Is It Time To Sell The Euro?

Includes: ERO
by: Elite E Services

While markets have relief that the mainstream, pro-bailout party has won the Greek elections, the European crisis is far from over. As Krugman points out, it is possible that Syrzia actually wanted to lose, thus providing more opportunity for the pro-bailout policies to fail. In a follow up post, he goes on to say:

In a way, the worst thing about the Greek election is the possibility that it will encourage the Germans and the ECB to persist a bit longer with their fantasies about how things might work.

The bailout itself does not solve the problem in Greece, nor does it address the wider systemic problems facing the entire Eurozone. This was reflected by the markets selling off European bank shares today.

Given the circumstances, the most likely scenario is a slow grind; a long term breakup of the Euro, although more orderly, also more painful.

How to sell the Euro

For many traders, being right about the market direction and trade execution are 2 different things. Here are 2 ways to profit from a Euro collapse in the long term.

Sell EUR/USD outright and forget about it

Using a maximum of 4x leverage, sell the EUR/USD spot outright with no stop loss and leave the position to rest for 12 months. If the EUR/USD goes down to 1.20, this trade would yield 4.53% (at current EUR/USD levels of 1.2570) per 1x leverage. Using 4x leverage, this trade would yield an 18.14% return on invested capital.

This trade could be done with the EUR/USD futures contract.

The risk of this trade is that as EUR/USD is going up, the contract is losing. However this seems unlikely to persist, although on a daily basis, as good news trickles out of the Eurozone, EUR/USD may get a temporary bump up as we saw post Greek election. If it does go up, it is not likely to reach pre-crisis levels such as 1.40 or 1.50.

This trade is a long term trade, not a day trade.

Strategic stop orders

Place a sell stop order below key technical levels, such as 1.25 - 5 pips below the support price (1.2495). Have a trailing stop on the order which will allow the trade to mature, yet it will close during a market reversal. The technical analysis on the majors will change from day to day, so you should change your stop orders according to updated supports. Your broker should have this information for you, if not it can be obtained online for free. It is important to place the sell order below the support, as what happens many times, when support is broken a snowball effect is created when stop triggering is combined with real money selling.

EUR/USD market

Unlike previous markets, the current EUR/USD prices are largely driven by real-money demand, as opposed to algorithmic trading or general speculation. For example, Spaniards withdrew 66 Billion Euros in March, while some of those funds went to banks in the Eurozone such as in France and Germany, a lot of it likely went to Britain, the United States, Switzerland, and other non-Euro countries.

Forex Risk Disclosure - Click here to read

The risk of loss in trading foreign exchange markets (FOREX), also known as cash foreign currencies, or the FOREX markets, can be substantial.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.