Assessing risk through related markets

Question

Hi Anna, I wanted to thank you for delivering such a wonderful book on the 3 core elements to FX trading. I have learnt and confirmed a tremendous amount through your presentation and for that I am most appreciative. I wanted to ask you how, on a practical day-to-day level, you tie together the relational, fundamental and technical aspects of your analysis to determine which currency pairs you would trade in a given week or day? If you can appreciate there is so much information out there with so much conflicting data…I have often found it difficult to see a clear path to utilizing the necessary information to support my technical approach to trading. Therefore, if you would be willing to elaborate or consolidate as to how you go about, practically speaking, of interrelating the relational, fundamental and technical aspects for currency pairs that you might be looking to trade? If you were to choose one or two currency pairs as examples, that would be most helpful. I’m very committed to being a full time trader, and any thoughts you are willing to share would be appreciated. Thanks in advance. Warmest regards

Answer

Hi – Many thanks for your email & very kind comments which are much appreciated. Also thank you for buying my 3D book and delighted you have found it useful. I have been told it also doubles up as a particularly good doorstop!! So practicality as well.

On a more serious note, and moving to the practicalities of trading and leveraging this information, the first step, if you like, is to try and get a sense of the market’s appetite and tolerance for risk. In other words what is the market mood? And this is always reflected in bond yields, in particular the 10 year treasury. In addition, the Japanese yen is another of the market barometers of risk, and a currency that all traders should pay close attention to. This is a mistake many traders make, assuming that markets are not connected. Stock traders rarely consider currency markets, and vice versa, and yet both reflect the flow of money and constant oscillation from risk on to risk off and back again. After all, trading and investing is all about risk and return and all this is reflected by money and yield and the cost of money, with the forex market providing the axis around which the others rotate. So my starting point is generally bonds, and the yen.

From there I would look at the overnight performance in equity markets, followed closely by a consideration of the US Dollar, and the dollar index.  Moving on, and picking up the yen theme, I would look particularly at pairs such as the AUD/JPY which are the counter balance of risk appetite. This global scan does not take very long, and much of this will be played out on the charts, and then of course the fundamental news will play its own impact. But here too the good news is that fundamental news releases are always signaled well in advance. At the moment anything from China is particularly influential and moves the market significantly, whilst in Europe it’s the politics. Finally, the commodity dollar currencies such as the Australian dollar, the Canadian dollar and the New Zealand dollar will reflect commodity markets coupled with the US dollar.

In terms of currency pairs to consider trading, I would suggest looking at other pairs rather than the traditional EUR/USD. Whilst this is the most heavily traded and a favourite of retail traders due primarily to the tight spreads, there are many others which are more ‘predictable’ in their price behaviour and offering better trading opportunities. Some of the cross currency pairs such as the EUR/AUD ( a favourite of mine ) and some of the yen pairs are excellent, and whilst the spreads will be wider, the trends and solid trading opportunities will be more frequent. In the majors, Cable offers excellent trading opportunities and also reflects more accurately the fundamental picture of the UK economy.

I hope the above helps & may I wish you every success in your future trading and investing career.

About Anna 1012 Articles
Hi – my name is Anna Coulling and I am a full time currency, commodities and equities trader. I have been involved in both trading and investing for over fifteen years and have traded many different financial instruments, from options and futures to stocks and commodities. I write and publish articles ( mostly for free ) for UK and international publications on a wide variety of financial issues, and in particular I enjoy helping others learn how to invest and trade.

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