If you were reading forex news on Sunday evening (May 11) and Monday morning (May 12), what you saw was headlines like these:
Dollar Bulls Gain Control as Euro May Be Near Peak (Update3)
May 12 (Bloomberg) – For the first time since December 2005, futures traders are turning bullish on the dollar. At the same time, traders have stepped up their purchases of options that profit from the dollar's appreciation. The measures are making long-suffering proponents of the dollar optimistic that this time the currency's rally may hold..."
Dollar Climbs on Speculation Fed to Halt Cuts, Losses Overdone
May 12 (Bloomberg) – The dollar rose against the euro and advanced against the yen for the first time in six days as traders speculated that the Federal Reserve will refrain from cutting interest rates next month.
Pity those forex traders who went short the EUR/USD Monday morning (May 12), expecting dollar gains based on that speculation. Because at around 2 AM Eastern (New York) time, the EUR/USD reversed and staged an almost 200-pip rally, brining the exchange rate to $1.5570 by 1 PM on Monday.
This is a good time to talk about speculation versus facts. Yes, in theory, the rumors that Federal Reserve is done cutting interest rates should be bullish for the dollar. So is the European Central Bank's decision not to raise rates at their latest meeting. It all makes sense… and yet it didn't matter one bit in Monday's trading. Why? Because the fact is that forex markets are not logical – they are emotional.
More often than not, what prompts large groups of forex traders into action is not the logic of "market fundamentals" and economic numbers. Sure, some traders do stay calm in the face of moving markets, but most cannot. So, when the EUR/USD started moving upward on Monday morning, all the dollar-bullish speculation went out the window as more and more traders piled in on the rising euro.
This is also a good example of how the Elliott Wave Principle could've helped you take advantage of this move.
On Saturday (May 10), EWI's Senior Currency Strategist Jim Martens posted this forecast and chart for subscribers of his Currency Specialty Service (some labels have been erased for this publication):
Update For: Monday
Posted On: Sat, 10 May 2008 03:53:00 GMT
EURUSD [Last Price]: 1.5481. EUR$ built upon the reversal from the short-term low Thursday. As a result, after making a new low beneath the low established last week, the market closed the week higher. We see that as a positive sign...
Then, at 02:20 ET/06:20 GMT on Monday morning, just as the EUR/USD was starting to rally from near $1.5380, a Currency Specialty Service intraday update said this:
02:20 ET/06:20 GMT
[EURUSD] Last Price: 1.5386. [Corrective, then higher] Little to add. Having almost reached the Fibonacci 0.618 retracement of the run up from 1.5287 to 1.5487, prices are expected to receive support here…which should help to propel prices higher again.
Then, another intraday update said this five hours later:
07:27 ET/11:27 GMT
[EURUSD] Last Price: 1.5455. [Higher] Little change. Prices are expected to receive continued support here against a three wave correction down from 1.5487. This support should help to propel prices toward 1.5567.
You already know what price level the EUR/USD hit on Monday before reversing – $1.5570, just 3 pips above Currency Specialty Service's ideal upward target.
You may wonder how it is possible to forecast the forex market with such precision, and in the face of opposing fundamental analysis views. The answer is simple: Elliott wave analysts track forex traders' collective psychology in market charts, and each wave pattern alerts you to what move will most likely come next. As for the price targets, you calculate those using Fibonacci and and other proportions between waves.
The result is clear: Rumors and speculation about "market fundamentals" versus concrete, precise forecasts.
Besides 24-hour-a-day forecasts for all major currencies, your Currency Specialty Service subscription also gets you instant access to a free 49-minute webinar on how to trade forex with Elliott wave forecasts. The webinar, recorded live on March 25 by EWI's Senior Currency Strategist Jim Martens, covers topics such as:
- How do I identify trade set-ups?
- How do I set protective stops using Elliott to help me manage risk?
- How do I set price targets using Elliott?
- How do I identify a wave pattern in real time forex trading on my screen?
To watch this free 49-minute webinar now, subscribe to EWI's Currency Specialty Service and click on the "Video/Education" tab once you have logged in.