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Trading Is About Reducing Baggage - And EUR/USD Has a Lot

Trading Is About Reducing Baggage - And EUR/USD Has a Lot

Talking Points:

  • All liquid markets have many market participants and in turn a bevy of motivations for where and how markets move
  • Trading is a probabilities effort, so reducing the number and/or influence of unknowns is crucial to boosting performance
  • EUR/USD is an example of considerable 'baggage' with dubious ECB speculation and key event risk casts a shadow

What makes for a 'great' trader? Strategy is important but there are many ways we can analyze to good trades. The most important limitations and advances are found in our own psychology. Download the DailyFX Building Confidence in Trading and Traits of Successful Traders guides to learn how to set your course from the beginning.

There are many factors that go into determining the direction and activity level of a market, and traders must account for these 'risks' if they hope to be successful. Risk is an inescapable feature of the financial system, so it is essential that we mitigate it as much as possible while maximizing our potential return on investments we intend to take - the functional explanation behind the sometimes surface level appreciation we give the advice 'look for the best risk-reward balance'. We cannot fully mitigate the risks that we encounter, but we can work to minimize the unknowns in an effort to select better trade opportunities. That said, our speculative appetites and a natural appeal to emphasize favorable or easy-to-evaluate aspects of the markets we trade can be difficult. A good example of this struggle is EUR/USD.

I am fond of the world's most liquid currency pair. It has a strong technical trend that has started to see some early technical pressure and I would certainly label it fundamentally stretched. That said, these factors don't independently leverage the probability of a change in direction, much less a timely one. In fact, there are a range of issues that can actively work against a productive move - what I would consider 'speculative baggage'. For the Euro, the persistent climb through 2017 has arisen from a distinct speculative view of an ECB rate forecast well over the near horizon. When will speculation finally succumb to the gravity of practicality? That is difficult to assess. From the Dollar, a similar fixation on monetary policy finds a drop in the Fed's forecast which has established a slide through 2017. Add to that the expectations of the FOMC meeting next week, and the feasibility of a clear and consistent trend seems highly unlikely.

From EUR/USD, there are a few takeaways for selecting unfettered trades. A driving, underlying fundamental theme can skew performance more towards irrational speculation rather than the measurable potential in technicals or scheduled event risk. Furthermore, the expectation of major events that can materially alter the market's bearings in the near future can undermine the drive that we would otherwise find from more tangible developments or key technical guidelines. Relative to EUR/USD, NZD/CAD is arguably a lower risk currency pair as it reduces the unknowns. However, the sway of the Bank of Canada's monetary policy bearings - with the probability of a third rate hike by year end over 70 percent - makes for a very clear difficulty. So, what pair would be a less encumbered opportunity? Watch today's Quick Takes Video to find out.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.