Volatile markets heavily drive sentiment
What a few weeks we have had in the market in the recently. The human cost to the current coronavirus crisis is mounting and fresh deaths are sadly being reported day by day. Adam was well ahead of the curve of almost everyone when he flagged this concern to ForexLive readers before the virus gained current traction. Sadly, like many great insights, they went ignored until they were upon us and common knowledge. It is bitter sweet praise since Adam would have hoped that he was wrong when he saw the express train of the coronavirus coming towards us. And the content of this post is bitter sweet too. Bitter, because of the sad coronavirus outbreak which has driven so many sentiment shifts, and yet sweet because of the case studies it provides to demonstrate how traders can use sentiment to trade with. So, let us focus now on the markets.
A sentiment recap
In case you have missed my previous posts on trading with fresh sentiment please check out these previous articles first, as they provide the foundation of understanding:
Once you have read those, or have read them before, please read on below to see more examples of trading with fresh sentiment. The first off is the simplest trade of them all, vanilla USD longs via the US dollar Index on USD safe haven strength.
Case study #1: DXY Longs
On March 18 I opened up three US dollar index longs with the following rationale:
I am expecting USD strength for the foreseeable future as the liquidation of equity longs, commodity longs, and a number of other financial instruments is resulting in cash positions. The USD is, as the most traded FX currency, the most liquid and movable currency so I am expecting USD demand. There are also USD funding issues.
Risks to the trade: Any positive coronavirus treatment or cure news might invalidate this outlook and potentially see USD safe haven flows reverse as equity markets recover.
I have closed my longs on two positions and I am running a third at break even. I intend to hold that into next month.
Case study #2: AUDUSD Shorts
On March 17 I opened an AUDUSD short position with the following rationale:
It is widely expected that the RBA will be cutting interest rates this week (March 19) and launching a quantitative program. Furthermore, with equity markets falling that will result in flows out of the commodity driven AUD. The USD remains strong on increased demand and funding issues driving the USD higher.
Risks to the trade: Any positive coronavirus treatment or cure news will invalidate this outlook and strengthen the AUD
This was a buy the rumour, sell the fact type trade. Once the RBA had done what they were expected to do, I closed the trade for a gain of +272 points.
Case study #3: USDCAD Longs
On 17 March I entered a USDCAD long trade. The rationale was as follows:
The Canadian dollar is weak as US oil hits lows from 2003 on multiple factors: high supply, falling demand, and Saudi planning on ramping up production to maximum levels are all keeping oil sold on retracements. With around 50% falls this month in the oil market, there is heavy selling pressure for oil which is also dragging down CAD. With considerable oil exports there is a clear link between CAD strength and Oil's strength. USDCAD and oil have around a 96% negative correlation, so when oil goes up USDCAD goes down and vice versa.
Risks to the trade: Any positive coronavirus treatment or cure news will strengthen oil and the CAD. Also, any renewed co-operation between Russia and Saudi regardingproduction cuts will support oil and thereby weaken USDCAD
All of these trades were taken without leverage, so hit the link to see more info on my view on using leverage. Developing a rationale for your trading is a very important topic. If you would like some more detailed help with trading sentiment shifts check out the excellent step by step guide from Forexsource which is the best I have come across.
Finally, as we close, may I ask a favour? If you understand this concept, please could you help people reading it for the first time by outlining your last or next sentiment based trade that you have taken/or are in? It would help reinforce this concept to the uninitiated and I know how many savy traders we have in our ForexLive readership. Have a safe weekend one and all and my prayer is that this outbreak is soon behind us.
