Catching Big Trend Moves = $40,000 on Four Small FX Positions

In March, I wrote for the Futures Magazine April FX issue that the euro base-building between $1.25 and $1.30 was an important consolidation juncture that would soon break one way or the other. My critical levels that would determine the next trend move were $1.24 on the downside and $1.31 on the upside. I thought the downside trade did not have enough “edge” to warrant being outright short, so I recommended only the purchase of put options for those with fundamental conviction about the euro collapsing against the dollar. And I advised that traders should “stop-and-reverse” to long any short positions if and when the euro broke above $1.31.

As U.S. equity markets rallied off the March lows, the euro quietly followed in lock-step on risk appetite. Then, when the Fed gave certainty about its quantitative easing asset purchases on March 18th, the euro, already sitting on $1.31, launched solidly above my key level in a four-cent, single-day move. With the euro above $1.43 on the dollar collapse this week, that breakout and explosive trend move has been worth at least $15,000 on a single CME Euro FX contract.

In mid- and late April, I began alerting viewers of my Mark2Market report “FX Overnight” to the base-building and impending breakouts in the Australian and Canadian dollars. Both of them also followed the euro higher after March 18th, but I didn’t have specific make-or-break levels I was watching in these pairs. I needed to watch how they reacted to their bases and moving average trends. The Canadian futures had essentially formed a very rare “quadruple bottom,” finding support just below 77-cents four times since the credit crisis began.

After sufficiently testing the water for buyers and sellers, the Canadian price action prompted me to issue a buy signal the week of April 20th when it climbed solidly above three important weekly levels clustered between $0.8130 and .8140 and stayed above its 10- and 20-week moving averages. My minimum short-term target then was 85 cents, the area of the 2009 highs in January and the site of the downward-sloping 40-week moving average, a confluence of resistance that would both attract and test the strength of the move. With the Canadian futures above 92 ½ cents this week, that breakout and explosive trend move has been worth at least $11,000 on a single CME Canadian dollar contract.

The Australian dollar confirmed its bottoming formation at the same time as the Canada in early March. The Aussie had a little tougher time getting through its January highs above 72 ½ cents, but held above the key $0.6870 level and its 10- and 20-week moving averages, so I issued a buy recommendation if it got back above 72 ½ cents. Once it did, it was the first to launch above its 40-week moving average, with the Canada and euro close behind within a few days. With the Australian dollar futures above 82-cents this week, that breakout and explosive trend move has been worth at least $9,000 on a single CME Australian dollar contract.

There is something else worth noting about the rally in the “commodity dollars,” as Aussie and Canada are often called because these are resource-rich countries whose economies are highly-geared towards energy and materials. These currencies had formed nice bottoms and were making higher lows before everyone was talking about a commodity-driven “reflation” trade. I did a report from the CME/CBOT trading floor on March 23rd I called “Reflation by Trillions” to describe some of the consequences I saw coming after the Fed’s moves. Remember, these were the first two major currencies I follow that launched above their 40-week moving averages and then began the fast ramp up of 1,000 points each.

My fourth and final big money FX play during this reflation trade was the British pound. After the commodity dollars and the euro broke out in the first week of May, I felt pretty sure this “weakest of the bunch” would follow. I told viewers of my “FX Overnight” report to buy the pound above $1.51 with my minimum target for May at $1.55. Well, the strong players pulled the weakest one up much faster during the massive dollar sell-off the week of May 18th, and the British pound sterling launched up to $1.59. With the pound futures above $1.65 this week, that breakout and explosive trend move has been worth at least $8,750 on a single CME British pound contract.

These four small currency positions using CME FX futures were worth over $40,000 in combined profits on these huge breakout moves. CME FX futures have what I call “appropriate” leverage of anywhere between 20-to-1 and 40-to-1 (contract value divided by margin requirement) and can be traded comfortably with risk management stops wide enough to stay in a trend move. As of May 30th, the CME minimum performance bond* (margin) requirements were as follows:

• Euro FX (125,000 euros) $4,725
• Canadian dollar (100,000 Canadian) $2,430
• Australian dollar (100,000 Australian) $3,375
• British pound (62,500 pounds) $2,700

In a future post, I will explain FX leverage and compare and contrast CME FX Futures with cash currency trading. I’ll also introduce the newest innovation, CME Forex E-micros, which open the playing field to more participants with a more manageable contract size.

Economists and analysts will expertly explain big FX moves after the fact. But we can be in the trades before they make these huge, violent shifts. More to come on the technical analysis tools I use to find these shifts and why CME FX Futures are the best vehicle to capitalize on them.

Mind the Risk, Bank the Profits!