Forex trading education: Ask yourself “Where should we not go?”
Being a father of three, I have had my share of advise giving. One is to remind my boys to not go to certain risk places either alone or with friends, as it will just be asking for trouble. That could be to the rivals “home turf”, to the edge of a cliff while hiking, or swimming alone.
Danger
In trading, I also find it beneficial to ask “Where should we not go?”.
The “we” is the price. The “go” is above or below a key technical level.
The EURUSD fell below the 1.1876 in trading today. That level was the low price in 2010. More importantly for me is the level represents the low price since the 2008 financial crisis. The reason that is so important is because if you were to make an economic judgement, the EU has had a more difficult time since 2008. Whereas the US has seen growth, employment, even inflation move higher, the EU has not enjoyed much of a rebound in any of those measures. It still has unemployment at 11.5%. The inflation is now below 0.0% (albeit not core but still) and GDP may be bottoming for some but for others, meaningful growth is still elusive.
I know the US has not had it’s nose totally clean. Remember the government shut downs. Also, the whole QE experiment has it’s issues as well (just listen to Peter Schiff for a minute and you can get a earful). However, overall, the US is leading the way economically. Despite that, the EURUSD has remained above the post 2008 lows – until today.
That is a big thing for me.
The price for the EURUSD has traded down to 1.1800 today and found support against a trend line there. It may be tempting to buy the dip and traders who did had little risk – if they used the level to define and limit risk then and in the future.
However, it might be better for traders to say instead “Where should we not go?”
The answer to that question for me is “Back above the 1.1876 level”. If you can accept this, it should give you more confidence to sell a rally, to stay in a position, to not fear if the short you have, sees a price correction toward that level before moving back lower. Fear is a traders worst enemy. If you can lessen trader fear by having more confidence (it really comes from defining risk), you will be better off.
Now, I am not saying that the EURUSD price will not trade back above the 1.1876 in the next hour, in the next day, the next week and stop out the trade. No one really knows do they, but from what I see, from what I assume others see both technically and fundamentally, the breaking of the 1.1876 is meaningful and makes me want to believe that “We should not go back above that level” – plain and simple.
So in your trading, if there are times where you can answer “Where should we not go?”, you may be able to lessen fear, catch some more trends, stay in positions longer, while limiting your risk in the process.