How to Find Themes in FX
One of the questions I like to ask aspiring traders is this: are you bullish or bearish anything right now? It seems like a dumb question but it actually gives a wealth of information regarding the trader’s mindset and whether he is thinking multidimensionally or not. Compare these 2 replies:
If a currency is strong against some trading partners but weak against others, it’s not a protagonist and we want to be following the protagonists at any moment in time. How can we systematically scan the FX universe attempting to find the current themes or best opportunities?
This is where scanning the crosses comes into play. At the moment, the JPY is having a good run. But before taking a position, I want continued confirmation that JPY is the flavor of the week or if something else is stealing the spotlight of late. So here are questions to work your way around:
Whenever possible, it’s best to simplify your trading endeavours and eliminate any possibility of analysis paralysis or conflicting signals. The concept of scanning the crosses in search of common movement is nothing new: FX dealers have been using the same idea for ages.
By filtering out themes and remaining on the sidelines (protecting your capital) when nothing is really standing out, your trading will never be the same, for the better.
- I’m currently bearish on USDJPY.
- I see strength in JPY across the board and prefer to play it against the NZD which seems to be weak.
The first reply is immature and shows superficial analysis. The second reply tells a lot more: the trader has scanned the full spectrum of FX crosses and has identified a theme (Jpy strength) and is puposefully playing it against NZD due to some weakness.
If a currency is strong against some trading partners but weak against others, it’s not a protagonist and we want to be following the protagonists at any moment in time. How can we systematically scan the FX universe attempting to find the current themes or best opportunities?
This is where scanning the crosses comes into play. At the moment, the JPY is having a good run. But before taking a position, I want continued confirmation that JPY is the flavor of the week or if something else is stealing the spotlight of late. So here are questions to work your way around:
- What is the USD doing? Being the world’s reserve currency, it is often the main focus in FX..but not always.
- Run the ruler across Gbp, Euro, Yen, Usd against their main trading partners. Is any of them dominant or passive across the board?
What we’re trying to do is make sure that the strength of JPY is not an exception limited to NZDJPY. Before selling NZDJPY, I’d prefer to see JPY strong across the board. It’s then a case of matching the strongest vs. weakest, to see if an opportunity exists.
Whenever possible, it’s best to simplify your trading endeavours and eliminate any possibility of analysis paralysis or conflicting signals. The concept of scanning the crosses in search of common movement is nothing new: FX dealers have been using the same idea for ages.
By filtering out themes and remaining on the sidelines (protecting your capital) when nothing is really standing out, your trading will never be the same, for the better.
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