People often want to know whether forex trading is profitable. They see a strategy online promising 1000% returns and millions of dollars in profits and wonder whether they too can become successful forex traders.

On the flip side, though, they will also have heard the stories of those traders who have lost money and in the back of their minds they will wonder if forex trading is no different to gambling.

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Currency markets saw some sharp moves on Wednesday as FX traders responded to a plethora of economic releases and statements by selling the US dollar and buying the Euro, Japanese yen and British pound. This has seen EURUSD enter an overbought condition that could lead to some short term downward pressure for the pair.

Traders would have anticipated the monthly Federal Reserve policy meeting to be the main item on the agenda on Wednesday, but in the end, Fed officials kept in line with expectations and were ultimately upstaged by a lacklustre GDP print.

US GDP came in at just 0.1% versus the 1.2% expected and was a real disappointment. This saw EURUSD rally around 80 pips on the day to close around 1.3870. Meanwhile, GBPUSD hit a four and a half year high, soaring by around 70 pips, and USDJPY dropped through all three support levels to 102.2.

Overbought condition for EURUSD

Looking at the chart, EURUSD appears to be entering an overbought condition here and this is confirmed by both the CCI (commodity channel index) and Williams percent range indicators, on the daily chart. For now though, RSI and Bollinger Bands are still not yet showing the market as overbought, though they are on shorter timeframes.

Overbought condition for EURUSD

Source: IG Index

More importantly, however, an analysis of open position data reveals that the market is now in a significantly one-sided position.

Open position data from large forex broker Oanda (below) shows that only 23.15% of current open positions are long positions and this makes EURUSD the most one-sided market of all the major forex pairs. Significant one-sided ratios, those below 25% often indicate that a reversal is around the corner because the market has become imbalanced. The only way to address that balance is if the market corrects, so short term traders should turn bearish on EURUSD for the next week or so.

Overbought condition for EURUSD

Source: Oanda FX


 


Trading and cricket

trading and cricket picture of cricket players

It is not altogether uncommon for people to try and compare professions with sport. With trading this is equally true and I have heard many times people compare trading to American football, baseball, golf or even tennis.

In many ways, baseball is a good comparison; The film Moneyball with Brad Pitt is an interesting example of this and the analogy between hitting a ‘home-run’ and finding a winning trend is particularly prescient. American football, too, has the strategic element that can be equally applied to financial markets.

However, I often find trading to have more in common with the English game of cricket than anything else. In some ways, trading and cricket require very similar skills.

What is cricket?

For those who don’t know the game well, cricket is a sport played with 11 players on each side on a large field, with a 22 yard pitch in the middle. Teams take it in turns to bat and score runs, (whilst the other team fields), with only two batsmen coming to the field at any one time. The batsman must defend his wicket (made of 3 wooden stumps) as the bowler hurtles down a leather ball trying to knock off the bails that are delicately poised atop of the said stumps.

Coming into bat

Batting in a cricket game is a lot like trading. As soon as the batsmen comes to the crease, the opportunities to score runs come flooding in. Just as they do when a trader settles down to trade.

However, each opportunity comes with its own risks, and just like a trader does, the batsmen must weigh each opportunity based on its risk vs reward.

Risk v reward

Every time a ball is bowled the batsman has an opportunity: He can hit the ball high and hard and attempt to score a ‘six’, the highest score in cricket. He could go for a ‘four’, striking the ball just hard enough for it to make its way to the boundary. Or he can play safe, opting to score just one or two runs, or even none at all, using his bat to play defensively and direct the ball away from danger.

The risks from hitting a six or a four are high, because the batsmen could be caught out or bowled more easily. Indeed the higher the score, the more risk that is involved in obtaining it.

Playing the field

Just like in trading, the batsmen has choices and each choice offers differing levels of risk. Each opportunity must be assessed on its own merit based on the settings of the fielders, the speed and direction of the ball and the conditions of the pitch.

Should he play safe and wait for a better ball?

Or should he commit and try to score?

Should he come out all guns blazing in attack? Or should he play cautiously, banking runs as he goes (like a scalper picking up pips)?

Successful traders must play the markets in just the same way as the successful batsmen plays cricket – with great concentration, commitment and a sensible approach to risk vs reward.

 



US stock markets moved up nicely yesterday for the second day in a row, after comments from Russian President Vladimir Putin downplayed the extent of military action in Ukraine and US housing data boosted stock market optimism. Putin said “we don’t want to split Ukraine up, we don’t need that,’’ and later, “Don’t believe those who scare you with Russia, who yell that Crimea will be followed by other regions.”

In contrast, EURUSD had an unsteady day, dropping below 1.39 in the morning before reversing its losses, bouncing back off of the first support level and closing back above 1.39. The outlook for EURUSD now looks interesting and six straight weeks of gains means the currency could be near a potential turning point.

Outlook for EURUSD

1 hour chart. Source: IG Index

Outlook for EURUSD

As you can see from the weekly chart below, EURUSD has recently broken through a descending triangle pattern to the upside. This is a bullish signal for trend followers who may see the breakout as confirmation of a multi-month upward move towards 1.45. I see the chances of this move developing at around 30-40%. However, I also believe we will see a decent correction before this move get’s going. This correction is likely to whipsaw trend followers who blindly enter the market following the breakout.

Outlook for EURUSD weekly

Weekly chart. Source: IG Index

 

One-sided condition

As I mentioned already, EURUSD has now moved higher for 6 weeks in a row and this could well be week number 7. This has led EURUSD into an overbought condition whereby most traders have moved to one side of the trade.

In fact, open position data from large forex broker Oanda, (below), shows that EURUSD is now the most one-sided of all the major currency pairs. As it stands, only 22.25% of open positions are now long trades with 77.75% short, showing a significant one-sided bias in the market. This is down from around 25% last week and coincides with EURUSD making another break for the 1.40 handle.

Outlook for EURUSD Oanda

Open position data. Source: Oanda FX

In my experience, when open position ratios move below 30% in either direction, a reversal is not too far away. In this case, the build up of shorts means that it will not take much for EURUSD to drop sharply.

Meanwhile, long traders will be waiting for the correction in order to add to their winning positions.

Result

In conclusion, short term traders should be weary about entering into the trend here, as open position data and technical indicators point to a significant one-sided market. These moments normally require a sharp correction, to relieve the overbought condition, and this should see EURUSD fall back towards 1.37 over the next couple of weeks.