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downrivertrader

Dollar Getting Ready to Make a Big Leg Down

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I think we are about to see a major continuation of a secular trend make perhaps its final leg down for a while. The stage seems to be set. The market has created just enough dollar strength to crate uncertainty for many traders and institutions. I find it interesting how we humans (myself included) always try to make trading such a complex undertaking. We have all our formulas, lines, oscillators, indicators, thing-a-ma-giggys, market profile, price distribution, etc. etc. Look a any longer term chart of the dollar and we would all be fools to be buying a market that is in such a strong downtrend. The dollar has certainly not told me that it has turned and a new directional trend has occurred.

 

We make trading so hard. Scrunch up any chart of the dollar past a few weeks and it is obvious that the market is going down so we should be selling the dollar. A market is never oversold. Never. Human nature makes us want to find the bottom (top). It is great for our ego but will not help your wallet.

 

I am selling the dollar for now based on a very simple analysis. Why? Because it is going down and I would be a fool to buy it right now. My guess is this will be a hard fast leg down....the time when the most money is made in a trend and make no mistake it is a trend. One I wish I had recognized long ago.

 

Something to think about.

 

DRT

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G'day, Downrivertrader.

 

I don't think the fundamentals have lined up to provide you with a big downleg in the dollar (yet). As you probably know, nothing goes in a straight line either. The dollar is driven mostly by interest rate differentials and although I personally doubt that the Fed will be raising rates anytime soon, they can have a fairly profound effect on the markets by simply talking. More importantly, europe and others are now starting to realize that they may need to start cutting rates. As soon as they commence cutting, the dollar will strengthen by proxy. So dollar strength isn't solely based upon U.S. economic factors. A slowdown in Europe will strengthen the dollar, and that slowdown is becoming increasingly apparent in the data as they lag the U.S. by some time.

 

It is possible you may be right. The dollar may suffer a catastrophic failure, but that likely wouldn't happen unless something equally catastrophic occurred - like the U.S. AAA rating (which probably shouldn't be AAA in the first place, but that's another argument entirely) getting downgraded by ratings agencies. I figure the odds of that happening anytime soon (within the next week or two) are about as high as getting hit by a flying whale.

 

A crash in the stock market might also cause a rapid decline in SOME dollar pairs, and this is perhaps the most probable cause of a rapid dollar decline. I can envision some sort of a capitulation market crash in the not-too-distant-future. A catalyst could be something as simple as Congress failing to pass the housing bill, or another major bank failure. At this point, many things might produce such a crash. EDIT: However, keep in mind that a stock market crash will only affect certain pairs. EUR/USD, for example, would probably drop (the dollar would strengthen) due to the safe-haven flight to safety feature of the U.S. dollar. Other pairs, like EUR/JPY would probably drop like a rock as risk aversion rockets higher. So care must be taken in which pair you trade during these events.

 

Trading what you think is often an error. Even if you're right, your timing will almost certainly bring you some level of pain.

 

If you really want to make money, trade what you see, not what you think. I'll trade further dollar weakness when I see it, and only when I see it. Follow the leader. Don't try to lead.

Edited by cowpip

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Trade what I see..my point exactly. This is what I am looking at, what are you looking at?

 

Just because the trend is down doesn't mean it's safe to short. You need to look at price action too and that tells me a different story.

 

I see that price has already moved a significant distance lower and the risk now is for a retracement before another leg lower kicks in. Price is oversold and the last several candles seem to confirm exhaustion. An inside bar has formed and has been broken on the long side, and has not yet been invalidated. The price action to me suggests that this may be a decent location to take some profits off of the table, if not take an outright tactical long position. I definitely wouldn't short here. It's too risky for my taste.

 

I'd rather be out wishing I were in, than in wishing I were out.

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I am no expert, but aren't comments like... "Scrunch up any chart of the dollar past a few weeks and it is obvious that the market is going down so we should be selling the dollar."... normally a good sign that the move is over? Like in 1999/2000 when it was obvious that internet stocks are going up and never looking back.

 

I think I read somewhere that the market's "job" is to prove our opinions wrong.

 

With that being said, I have no opinion on the dollar and I am not trading it. Just purely my observation on what is said and I wish you best of luck with your short trade.

 

Regards

- FS

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The trade what you see argument is always interesting.

