1,132 Pips and Why We’re Taking (Some) FX Profits
Here at the Pattern Trader, we’ve been enjoying some very profitable forex (FX) trades despite the rather slow pace of the markets overall.
For example, I’ve been observing that the U.S. Dollar Index (USDI) has been trapped within a very narrow trading band for the last several months. And last week's range – and volatility – literally slowed to a crawl.
Just look at the “narrow-range bar” on the USDI chart below (it’s so small that it’s hard to see):
There’s an upward trend in USDI, but volatility has been steadily dropping. And last week was about the least volatility we’ve seen in the U.S. dollar for quite some time.
This isn’t unique to USDI.
The challenging trading conditions are widespread. That’s why I’ve been advising our members to trade only the most favorable risk:reward set-ups and opportunities while taking a patient and disciplined approach.
I’ve also advised that the challenging market environment doesn’t mean there’s no profits to be made.
That’s why I’ve recommended the following positions at the following times earlier this year:
Short AUDUSD (since Mar 5) … Short NZDUSD (since April 2) … Short USDJPY (since April 25) … Short EURJPY since April 29 … and Short XAUUSD (spot gold) since Mar 27.
Here’s a snapshot of just how well these trades have performed:
This table is from last Wednesday but overall the cumulative gains and profits on these and other open positions have actually exceeded 1,200 pips.
And yes, some of these trades are 6 weeks old.
But so what? What really counts is the overall profits and that’s what we’ve been making … even in an FX market where overall volatility has been collapsing.
You see, it’s my philosophy – and personal contention – that long term, sustainable profitability isn’t possible when you’re trading in-and-out of the market. (By that I mean trying to scoop out small (7 – 25 pip) gains in the market several times a day.)
That’s a game of chicken in which your broker will be the only winner thanks to all the commissions you’ll be racking up!
Trading my way works much better.
Because over the past three months, in what has been nearly impossible trading conditions, myself and our Pattern Trader members have reaped enormous trading gains by simply sitting in a few trading positions.
(We’ve since taken some profits and closed some positions as I feel market conditions are likely to “tighten” in the weeks to come. More about that in a moment.)
But first, here’s the bigger picture …
While I’m proud to have generated enormous windfalls on behalf of thousands of worldwide members, this actually represents to me (and hopefully to you too), that the virtues of “price action” trading based on longer term trading horizons really does work.
Forget about trading several times a day, or even a week. Think longer term. You’ll not only save a fortune in brokerage commissions, you’ll also become more profitable overall with less stress and a much lower time commitment too.
Are you with me on that?
If so, let’s look at where the next trading opportunities are …
The first pair of note is EURNZD (the Euro against the New Zealand dollar).
This pair has experienced a fairly large trading range over the last year, but the long term trend has been up. The price has risen from 1.40 to 1.70.
The market tried to form a classic head and shoulders pattern but that’s now been busted.
I’ve drawn an example for you of how a head and shoulders normally works: typically these are reversal patterns where an uptrend turns into a downtrend after the neckline has been breached.
This head and shoulders has failed as each time it penetrated below the neckline it reversed quite strongly. And in the last few weeks the price has pushed along on a strong uptrend. That’s why I consider the pattern “busted” which means we should be bullish on this pair, not bearish.
Right now, EURNZD is at key resistance, but I expect that resistance to be eroded over time.
We might be stuck in a sideways trading range for a while due to seasonality (many Europeans go on vacation at this time of year and trading volume decreases accordingly), but the long term path for EURNZD is up.
Meanwhile the GBPJPY pair (the British pound against the Japanese yen) is one I like on the short side. At first glance, you’ll note that this pair has been gridlocked with a lot of long-term sideways action here.
But there’s more going on than that. Historically there’s a bearish double top here.
The resulting drop from that double top would have delivered a $70,000 profit for every $1,000 at risk if you’d shorted this pair as it fell below the neckline.
The double top is also a head and shoulders:
That would have delivered $50,000 in profit if you’d shorted it from the neckline of the head and shoulders.
There’s little on this chart to suggest being bullish. Just the opposite.
More recently GBPJPY has formed a complex head and shoulders with a double top and multiple shoulders. And in the last few weeks we’ve seen a bearish descending triangle take shape.
GBPJPY might go back and forth for a few more weeks but ultimately this pair should break lower. Will it break $50,000 or even $70,000 lower? I don’t know yet. But there’s no reason why it can’t.
History has already shown us the potential from a similar bearish pattern in GBPJPY.
Now for another very interesting prospect: USDJPY is looking like another good short.
I’ve already made a lot of money on this pair in recent months. After all, I do eat my own cooking when it comes to making these trades.
You can see that one of my most recent USDJPY shorts has netted me over $75,000 in profits:
So how did I feel so strongly about going short this pair?
First of all, you can see the double top as the head of a larger head and shoulders pattern. Yes, just like GBPJPY!
After that, things have gone differently here. USDJPY has traced out a very large descending triangle with a double top inside that. Both these patterns are bearish.
But the trigger to go short was a key reversal in that second top – I emailed members about it and it’s bene a very profitable call. USDJPY has dropped significantly since that time.
Right now the price is at a significant support area from that double top and therefore there might be some consolidation here.
But ultimately, as with GBPJPY, the price is headed toward the support line of that large descending triangle at 104. That’s a long – and very profitable — drop from the 110 range where it is now.
XAUUSD (spot gold) is a bit more ambiguous but I’m still bearish on the yellow metal.
Right now gold is at a major inflection point on the monthly chart.
See how gold’s sitting right on the line of that symmetrical triangle after temporarily breaking out? While gold could turn around and take another run to the upside, I’m more bearish than bullish.
Let’s look at the weekly chart to see why:
The main thing I’m watching now is the recent double top with its bearish key reversals. (A bearish key reversal is when the price makes a new high but closes at or near the low for the week.)
You’ll also note the historic resistance at the 1340-1360 level that’s turned gold back time after time.
Right now the price is sitting at the neckline of that double top. Gold might slide sideways for awhile, but I’m confident it should drop sooner or later.
The first target is 1200 where that ascending triangle will likely provide some support. After that, gold could drop even lower to the support line of that monthly symmetrical triangle in the earlier chart.
Gold bugs don’t like that prediction, of course. But the charts are saying that gold is much more likely to go down than up right now.
So what about the U.S. stock markets?
I’m using the NASDAQ 100 (the tech stock index) as my main reference here …
As you can see, the NASDAQ made a new high near historic resistance levels set earlier back in September of last year.
Since then it’s retraced, pretty much as I predicted. If you refer to my earlier reports, you’ll see I felt the NASDAQ would consolidate at this level as a new, sustained bull run looked very unlikely at this time.
That’s pretty much what has happened and we should see a sideways trading range as the summer winds onward.
So there you have it: consider shorting any (or all) of EURNZD, GBPJPY, USDJPY and spot gold (XAUUSD). I also feel there will be ongoing weakness in NZDUSD and AUDUSD too but there wasn’t room to include them in this week’s article.
The tables of trades I’ve included should give you more ideas of what I consider the best shorts and longs right now, as I’ve put my own money in them and recommended them to Pattern Trader members.
I wish you a very healthy and prosperous trading week.
Mark “MonsterMoves” Shawzin