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Five Rules To Focus On To Profit From The U.S. Dollar Rally

|Includes: PowerShares DB USD Bull ETF (UUP)

If investing/trading were easy more people would be successful at it. To stay on track with any sustained market movement takes focus and a plan, and the multi-year rally in the U.S. Dollar will be no different. We've compiled a list of what to focus on to stay the course.

Believe what you see, not what you hear or read. Trust that price and the patterns price creates are an accurate reflection of the underlying reasons for markets doing what they do. Given the huge amount of information bounding around the internet on an hourly basis it's too easy to think there is a logical explanation for every micro move the market produces -- nothing could be further from the truth. The reasons for large traders or funds deciding to load up, or unload on a market are generally known only to them and even they will second guess themselves. Do NOT read too much into intraday price reactions accompanied by trite analytic explanations. Trust that at the end of the day or week that price action will have gotten it right. If you can see the current price pattern on the chart is showing a clear pattern of higher lows and higher highs - see Figure 1. --know that is more valuable information than what is said or written.

Figure 1. Weekly Chart of the U.S. Dollar Index

Do not put too much emphasize on market correlations. There will be days when the U.S. Dollar is strong and the U.S. stock market is weak, and they're will be days when they are moving in sync. And there will be days when bonds are going up or going down, and you will be tempted to act in your account in anticipation of making more money or protecting your current money. Markets are like people in that they are social, and will react to the actions of other markets, but, not always in the same manner. For example initially higher interest rates are a good thing for currency investors, but if they rise too quickly, this can become a negative. Likewise similar market behavior can have the opposite effect depending on where the economy is in the overall business cycle. Do NOT try to outguess or time the market based on yesterday's correlations

Do not dig up the seed to see if it is growing. There is no class, or amount of advice that can prepare you for the temptation of exiting a trade too soon, or the pull of wanting to ignore your money management rules to maximize your profits. Trading and investing is the most intense self-analysis you can go through and no matter how prepared you think you are for this you have a ways to go. The hardest thing you will ever learn in trading is to simply let a profit run. Once in the trade or investment, set your stop loss, preferably further back than you initially think, and try to forget about the trade all together. Do not think that you overlooked something in your analysis, do not search out articles in the papers or online to support your thesis, do not look at the last price every 2 minutes. In other words: do not dig up the seed to see if it is growing.

Buy dips in uptrends and sell rallies in downtrends. This is the golden rule of trading and the first thing we learned on a trading floor. No matter the strength of a trend there will always be intraweek and intraday reactions counter to that trend which will provide opportunities for astute traders. And often times these counter-trend moves occur after news releases which seemingly contradict the prevailing pattern or trend. News is more often significant to us because it scares traders out of their positions, which creates sharp counter-trend price moves which in hindsight prove opportunities to "buy dips in an uptrend".

Do not think you need to get in at the bottom. While many of us want to pick the bottom in a market because we perceive our risk is less then, the truth is professional traders want to participate in the top third of a move because that is when the rewards are greatest and can be reaped the fastest. We teach our students two types of trades. There is the zone trade where we are buying dollars in a specific buy zone based on structure - in this case support. Then there is the momentum trade where we are buying based on short-term momentum. Our risk is less on the momentum trades because the stop is closer, and there are more signals given, i.e.: we trade more often, and we trade more contracts. Of all the different groups of traders in the markets momentum traders are perhaps the biggest, and they are not looking to buy low, they are looking to "buy high and sell higher".

Jay Norris is the best selling author of The Secret to Trading: Risk Tolerance Threshold Theory. To see Jay highlight trade set-ups and signals every Thursday and Monday go to Live Market Analysis.

Trading involves risk of loss and is not suitable for all investors!

Disclosure: I am long UUP.