Avoiding Tech Tops and Bottoms as Well as Fundamental Long Shots
• Prudent trading gives equal - or even greater - deference to the risks of a trade as its potential returns
• Chasing extremely volatile or dynamic events for trades is similar to picking tops and bottoms technically
• We consider this for the 'Black Wednesday', the Crimea situation and China's current efforts
See how retail traders are positioning in the majors in your charts using the FXCM SSI snapshot.
Most traders are attracted to volatility and the allure of exceptional potential returns. The risks these opportunities will incur is more often an afterthought. However, a proper appreciation of risk is crucial to longevity in the financial markets. The scenarios with the greatest potential profit most often present with the greatest potential risk - both in terms of probability and notional exposure. When it comes to technicals, picking tops and bottoms is a great example of the pitfalls of skewed trade analysis. Yet, this speculative vice can also show up in fundamental evaluations. Chasing low probability, complex or highly fluid situations can present just as many pitfalls for the market participant. We look at how the Bank of England's dropping the Euro peg, the Iraqi Dinar rebound and Russian Ruble's response to the Crimea affair all fit the bill of distorted risk in the past. We then consider how traders are being drawn into China's interventions now in today's Strategy Video.
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.