Talking Points:

  • Most traders spend a considerable amount of time evaluating opportunities before entering a trade
  • We should dedicate the same effort to qualifying market intent and conviction after a trade is on
  • I weigh in on the Dollar's bearing and potential with my EUR/USD short in mind

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.

Evaluating Trades Before and After You Put Them On

Disciplined traders will put considerable time into evaluating the potential and probability behind a setup before placing a trade. However, it is just as important to regularly assess the performance of a position that is already on the books as a mere possibility before capital is placed behind the view. Despite our best intentions and the effort we put into establishing the most appealing conditions, trades do not always work out as expected. Sometimes the position goes astray from the time it is placed and other times favorable winds stall out or even turn against us well beyond the point of maturity. The longer a position is held, the more time there is for conditions and sentiment to swing against us. What would you do if a profitable trade hadn't hit your target but the underlying factors that inspired the pursuit in the first place started to evaporate? If a setup no longer meets the criteria for conviction that initially prompted the exposure, it stands to reason that you should close the position out and either wait for the factors to realign for re-entry or to move on to a different market and/or opportunity.

Dollar: Always Question Moves, Even When They Favor Your Trades

The Dollar's Recovery Catches Up to Expectations

I had been watching the Greenback's slow burn throughout 2017 seeking out the source of conviction behind such a persistent and counter-intuitive run. The retreat contradicted traditional fundamental themes such as relative growth and monetary policy. Deviating from speculative norms is not unheard of, but the departure rarely last for long. After three months of consolidation at the beginning of this year, it seemed like the productive slide of the previous year had finally been spent. When the upswing began to gain definable traction last month, the technicals looked to align with fundamentals. Breaking a the upper bound of obvious range led to subsequent clearance of the past year's trendline and then further the 100 and 200-day moving averages. It seemed that finally the market was appreciating the benchmark currency for the discount on a growth, monetary policy and yield basis that had become so exacerbated through the preceding slide. That said, my confidence in the upswing has never truly hit the degree of conviction that I usually consider reason to leverage exposure - usually 80 to 99 percent confidence (I am never 100 percent confident of everything).

What is Driving the Dollar - And Where are the Cracks

Over the past months, there have been a few high level fundamental themes that have driven the broader markets to an accelerated trend or towards reversal. Yet, none of these factors had materially highlighted the potential behind the Dollar. Relative growth for the US to its counterparts has held reliable level. Political risk and trades wars may seem a path to concentrate power towards the USD, but the opposite is more risky and likely. Many believe that monetary policy was the dormant bullish bid that would awaken speculative appetite. However, as prominent as the disparity in policy has been for the Greenback, the implied yield and DXY had deviated for more than six months. A sudden reversion is possible, but we hadn't seen a surprise upgrade for the US policy path nor a universal collapse in intent for global counterparts. All told, there was little in this fundamental mix to promote a reliable appetite for the currency. The exception was speculative positioning. Net speculative positioning last month on Dollar futures exposure was the most heavily net short in five years while the net long exposure to the EUR/USD has just recently come off a record.

Dollar: Always Question Moves, Even When They Favor Your Trades

Whether to Cut or Hold EUR/USD Moving Forward

In the past six weeks, as the Dollar has mounted its recovery, there has been markedly little change in the USD's fundamental prospects. In fact, growth forecasts have cooled (perhaps not faster than counterparts) and political risk has clearly intensified around the United States. Many bulls believe the reversal in fortunes for the benchmark currency and EUR/USD was the eventual but inevitable effort to close the gap between spot markets and rate forecasting. It is highly unlikely the Dollar moves up to meet rate forecasts, but this dynamic may further shape performance through the immediate future. That risk considered, the implied yield in December 2018 Fed Fund futures has shown a clear retreat from its near decade high this past week. If monetary policy is the foundation of any confidence you maintain for the Dollar, beware. Personally, the primary source of my confidence is the speculative exposure and the growing pull by global investors to redistribute capital to 'safer' positions. There is enough in my fresh evaluation of EUR/USD to keep my in the short, but I will be trailing up the stop and watching volatility with conviction diligently. We discuss the importance of evaluating positions mid-trade and against the context of the EUR/USD in this weekend Quick Take Video.

Dollar: Always Question Moves, Even When They Favor Your Trades