Forex - Game Of Odds?
Nobody knows the future. It's as simple as that. We can make assumptions about the future, but they are assumptions, no matter how rational they may seem to be. Theoretically, every economist should be a billionaire. After all economists are the ones who are supposed to understand how the flow of resources move through society. They are supposed to know the factors of supply and demand, the two forces that drive every free market economy. It's what they study for years on end.
But even the most talented economists are confronted with the duality of every economic situation. For example, when the dollar declines in value, it effectively reduces the spending power of every American consumer, making imports much more expensive. On the other hand a lower dollar means cheaper American goods and therefore better exports, which in turn means more revenue for American companies, which in turns boosts the American economy.
Bring this all back to trading and we find a rational reason for someone to sell the dollar and a rational reason for someone to buy the dollar. Those who sell the dollar believe that the dollar will continue to weaken because of a weakening economy, whereas those who buy the dollar believe that cheaper goods and assets will attract foreigners to buy the dollar and therefore bet on a future strengthening. Who dominates in the buying and selling depends on perspectives. Traders know that there are certain levels at which the perspectives of the sellers will overrule the perspectives of the buyers, and therefore there will be a greater supply than demand. This is also true in the converse.
So what is a trader to do? He or she should calculate the odds by stacking the various factors that modify perspectives. For example, the recent sell off of the US Dollar against the Canadian Dollar, to a level of $0.91 cents, provoked the following reasoning. How can the Canadians continue to export their commodities when their currency has reached the highest value in recent history? Technically the charts showed this level as being at an extreme level. At some point there would have to be be a retracement of the move or a reversal of the sentiment. These kind of odds should put a trader on alert to watch the currency pair for signs of a change in sentiment.
So a low risk opportunity sets up for intra day traders looking for a bounce and for swing traders observant of the fact that a profit taking opportunity will cause the sale of the Canadian Dollar. This contrary to the trend trade offers the possibility of great rewards, even though the window of opportunity may be short. These trades do not stack up every day but an alert trader should always be on the lookout for them.
The consequence of this potential trade was a move from .91c to .98c in a matter of a week or so. This is a move of over 800 pips. Very profitable if the trade was sized properly.
But even the most talented economists are confronted with the duality of every economic situation. For example, when the dollar declines in value, it effectively reduces the spending power of every American consumer, making imports much more expensive. On the other hand a lower dollar means cheaper American goods and therefore better exports, which in turn means more revenue for American companies, which in turns boosts the American economy.
Bring this all back to trading and we find a rational reason for someone to sell the dollar and a rational reason for someone to buy the dollar. Those who sell the dollar believe that the dollar will continue to weaken because of a weakening economy, whereas those who buy the dollar believe that cheaper goods and assets will attract foreigners to buy the dollar and therefore bet on a future strengthening. Who dominates in the buying and selling depends on perspectives. Traders know that there are certain levels at which the perspectives of the sellers will overrule the perspectives of the buyers, and therefore there will be a greater supply than demand. This is also true in the converse.
So what is a trader to do? He or she should calculate the odds by stacking the various factors that modify perspectives. For example, the recent sell off of the US Dollar against the Canadian Dollar, to a level of $0.91 cents, provoked the following reasoning. How can the Canadians continue to export their commodities when their currency has reached the highest value in recent history? Technically the charts showed this level as being at an extreme level. At some point there would have to be be a retracement of the move or a reversal of the sentiment. These kind of odds should put a trader on alert to watch the currency pair for signs of a change in sentiment.
So a low risk opportunity sets up for intra day traders looking for a bounce and for swing traders observant of the fact that a profit taking opportunity will cause the sale of the Canadian Dollar. This contrary to the trend trade offers the possibility of great rewards, even though the window of opportunity may be short. These trades do not stack up every day but an alert trader should always be on the lookout for them.
The consequence of this potential trade was a move from .91c to .98c in a matter of a week or so. This is a move of over 800 pips. Very profitable if the trade was sized properly.
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