Last week, I mentioned there are eight major currencies in the forex world.
Today I want to go into my trading process and take a look at a recent trade of mine.
The first thing I do is group these major currencies into four different categories. This makes it easier to figure out where the best opportunities will be.
The first category contains three of those eight majors called “growth currencies,” because they tend to trade closely with other risk assets.
They are the:
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Australian dollar (Aussie)
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New Zealand dollar (Kiwi)
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Canadian dollar (Loonie)
When the market is feeling “risk-on,” investors will flock to things like stocks, cryptocurrencies, high-yield bonds, and the growth currencies.
Another reason they’re known as growth currencies is because each of their respective economies export large amounts of commodities.
For example, Australia is a significant exporter of industrial metals and gold, particularly to China – its largest trading partner.
New Zealand’s major exports include livestock, agricultural products, and metals.
And Canada is famous for its large oil reserves and timber industry.
You see, businesses and governments need these raw materials to build infrastructure and expand operations. This happens when the world is optimistic on the prospects of continued growth and prosperity.
But these days, the world is feeling anything but optimistic. “Risk-off” sentiment has a firm grip on the markets around the world.
When the market is feeling risk-off, they’ll look to sell their growth investments and move into safe havens like the U.S. dollar.
It’s this sentiment that I was looking to take advantage of when I opened a trade on the Australian dollar on September 15.
If you had followed that recommendation, you could’ve made $2,000 in just five days. (If that kind of return interests you, stayed tuned. I’ve got some exciting news coming soon.)
Let’s look at a price chart of the Australian dollar/U.S. dollar (AUD/USD) currency pair below to see what I mean…
I identified this head and shoulders pattern a week before the last Fed meeting.
Regular readers will know the head and shoulders pattern is one of my favorite technical setups with its three key defining features – the left shoulder, the head, and the right shoulder.
The pattern is complete once prices break and close below the neckline – as they did in late September.
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The neckline (blue line) is a trendline that connects the bottom points of the left and right shoulders. What typically follows the completion of this pattern is a powerful move that continues below the neckline.
And that’s exactly what happened in this case with AUD/USD. I shorted the Australian dollar, anticipating it to move lower.
The burst of volatility from the September 21 Fed meeting drove the trade deep into profitable territory. In fact, the overall volatility in forex is proving that it’s one of the most profitable markets to currently be in.
On Thursday, I’ll cover another one of the major currencies that I love to trade.
I’ll go over its unique personality and tendencies before breaking down how to trade it.
Happy trading,
Imre Gams
Analyst, Market Minute
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