A colleague pointed out the US Dollar Index has formed a “double-top” (thanks Dave). The recent CFTC data showing USD longs at record highs already had me thinking about selling USD, on the basis there may be “nobody left to buy”. This double top, combined
with the potential for positive news flow from Europe between now and December 10 (Euro finance ministers tonight and Euro leaders Dec 9) points to potential USD weakness as the Euro in particular, and risk assets generally, return to market favour.
I’m looking at a swing trade – a smaller position, with a looser than normal stop, intented to remain open for days or weeks to capture a significant move.
Here is the USD Index daily chart:
In thinking about the best way to take advantage of a weakening USD, I used the CMC Tracker platform’s volatility field to sort for the highest one month volatility of currencies paired with the USD. Volatility may frighten investors, but can also be a trader’s friend.
This led to the HUF – the Hungarian Forint.
Here is the daily chart from the platform:
This gives me a simple, “stop entry” trade. I stop in on a break of the trend line, just below 230 (say 229.80), with a fixed stop loss at 234.90. I’m looking for a move towards the 208 level, the recent support at the beginning of the current trend. This gives me a reward to risk ratio better than 4.
What I particularly like about this trade is that there is a further potential warning of a wrong trade – if the USD Index closes above the 79.70 level (the recent high), I’ll stop out, potentially further enhancing the reward to risk ratio.