Hit 4 Birds with one Stone
We all want to save time by analyzing less time as it will give us more time for other works. when we follow one pair, many a times we miss a lot of opportunities in other currency movements unless we have multiple monitors. In this article I explain how one can analyze one pair but trade 4 pairs based on the analysis.
An analysis of last one month's movement suggests that there is an orchestrated movement in a few pairs viz.
Before moving ahead, let’s brush up the basics of currency valuation. As we know, cross currencies DO NOT have independent valuations and USD is the big boss of currencies. When we buy EUR/CHF, we buy the EUR/USD and sell the USD/CHF which gives us the figure of the valuation of EUR/CHF. To elaborate it, let’s calculate the value of EUR/CHF. Currently the bid of EUR/USD is 1.29158 and USD/CHF is 0.93013 and the value of the EUR/CHF is derived by multiplying the EUR/USD and USD/CHF ie. 1.29158*0.93013 and ask of EUR/CHF is 1.2013.
Wondering how this information will help us trade multiple
pairs at a time? Here are simple steps.
The stone in our hand is the EUR/USD and is also the First
bird. This is the pair which you will analyze.
The second bird is the USD/CHF:
Once you decide the trend in EUR/USD, the immediate pair to be traded is the USD/CHF. We know SNB has fixed the minimum value of the swissy is at 1.2 of EUR/USD. As long as EUR/CHF is above 1.2, we will see the orchestrated movement in these pairs. So, If as per your analysis, your trade in EUR/USD is to long, simply short USD/CHF.
Let’s see it with chart example.
We will go the reverse way of the procedure as explained in
how currency valuation is done.
As we can see EUR/CHF is stuck in a tight 10-15 pips movement for over 2 months. If a cross pair is in a side way, it means that the major pairs are moving in opposite direction. So, When the EUR/USD gains, USD/CHF loses. Let’s see what happened in those pairs
While EUR/USD is in a down trend, we are seeing the USD/CHF in an up trend.
Now, we can comfortably use the analysis of EUR/USD and place trade in USD/CHF. Since EUR/CHF is in a side ways with 10 pips movement, we would not trade that pair for the time being.
It is the time for 3rd and 4th birds. i.e USD/JPY and EUR/JPY
While trading the previous is pretty easy, this needs some caution in trading. While EUR/USD is getting weakened due to problematic Euro zone countries, we are seeing JPY taking the lead as the safe investment in currency market and yen tends to gain when ever there is a fall in EUR. So, when we see EUR losing and JPY gaining, the move in the aforesaid pair will get the boosted and move faster than the major pair.
The best way to trade USD/JPY is to short if the EUR/USD is expected to weaken. And long the USD/JPY if the EUR/USD is strong, since we are seeing direct correlation between USD/JPY and EUR/USD.
When one pair is weak and the other is strong, the first pair moves pretty faster. Hence, in our example, we can trade the EUR/JPY in the same direction of the EUR/USD. For instance, if a trader shorts EUR/USD, he can also short EUR/JPY.
Conclusion: If the analysis of EUR/USD, the position in USD/CHF should be the reverse of EUR trade and EUR/JPY and USD/JPY should be same as EUR/USD. So, to put it in a nut shell, If as per the analysis EUR/USD is to long, then short USD/CHF and USD/JPY long USD/JPY and EUR/JPY.
Money Management: Money management is the technique of controlling loss and maximizing the profit in trades and when we decide to trade the aforesaid pairs, We should use the same leverage for EUR/USD and USD/CHF. But the movement in the USD/JPY is a little lower compared to other pairs so, the leverage may be a little more in the pair and movement of pips in EUR/JPY is high and it’s advised to use about 50% of the leverage used for other pairs.
DISCLAIMER: While this strategy can give you hundreds of pips, If it boomerangs the birds may turn out to be hundreds of stones if the trades are on wrong side and can blow up entire fund in a very short time. A great level of accuracy/judgment is highly required for this strategy.