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Adjusting the Mix of Timing and Motivation with Dollar Examples

Adjusting the Mix of Timing and Motivation with Dollar Examples

John Kicklighter, Chief Strategist

Talking Points:

It's not about the break, it's about the follow through; and motivation often arises out of fundamental developments

Timing is crucial to successful trading, and technicals play a key role in shaping execution

We use the USD/JPY, USD/CAD, USD/CHF and EUR/USD to illustrate how the balance of timing and motivation can change opporunity

How are retail positioned as the Dollar seeks technical and fundamental cues for its next leg after months of congestion? See how traders are positioned on the Dollar-based pairs on the DailyFX sentiment page.

Timing and Drive: Two Critical Components of Successful Trading

While we should do a thorough analysis and have a bias for a particular outcome for a market when we intend to trade it, it is critical to appreciate that even the best setup only carries a probability of working out as expected. Considering the market can surprise, it is also worth evaluating trade options for alternative outcomes. A particular market may not be as attractive with a bullish bearing as a bearish one for example, but preparing for both outcomes can help establish a deeper conviction for the bias amid a fully evaluation of the alternate scenario. It can also help you to act more quickly and with a greater degree of confidence regardless of the direction the market takes. To help think in these terms, it's worth establishing a better appreciation for two particular facets of successful analysis and trading: timing and motivation. It is a tongue-in-cheek saying of mine that 'it isn't about the break, it's the follow through.' Drive is founded most often in a common view or theme that encourages a mass build up or unwind in an asset. As for timing, the perfect balance of event risk and technical cue is ideal; but many only have patience for one.

DXY Dollar Index Daily Chart

Using the Dollar to Illustrate this Mix

We could chose any currency or asset to run the gamut of different scenarios that can be drawn out of the market, but I chose to weigh in on the Dollar. That is because of the remarkable amount of fundamental churn currently behind the market as well as the run down on the Greenback's fading fundamental outlook that I went into detail on with yesterday's quick take video. I make some assumptions for the sake of illustration of the concepts at hand. If you're already bullish on the Dollar, this video will hopefully offer further insight into your own analysis. Yet, if you are on the fence or bearish; just take know of the concepts and run them with your own evaluation and bias as the initial approach.

USD/CAD Daily Chart

When Timing is Of the Essence

Let's say hypothetically that we already have a strong fundamental wind to the Dollar's back or we fully expect a favorable bullish drive to arise in the immediate future. As we look over the crosses, we can find different 'majors' in various stages of their respective patterns, but two pairs to pay closer attention to here and now would be USD/CHF and USD/CAD. For the former, we have just recently cleared an inverse head-and-shoulders 'neckline' pattern with a retest and rebound from the former resistance as new support. Looking at the scale of the past six months, we have barely started to cover the pair's wide range. If we have great conviction of a favorable move, timing and position would be ideal for this pair. However, let's say we weren't as convinced that the USD charge was imminent. USD/CAD has a recent technical break of 1.3000 and it certainly is positioned to take advantage of a further Dollar bid. Yet, even if the intensity of the Greenback rally is materially less pronounced, the pair has already established itself a positive drift - at the expense of considerable progress already won.

USD/CHF Daily Chart

Favoring Potential and Awaiting a True Fundamental Wind

If we recalibrate our scenario to de-emphasize the importance of timing to instead place the critical importance on conviction, we would look for pairs that are set for substantial moves but have not yet cleared their technical hurdles or received jolts from unrelated fundamental event risk. USD/JPY is a good example of such a situation. It is currently carving out the right shoulder of its own inverse head-and-shoulders pattern but there is still some room before we reach the neckline. If the fundamental winds shift away from trade wars and thus boost risk trends and the Dollar, a move to and through 107 can be established as a trigger to accompany the sentiment. After such a significant one-sided tumble these past three months, there is considerable discount to work off. A similar approach can be taken with EUR/USD. The benchmark pair advanced against typical fundamental themes for a year and then set up a range for a few months. A break back below 1.2150 is likely only to come with a certain level of conviction; but when it does happen, it will signal a serious opportunity. We evaluate the balance of timing and motivation with trade setups in today's Quick Take Strategy Video.

USD/JPY 4 Hour Chart

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