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Feb 05

The Most Neglected Trading Skill Ever – Looking Past The End of Your Nose.

After having six weeks away from the markets, it’s great to see that nothing much has really changed.

The trends are still trending, the traders are still twittering, and the perpetual $EURUSD bears are still trying to pick a top in a Forex pair that continues to climb.

I came back from holidays yesterday to a great deal of whooping and delight – I figured either a circus was in town, or maybe everyone was inordinately pleased to see me; but sadly it just turned out to be a 100 point drop in the $EURUSD.  Ah well.

Before Christmas even the non-EU traders were noticing that the pair were looking pretty darn bullish.  On the weekly chart it had broken its down trend and was happily making some fresh highs and everyone knew it.  Well, everyone except the forex traders, it seems.

To my amusement a large proportion of the traders on the stream were determinedly trading the short side, fading every breakout and basically getting cleaned up.  Come on, it is a little bit funny – there really is no excuse for fading a ripping trend.

Anyway, at that time the $EURUSD was bullish on EVERY time frame, yet these stubborn bears were continually calling the top.  And occasionally they’d be ‘right’, in the same way a broken clock might be right, and score a few pips.

But the real question here is why the heck are traders trying to score these tiny, anti-trend wins when there is an up-trend on all timeframes over 1M?  It just doesn’t make sense.

These traders are not flicking from long to short, trying to get swings.  They are calling tops on miniscule time frames whilst utterly ignoring what is really going on the pair.

Trend?  I can't see no trend!

Trend? I can’t see no trend!

But – But – My Indicators Say Over-Bought!

The crazy thing that everyone either doesn’t know or chooses to ignore is that in a great trend, a pair will be over bought on the RSI  (or any mo-mo indicator) a LOT for the simple reason the best trends have great momentum.  I know, it’s a shock.

Personally, I think the terms over-bought and over-sold are stupid because they imply that price has gone too far.   Here’s some news – the market doesn’t give a crap what your indicators say.  It will go up and be ‘over-bought’ longer than you can stay solvent.

You can’t look at some random indi in exclusion from everything else and blindly rely on it without checking to see if what it’s telling you makes sense in the context of the bigger picture.

Which brings me back to right now and yesterdays drop in the $EURUSD.

Is The $EURUSD Trend Over?

To quote a rather old and corny song, “It’s not over, till it’s o-o-ver”.  And I don’t know about your charts, but mine tell me that it’s not over.  The huge up-trend, that is, not the 100 point drop.

I know you’re just busting to know how I know that – it’s actually very easy.

On a short timeframe, a 100 point drop looks enormous.  On my 5M chart, it looks wonderful – there is some great profit potential in it and it’s a bit of fun.  But it’s really important to recognise it for what it is – which is a perfectly normal move in the context of an over all up-trend.

 

EURUSD

You can see in this daily chart that the $EURUSD has a reasonably large down day every so often, even within the up-trend.  This is not the time to start calling the EU at 1.28 by the end of the week.  Sure – it could happen.  But trading is not about vague possibilities, it’s about probability and likelihood.

After one down day, the likelihood of a massive sell off is pretty darn slim.  Call it if you want – after all, every sell-off starts with a down day.  You just need to recognise that, right now, the odds are not in your favour.

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  • Chris

    Good to see you back, thanks for the great post.

  • KinsaleForex

    Great post Jess. Some of your comments rang quite true, whilst i’ve tried a couple of shorts on EU, the up trend has been very good to me since the start of December basically, especially with the Point and Figure strategy i’m now using.

    Interestingly, the daily volume at the high is huge, this led in part to the large down day in my opinion, the two days after looks like indecision to me with some further high volume on the day that made the low for the week. Interesting times!