Keeping pace with a rapid market after the unilateral BOJ intervention and now the EURO and EURGBP cross rates reversing their price directions lower is one of those unexpected market movements which we were referring to in our previous market view report on Oct.10-EURO & EURGBP key levels and the 'Mid-week Market Analysis 10.27'. As most Forex traders, hedge fund and portfolio managers were caught flat-footed on the main price reactions and repercussions that has spilled over across the board particularly the EURO and the EURGBP.
Currently, the EURUSD at 1.3650 with a low at the 1.3607 is struggling from the obvious market news on the EU debt crisis prompting the continued strength for the USDX to move higher now at the 77.52 basis point higher. Meanwhile, the cross rate EURGBP making its low at the 0.8546 with its initial objectives at this levels with extensions below the 0.8420/60 trading range.
Sequence of Trade & Applied Strategy:
The strategy in place since the 10.10 was after taking/settling the EURGBP short trade and simultaneously reversing to a long the EURGBP was the right move as prices have reached its extensions at the 0.8810. Although, our calculations were at the 0.8870 not too far from the registered high on the week of the 28th of October. Pls. refer to our market view on 10.27 above. Long EURGBP is Shorting GBP; hence long GBPJPY ( while USDX at 74.72 low and USDJPY 75.75 equilibrium price levels ) is hedging the GBP while buying the USDJPY as a cross trade strategy before the BOJ intervention. Cross referencing GBPJPY with the EURJPY was not an issue, since the EURO was more in the limelight.
Now with that said, the liquidation on the way down for the EURGBP as the GBPJPY rises is offsetting both positions while maximizing the market potential. The registered high on the GBPJPY is 127.27 with an intra-day corrective move lower, currently at the 124.76 as of this writing. And while the EURUSD and the EURGBP heading lower at 1.3674 and 0.8575 respectively. With extensions nearing their respective support levels but without discounting the possibility of further momentum as it moves forward the end of the week with NFP this coming Friday's report.
However, the momentum for the USDX to move higher was greater than just a probability; creating a sequence of short sell-EURGBP as shown on the chart makes more sense as the market lost confidence on a resolution to the EU crisis has driven the market prices for the EURO & EURGBP cross lower with much more conviction. Either way we have accomplished to level the playing field and would be able to tolerate any sudden and unexpected adverse price reaction in the market.
These strategies may be a lot more expensive and risky for others to manage. And there is no guarantee that the same results would occur as market conditions changes so rapidly that could also result in a negative balance on the account holder. Tolerance and risk factors should always be properly exercised.
Psychology & Market Behavior:
The market's behavior of stalling price market action and thereafter delivering rapid market prices in lightning speed is what makes the Foreign exchange market one of the most volatile and dangerous markets to deal with if not well prepared. As most trading platforms executing an entry and even stop loss would have difficulty in connecting with a busy line where most would not be executed at all. And wait for the next turn while prices have changed dramatically from your intended price action/order. We wouldn't be surprised really!
The sudden change of price direction and change of hands has made it clear that the market's ability the lat couple of days was susceptible and typical of price reversal on both directions. Catching unsuspecting players not knowing what hit them.
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