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U.S. Dollar: How to Predict Trends, Not React to Them
There IS a way to predict the trends in forex markets.
What creates trends in all liquid, freely-traded markets? That depends on whom you ask.
To a conventional market analyst, the answer is news stories and events -- political, economic, you name it. The Elliott Wave Principle, on the other hand, teaches that trends are shaped by the collective mood of the market participants. And on occasion, even the mainstream observers give the market mood idea some credit. For example, on Monday, June 22, The Wall Street Journal ran this story: "Risk Fears Help Dollar Climb -- The dollar is broadly higher Monday morning ... in response to a more risk-averse mood in markets."
Still, there is one major difference in how conventional analysts view market mood: They say that it's shaped by the news, good or bad. Most investors believe the same. Of course, waiting for a news story to break and signal a trend change means that you're usually reacting to price reversals after they've occurred. Not necessarily a bad thing if you're quick on your feet, but there is a better way: You can anticipate trend changes. Here's how.
The Wave Principle says that the market participants' collective mood is not affected by the news but changes for its own, endogenous reasons. In turn, those changes shape market trends -- regardless of the news. (You can explore this curious concept further at our free Club EWI.) Moreover, collective (or social) mood shifts in predictable patterns. Result? With wave analysis, rather than playing a constant catch-up with new market trends, you can predict them.
Let's look at an example. While the conventional forex analysts were busy explaining a sudden U.S. dollar strength Monday morning (June 22), readers of Elliott Wave International's intensive Currency Specialty Service were prepared for the stronger dollar three days earlier:
Market Insight (Intraday)
Posted On: Jun 19 2009 8:53AM ET / Jun 19 2009 12:53PM GMT
We continue to look for evidence that the dollar has bottomed and is poised to strengthen going forward. ... [T]he environment is right for a "surprising" dollar turn. ... To us, it's not a question of "if" the dollar will rally, but "when."
EURUSD (Intraday)
Posted On: Jun 19 2009 10:13AM ET / Jun 19 2009 2:13PM GMT
Last Price: 1.3918 [Rolling over] All the evidence points toward a weaker euro relative to the dollar.
This is just one example of how paying attention to waves of social mood in market charts can warn you of coming trend changes. To see what difference Elliott wave analysis can make in your currency trading, try our intensive Currency Specialty Service.