Will the New Year Bring New Trends?
-USD near trend defining 200 SMA on 4 hour charts
-USD is currently in a 3 week consolidation, awaiting the next move
-Buy US Dollar Currency Basket (enroll for demo account at the same link) on a break higher
January is typically one of the stronger months for the USDOLLAR. For example, in 2013, the lows experienced by the Greenback in January held for several months through the 2013 calendar year. However, we don’t want to use seasonal tendencies in a vacuum.
Applying forex technical analysis, we can see the US Dollar is near the 200 period Simple Moving Average on a 4 hour chart relative to the EUR, NZD, CAD, and CHF. If the USDOLLAR can strengthen to 4 month highs above 10,732, then we will look to buy the USD against a basket of currencies.
Forex Strategy: Matching Strong versus Weak
|Currency||Up Arrows||Down Arrows||Change From Last Report|
|GBP||7||0||Higher 1 ranking|
|EUR||5||1||Higher 1 ranking|
|USD||2||1||Higher 2 rankings|
|CHF||2||2||Lower 4 rankings|
According to our Strong/Weak chart above, the Greenback has been holding steady in the top half for the past several weeks. With the EURUSD, USDCHF, NZDUSD, and USDCAD 4 hour charts each showing prices near the 200 period Simple Moving Average. Therefore, the Dollar’s positioning in the Strong/Weak chart above could swing dramatically to the downside upon further weakening.
As a result, before initiating a position in the USD Buy Basket, we would like to see the Greenback move forcefully towards strength first. That type of strength would indicate the market is ready to trade to levels not seen in several months.
Forex Education: USDOLLAR Congestion Zone
(Created using FXCM’s Marketscope 2.0 charts)
When analyzing the USDOLLAR chart above, we can see the price is stuck in the tan congestion zone. These types of ranges can provide important clues to the market. For example, is the pause preceding a reversal or continuation? Once the market answers the question, we can position ourselves accordingly.
In this instance, the USD is firmly off its lows from late October 2013. Therefore, if the USD breaks above this current congestion, that would signal a continuation of the 2 month trend toward higher prices.
Executing the Trade
Since we anticipate the USD may continue its broad based rally, we will take a diversified approach and buy the single currency against a basket of currencies. There are several advantages to trading a currency rather than a pair with the largest benefit being diversification.
Therefore, if the USDOLLAR index breaks above 10,732, then we’ll look to initiate a USD Buy Basket trade through the Mirror platform. You can even try this out in a practice account at the same link above.
We will look to risk 1.5% on the trade for a minimum profit objective of 3%.
Good luck with your trading!
---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education
Follow me on Twitter at @JWagnerFXTrader.
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.