 

The skill is in seeing something useful.

 

In the case of the chart above I don't trade currencies really but if it was something I did trade what I'd see is:

 

"Its just done a down extension and a small pullback. In this extension from the 05/06 high point it has had 4 small pullbacks so far. This is the 5th."

 

I'd say "5 similarly sized pullbacks is a lot ... hmmmm."

 

Then I would be saying "what does it take to get the maximum number of people offside so that the next extension down would start with plenty of liquidity and the chance for good extension when everyone piles on?" And the answer to me would be "a little push down to engage some suckers and then a failure - even a slight extension beyond the lows which could suck a lot of folk in."

 

So my personal view, simply as a trader who looks for good risk reward situations would be: a short now is not a low risk trade. I wouldn't be surprised to see a pullback into 80 or so.

 

But who knows. If you can get a good reward for a little risk setup then trade it.

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When most traders look at a chart like this, it is human nature to say....okay lets look for a pullback now, the market is oversold, consolidation, 5 downs, 3 ups, etc., etc. My point is that based on this monthly chart there is no indication for me that a long trade is warranted. For me, markets are never oversold or overbought. The human brain wants us to figure something different out at this point and I believe mother market wants to suck us in to abandoning shorts or playing a bounce. The fact is that the market is moving down so short trades are warranted at this point.

 

I here what you are saying and your points are certainly valid. What you stated is exactly what most traders think will happen. This is the reason I bothered to post this comment. We may very well go on a tear upward. I have no idea. All I know is that price is sideways in a major downtrend and long trades are not warranted in my opinion. The human brain wants to do something complicated at this point on charts in any time frame. We all make trading so complex with our ideas. Me included. The simple approach is that the market is down. Stay short.

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I agree that long trades are not yet warranted for a trend orientated trader such as myself. The trend down has not reversed by my definitions ... but continuation is no means a good bet with that many minor retracements (at least it wouldn't be in the sort of things I trade).

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"stay short" is valid.

 

The point being made is that taking a NEW entry short is in most trader's view a poor (at best) potential risk/reward trade.

 

Remember you are charting the Dollar Index, which no one trades.

 

1) what are you going to trade, which pair.

2) what is your entry price

3) what is your stop

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I don't trade the USD but I do monitor it against a couple different currencies. Therefore I can't comment on it appropriately.

 

Downrivertrader I will point out some interesting things I picked up on your post which could be food for thought. If you have just entered a short or have been in a short trade for quite some time, you might want to look at your position as unbiased as possible. I'm not saying you have done so but often people post "the market is going to do this" more out of a wanting the market to do so rather than out of unbiased analysis.

 

The need for clarification from others is often a form of solidifying ones reasoning for entering a trade. As I said I have no idea of your circumstances but if in a trade or thinking of getting in, make sure you look at it from an objectionable viewpoint. Most traders I know don't say "we are about to see", generally its more of a "the odds favor a move".

 

Something else I picked up on in your post is that you mention traders make things so hard. I would have to agree with you there. Although I think you are trying to fade the guys that really matter in the market. The guys that matter take advantage of those who get in on trends late. It's what they do because it is most efficient for them. The people who look at a trend that has seemingly been going on forever and cannot possibly fathom the market turning are usually the ones most likely picked off by the big guys. They deliberately play the game that way.

 

Your point of view to me seems overly complex. Correct me if I am wrong but your idea is that we have been going down, so there will be plenty of traders who won't continue shorting the trend (usually the pros in this instance). So as they (the pros) look for the bottom, the short side is much better for a continuation because many of the people who are experienced in the markets will get caught out trying to find the bottom.

 

So in short you would be creating a method that cancels itself out. Instead of taking advantage of those who are on the trend late, you are looking to take advantage of those who are trying to take advantage of the people in on the trend late. So in fact you would become one of the people in on the trend late. If that makes sense.

 

Just food for thought as I think it is important we look at our trade ideas objectionably.

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Downrivertrader has demonstrated why markets work. There are more than enough people trading the markets for a counterparty to exist. A diversity of opinions is a healthy thing, so I wish you the best in your dollar short trade (I will probably join you at times during the weeks and months ahead). I envy your patience and risk tolerance.

