Trading the global currency markets has traditionally required as much macroeconomic geopolitical knowledge as it has technical analysis and money management. Frankly, as the world’s information travels faster and faster with breaking news occurring in 140 characters or less it’s become nigh on impossible to filter and assimilate this information into a trading plan on a real time basis. The other option is to simply accept the opinion of your favorite talking head or political party aligned news agency, television station or radio program. The optimal solution would be a weekly polling agency of those with vested interests in the specific currency pair being discussed. Our analysis has shown that the weekly Commitment Traders reports offer a reasonable proxy for our proposed solution.
We use these reports to quantify the media’s hyperbole by distilling the headlines down to the essence of how much and how quickly big money feels the need to participate at current price levels. The call to action of the commercial traders provides the first branch on our decision tree. Simply put, we want to be on their side. Currently, the commercial traders are putting their money to work on the long side of the euro currency as it trades around $1.34 to the tune of their most bullish outlook since august of 2012 when the market was $.10 lower.
Commercial traders have been net buyers of the Euro in 10 of the last 11 weeks. You can see the position they’re building along with the short-term market momentum indicator we use to time our entries on this commercial trader chart. Yesterday’s inside bar is most likely the precursor to a short trap bottom. Typically, the market will resolve itself in the short-term direction of the breakout beyond the inside bar. This morning, the market has pushed through yesterday’s lows and should attract more speculative money to the short side of the trade.
While we’ve clearly missed the short side of this trade over the last few weeks, we’ve also been able to keep our powder dry while waiting for a reversal higher which would bring the market back from its currently oversold levels. This will trigger our long entry. Our protective stop loss order will be placed at whatever this swing low turns out to be. While this is typically a mean reversion strategy, we have found that the size of the position imbalance can lead to moves extending beyond medium term moving averages. The current position could very easily fit this scenario.