Page 131 - Ultimate Guide to Currency Trading

Trading the Market's Risk Appetite

You can trade the market's risk appetite by capturing the gains of currencies that are considered low
risk and selling short currencies that are considered high risk. When the world has a lower-risk
tolerance, it will sell off risk assets. These risk assets include the selling off of the world's stock markets
and higher-yielding currencies. The world's traders will then move into bonds and safe-haven
currencies. One of the reasons that these sell-offs occur is that most traders will be looking at the
same information, and they will come to the same conclusions. They will all want to protect their
money, and will all do so in the same way.

The markets can move with stampede-like force once a large number of traders start
selling off securities at the end of a big run-up in the markets. The U.S. markets have
been becoming more and more volatile in the last few years. This rapid and forceful
Essential
up and down spells opportunity to currency traders worldwide.

This happens during times of unrest and upheaval, but on the opposite side of the spectrum it
happens every other three or four days after a strong run-up in the market. If the U.S. and European
stock market has run up 3-5 percent in the past three or four days, people will begin to feel like they
have had enough success for a while, and will sell off their winning securities in an effort to lock in the
profits they have won.

You can use your observations and trading journal to get an idea of when the U.S., European,
and Asian markets have moved up over the past few days, and when they are getting ready to make a
reversal due to profit taking. If the market has done well and has gone up 3-5 percent in the past few
days, then this might be a time for a turnaround. Another major indicator that it is time for a
turnaround is if the U.S. stock market's gains have been heavily in the news. If the stock markets make
the news for how much they have moved up, then this is a surefire way of knowing that it is time to
book some currency trades that will make money when the market corrects. This is because by the
time the stock markets make the general news (such as the regular afternoon and 10:00 P.M. local
news), it is already old news, and the market is stale.

If the stock markets are making the news on stations such as WLS-ABC Channel 7 Chicago,
KNXV-ABC 15 in Phoenix, or similar local news stations, then you should be getting ready to make a
few trades in your currency account. These trades should make money when the world's stock traders
have had their fill of risk assets: when they are selling short the DOW 30, The CAC40, and the Hang
Seng. If you have shorted risk, and you have bought safety, you will make money. At the same time, if
the market has been down for four days or even a week, and it makes the news, then this is a good
time (for the same, but opposite reasons) to go long risk and sell short the less risky assets.