Forex Trading in 2010: Like the Equities Market in 2003?

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 |  Includes: DIA, ERO, FXE, GBB, QQQ, SPY, UDN, UUP
by: Ron Finberg

Is Forex in 2010 like Equities in 2003?

The first half of 2003, around the time the second Gulf War was about to begin, was probably one of the worst times for short-term trading (I heard 1994 was terrible too, but I didn’t start trading until 1998). The S&P 500 had traded to post 9/11 lows of around 800 during October 2002, and then rebounded to 930. However, the rally was short lived as an Iraqi Invasion was looming and stocks slumped back toward to their October 2002 lows.

What made trading during this time difficult was the lack of any intra direction. Stocks would rally on a great earnings announcement, only to rapidly fall as a rumor about Iraq emerged. Similarly, short positions would often get stopped out as the markets turned around without any news releases. Overall, continuing low volume along with news and rumors regarding Iraq made created choppy intraday trading and very little follow through for short term positions trades.

Forex 2010

Back to 2010, we have a similar situation brewing in Forex land. The UK isn’t sure who will be leading its government in a few months and dealing with the country's debt problems. In Euro land it is all about the PIGS. And back in the US, traders can’t make up their minds if positive US news is good for the dollar yet. Or is the year and a half scenario of better US news = weak dollar, bad news = Safe Haven dollar buying.

Let’s take a look at the pound. Visibility is terrible, however going totally negative on it could prove dangerous as any time a new UK election poll comes out it could cause a greater than 100 pip move higher. Also, any buyers have to worry about the Bank of England stating that the economy is improving, but then the next day a bank member will state that the UK can benefit from a weak pound. The same flip flops occur with the Euro regarding a Greek bailout (on a side note, I don’t think a bailout will occur in the next six months), and EU leader comments about Euro devaluation.

Across the Atlantic, I feel the US is the biggest danger to traders. There doesn’t appear to be a specific direction that the market wants to take the dollar on positive US news. A few months ago, when we appeared to be headed for positive job growth, the consensus was that positive US economic news would lead to a dollar rally. The rationale being that the FED would be forced to raise rates. However, the tide appears to have turned as better than expected Nonfarm Payrolls numbers led to dollar weakness when risk buying took place. Also in the February release, the worse than expected number led to dollar strength. And this has all occurred after the FED raised the discount rate.

So What’s a Trader to Do?

There are two options: One, take a break from trading (a friend who got married and took time off in 2003 ended up being one of my group’s best traders back then), or two, take smaller, longer term positions. For any short-term trader, taking longer term positions is always a rough transition. However, it may be one of the few ways to survive the intraday volatility of this market.

Personally I like the short-term trades but have paid a price for it lately (though I am looking for a rally in the EURAUD above 1.5000 to enter a longer term short position). Just my thoughts on the matter. As always, I'm interested to hear what is working for everyone else.

Disclosure: No positions