping the European markets rebound.

But, we need to know the historical price ranges for the EUR/USD. By looking at the historical ranges of these currencies, we can compare them to figure out where the currency pair is sitting. Obviously, there is a limited history since the Euro is a relatively new currency, but we can still gain insight by looking at the past trends of the EUR/USD. Based on where the EUR/USD price is now, we can make assumptions about how to proceed.

The current price on the EUR/USD currency pair is in the historical range for consolidation.

What does this mean for us?

Even without any changes in the news or markets this would be cause for concern and require a careful study of this currency pair’s situation. Combine this historical consolidation range for the EUR/USD with very positive news on a Euro debt deal and bank support and we need to be careful. This might be the time to think about exiting the trade or at least weighing options.

European stock markets are moving up strongly on the news. There are still some potential worries, such as Italy’s debt being downgraded. That being said the markets seem to think this new support of the banks is a very positive step and many expect the EUR to strengthen as a result. The combination of strengthening markets, less worry about Europe’s debt issue, and the EUR/USD already being in the historical consolidation range, should worry traders who are in  short positions.

Why?

Because the EUR looks poised to recover lost strength with all these elements into play.

Forex traders trading the EUR/USD need to consider moving to break even or even exiting the trade altogether. As I warned last week, positive news on the EUR front was unexpected by the market and would alter the EUR/USD trade expectations.

The key here is to get out to protect your profits; or at the very least to protect yourself from the reversal that seems very likely to come.

With the debt deal already buoying the EUR, any new positive developments will only speed up and strengthen the bullish pressure. Keeping a close eye on European debt news and the markets’ reaction to it is critical for anyone still in the EUR/USD trade. For example, the downgrade of Italy’s debt did not bring down the EUR.  When bad news doesn’t trigger selling in an already down trending market, that’s a clear indication that there are buyers for the EUR at these levels.

Any bad US news or positive EUR news could spark a rapid move higher.

Traders who are short selling for the long term on the EUR/USD need to close their positions.  Remember, we buy the rumor and sell the news. Well, in our case it was sell the rumor and buy the news.

Regardless of the direction, I believe that the “News” is here and it’s time to either exit the trade with profits or move your stop loss close to the market. By doing this, you will be able to exit the trade if the EUR/USD moves higher. If the EUR/USD moves lower from some unexpected news or break down in EU debt talks, then you will still be in the trade and profit if the EUR/USD moves further to the down side.

I am moving my stop to 1.3515 which is right above the current week’s high.

[2]

You’ll want to continue watching for news on both currencies to see if the market changes again. For now the safe bet is to close the position or lock in profits. Then wait out the upcoming market fluctuations. It can be tempting to try to stay in a little bit longer to milk out every last pip but that’s just not the best play right now.

Good trading,

Jason Fielder


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[8] Obama’s Jobs Speech Means Short the Euro: http://www.absolutewealth.com/obama%e2%80%99s-jobs-speech-means-short-the-euro/

[9] FOMC Decision Tells Me to Go Short EUR/USD: http://www.absolutewealth.com/fomc-decision-tells-me-to-go-short-eurusd/

[10] How to Trade the Euro Debt Crisis: http://www.absolutewealth.com/how-to-trade-the-euro-debt-crisis/

[11] The Best Play On The EURO: http://www.absolutewealth.com/the-best-play-on-the-euro/

[12] The Carry Trade: Get With It Or Get Run Over By It: http://www.absolutewealth.com/the-carry-trade-get-with-it-or-get-run-over-by-it/

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