 

My guess is this will be a hard fast leg down....the time when the most money is made in a trend and make no mistake it is a trend. One I wish I had recognized long ago.

 

I suppose this statement is what led me to believe you were planning on initiating a short trade now. It also implies that because you had not recognized this trend long ago, you probably don't have a long-term position in-place. Please correct me if I'm wrong.

 

I hope your "guess" is liberally stitched with sound reasoning and properly interpreted price-action. I also hope that you have a good money-management plan in-place to handle your trade as it progresses in your desired direction. I finally hope you have a solid stop in place just in case your guess is wrong.

 

The dollar has certainly not told me that it has turned and a new directional trend has occurred.

 

Don't forget that all reversals start with the shorter time-frames, then build into the larger time-frames. By the time you see a true reversal pattern on the monthly frames, you will very likely be unable to execute a meaningful trade without exposing yourself to greater risk. Zooming in to the faster (daily, weekly) frames will provide you with far greater insight into market sentiment than just looking at a monthly line-chart of the dollar (I find other charting methods [bar or candle-stick, for example] far more "telling" of market sentiment than line-charts, but to each their own).

 

I fully concur that based on the monthly chart, the trend is still down. But I would never take a trade based solely on what the monthly chart is saying (and a line-chart to boot). I would need confirmation on the weekly, the daily and maybe even the 4-hour charts before I would ever consider initiating a long-term entry as you have considered. I believe many here would concur. I will do everything in my power to minimize my risk before initiating a trade. If I miss the boat on what ends up being a huge move, then so be it. There's plenty more fish in the sea. As I said, I'd much rather be out wishing I were in, than in wishing I were out. Too many people (mostly new people) make the mistake of shorting a downtrend just because they think / hope it will continue. I don't know what kind of experience you have trading, but I hope you are one of the more experienced people.

 

I have demonstrated in greater detail why a dollar long trade is not unreasonable, based on price-action. Thus far, you haven't provided any sound reasoning to support your trade recommendation. I would be interested in learning why you believe this so staunchly. For me, a downward sloping line just isn't enough information to base a trade decision on.

 

If you wouldn't mind sharing, I would like to know what sort of technical and fundamental analysis has led you to your conclusion, downrivertrader?

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down river trader i am a student of supply and demand and VSA and it appears to me that on that last down bar that closed in the middle you have professional buying( although there is no volume im sure you would see a spike there if it was on the chart) i am sure of this because you would expect follow through from a nice down bar but instead you get sideways moving showing that there was definitely buying in the previous down bar. so going short here im sure is going to cost you. instead i would wait for price to get marked up and wait for some weakness because it is of my opinion that the next move is sideways then up

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When most traders look at a chart like this, it is human nature to say....okay lets look for a pullback now, the market is oversold, consolidation, 5 downs, 3 ups, etc., etc. My point is that based on this monthly chart there is no indication for me that a long trade is warranted. For me, markets are never oversold or overbought. The human brain wants us to figure something different out at this point and I believe mother market wants to suck us in to abandoning shorts or playing a bounce. The fact is that the market is moving down so short trades are warranted at this point.

 

I here what you are saying and your points are certainly valid. What you stated is exactly what most traders think will happen. This is the reason I bothered to post this comment. We may very well go on a tear upward. I have no idea. All I know is that price is sideways in a major downtrend and long trades are not warranted in my opinion. The human brain wants to do something complicated at this point on charts in any time frame. We all make trading so complex with our ideas. Me included. The simple approach is that the market is down. Stay short.

 

Staying short if you already are AND going short after a prolonged downmove are quite different!

Edited by pgd

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Sorry to rub salt in the wound here, but this thread has proved to be a fantastic example of why you do not just try and jump on the end of a trend without specific reasoning.

 

This thread was started 24th July.

 

If you had entered a Short USD trade against the Aussie, you were filled long on the close at: 9520.

 

As at 8th August, Aussie dollar is now at 8849.

 

Trading the futures FX futures:

9520 - 8849 * $10 tick = $6710 loss, per contract.

 

Similar story with the EUR:

 

Short on the 24th July @ 15641

Last traded price 8 August @ 14977

= 664 tick loss ($8,300 per contract).

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USD to the moon baby!!!

J/K but man what a move she pulled. :)

Hope any fresh shorts ran stops just outside the congestion zones.

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