Markets hate uncertainty. And unfortunately, this year there’s been plenty of it to go around.
There’s uncertainty regarding the ongoing war in Ukraine. We’re uncertain about when inflation might finally peak… and uncertain about how high the Fed is willing to increase interest rates.
Periods of intense volatility such as now are quite rare, but they’re also difficult to predict.
Not too long ago, the market had completely bought into the Fed’s narrative that inflation was just a “transitory” annoyance.
In reality, market shocks always come as a surprise. They wreak havoc, they fill the streets with blood, and then they disappear.
For some traders, these shocks leave lasting impressions. Even after the bear market is over, they’re left wondering when the other shoe is going to drop.
But trading in a constant state of paranoia is NOT good for your mental health and your portfolio’s health.
A better solution is to have exposure to different asset classes that can provide your portfolio with returns that are uncorrelated to the broader stock market.
Foreign exchange (FX or forex) is my favorite asset class to trade when I want to add diversification to my portfolio.
Whether the stock market is in the middle of a bull run or is struggling through a bear market, it’s possible to generate great returns trading forex.
This is possible because currency exchange rates fluctuate continuously.
Regardless of what’s happening in the stock market, currency transactions take place virtually around the clock.
For example, Tesla (TSLA) sells cars in Europe and its customers pay for the cars with euros. Eventually, Tesla will convert those euros back into dollars.
At the same time, a family living in Canada will send money back to their grandparents in India, converting Canadian dollars into rupees.
Meanwhile, a real estate investor in Switzerland looking to buy property in South Florida, will have to convert his Swiss francs into dollars to do so.
Each participant contributes in their own way to the millions of overall forex transactions taking place around the world each day.
The motivations of forex participants are as large and varied as the marketplace itself.
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While all forex participants would love to get the best possible price on their currency exchanges, the reality is that sometimes the motivation for making the transaction is more important than simply getting the best price.
This is one of the causes behind short-term imbalances in the values between different currencies.
My forex trading strategy focuses on identifying these events and taking advantage of them before the market corrects the imbalance.
To see what I mean, let’s look at one of my recent trades on the U.S. dollar/Canadian dollar (USD/CAD) currency pair.
On July 7, I identified an imbalance in USD/CAD that showed the USD to be slightly undervalued.
I bought USD/CAD when the pair was trading at 1.3020.
Then on July 14, I closed the position with USD/CAD now trading at 1.3135, capturing a 0.9% appreciation of the USD relative to the CAD.
Hours later, the market started to correct this imbalance. USD/CAD ended the week trading right back in the 1.3020 range.
Here’s what this trade looked like…
While the percentage move might seem small – especially if you’re used to trading cryptos or growth stocks – you should know that forex trades utilize significant amounts of leverage.
The max leverage that a U.S. broker can offer is 50:1. This means that for every dollar in your trading account, you can control up to a maximum of $50 more.
If you used the max amount of leverage on this USD/CAD trade, that 0.9% increase would’ve turned out to be a 45% increase instead.
Of course, you control the amount of leverage you take on each trade. Some traders will be comfortable taking on greater amounts of leverage than others.
Just know that leverage can cut both ways. While it can magnify your gains, it can also make your losses more painful.
Whether you’re trading forex, options, or anything else – sound risk management is the key to longevity.
The current trading conditions in forex are the best I’ve seen in many years. And the best part is we’re just getting started.
Next week, we’re going to look at the charts again and I’ll share the most interesting chart setup in forex right now.
Happy trading,
Imre Gams
Analyst, Market Minute
Reader Mailbag
Last week, Delta Report subscribers made their first “Breaking Point” penny option trade – a 300% win on Citigroup (C) in 48 hours. And we asked them to write in. Here’s what a few said…
Yes, I was able to take advantage of today’s 300% trade! Would like more like that please. That was a good one. Waiting for gold to move. It’s good to win one in this crazy market.
– Deborah C.
Thanks for the recommendation on C recently. You’re a genius to pick C. I was worried yesterday when the market tanked due to bad results from JPMorgan and Morgan Stanley. Today’s C result was a big surprise that resulted in a much-needed uplifting for the market. Again, a very nice trade. Thank you!
– Mike Z.
Great recommendation, thanks. I doubled my position and sold more puts yesterday when it dropped with the bank reports.
– Jeff L.
Wow, what a trade. I was skeptical to jump in on the financials trade with Citigroup and had a big “oh no” moment when the reports from JPMorgan Chase and Morgan Stanley were bad. Then Wells Fargo reported less than spectacular numbers, and then Citigroup knocked it out of the park. All of this was due to where each large bank had exposure.
Citi’s exposure was with credit cards, but the consumer was strong… likely using their credit cards to continue to make purchases in an inflationary environment. I expect Citi will eventually have a bad report when consumers begin to be late on monthly payments, if inflation does not get tamed soon.
Someone did great homework, knowing which bank stock would perform or was extremely lucky. In any case, I won!
– Wagner H.
I made a little over $2,000 in two days from this paired trade. I’ve been a long-time subscriber.
I’ll be reinvesting the profits. This is not applicable. I have generally made money on Jeff’s other investments around earnings reports.
– Michael B.
I was slow in getting into this trade, so I actually cheated a little bit and bought three $50 options for $0.28 yesterday. Then, I was alerted to movement of them by your post in the morning and was able to sell one to cover all three options that bought for $1.53.
So, I made a 446% gain! I was just considering if I should sell the other two as well when you reposted to get out.
So, I did and scored a 589% at $1.93 on those two! To say I’m a happy boy would be an understatement! I now have four put options that you suggested and an extra $159 in the account to boot! I can’t wait for the next one to pop! Thanks so much.
– Mark A.
I made 348% in 48 hours from the C call options suggest by Jeff. Terrific! I’m not quite yet even on the cost of my Elite subscription. However, I appreciate Jeff’s insights and hope to profit more.
– Dawn M.
I was able to sell your C put recommendation for a higher premium. I bought two C call options at a lower price and sold them both to close at higher prices so that my return seems to be between 300 to 360%. At any rate, whether my rough calculations are precise or not, thanks for making it possible.
– Rick M.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at feedback@jeffclarktrader.com.