I sent a note out to my mailing list on Monday asking:
Obviously we’ve got some crazy stuff going on in the markets these days. I’m guessing this is generating some questions out there. Is there anything you’d like to see me address on my blog?
Here’s one of the questions that came in:
Yes, please address the news/fundamentals on currency trading, particularly in light of recent Lehman Bros and Merrill Lynch stories. Do you have a strategy that gives you an edge or do you wait it out and trade post news reaction?
The current situation in the global markets is one of fear and risk aversion. When that happens, as we’ve seen a few times in the last year or so, there are certain tendencies – at least in this cycle. One is the flight to quality. That sends money into US Treasury securities (which have been bought up aggressively of late), gold, and safe haven currencies like the Swiss Franc. The other side of things to flight to quality is the move away from risk. In the forex market that’s been a move out of the so-called carry trade pairs like EUR/JPY.
When it comes to trading forex I’m a technical trader, so I don’t make buy/sell decisions based on fundamentals or news events. I just stick to the technical methods I always employ.
That said, in situations where volatility is running high I’m generally inclinded to back away and let things settle down. My reasoning for that is simple. The market tends to move further than expected in that kind of environment, making the determination of good entry and exit points significantly more challenging.
Granted, the action in high volatility times can produce some spectacular gains. That can tend to encourage one to stay in the market, and if the prices are moving in line with a wider trend or something like that it makes sense to be in. At that point, however, position sizing needs to be reconsidered to keep the risk situation properly defined.
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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
** See John’s full bio.
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