Stocks & Commodities V. 24:13 (58-60): Avoiding The Herd Mentality In Forex by Todd Gordon, CMT
Careful analysis of the technicals along with a good dose of logic and common sense will help you become a more successful foreign exchange trader.
There was some interesting price action in the last quarter of 2005 in USD/JPY, with foreign exchange traders anticipating a break of the important 115 level. They got it, but in a rather lackluster fashion. As it turned out, the real level to contend with was 116. Look at the candlestick lows, closes, and Fibonacci support levels from 2002 and 2003 that dictated price action in 2005. Armed with this knowledge, you might have prevented a costly short trade at 115.00 and been properly positioned for future price action.
2005 IN A NUTSHELL
October was a busy month in the forex markets. EUR/USD battled with 1.2000, while USD/JPY struggled with 115.00. Tradable volatility that allowed for outsized profits was not all that spectacular, but as it turned out, Octoberís price action set the course for the rest of 2005. And what a finish to 2005 it turned out to be.
But first, letís go back to the end of August, when USD/JPY first broke through 110. This new high jump-started the largest USD/JPY run-up in more than six years. Those momentous levels 110 through 114 came and went without much of a to-do, but as USD/JPY cleared the 114.50 level and approached 115, the hype began. Bank traders and market analysts could not talk about anything but 115.00. Their analysis showed that 115 was the breakeven point on hedges
of Japanese exporters, who would certainly defend this level. Soon, the newspapers, magazines, and trader chatrooms got on board and before long, every trader in the crowd was ready to sell into 115.00.