
Our call on the AUDNZD was a prescient one and the pair is now more than half way to our first profit objective. It has broken through the well established support line at around 1.12.
Why did the AUDNZD pair break through this support (and go below it for
the first time in five years), after attempting and failing to do so on four
previous occasions since August of this year (see chart above)? The reason is
the swap differential, a measure of the gap between the interest rates set by
the relevant Central Banks, and its relationship to the exchange rate. It now
transpires that the swap differential and the currency exchange rate between Australia and New Zealand has had a correlation
of 97% over the last 12 months (National Australia Bank calculation). That
means they are, to all intents and purposes, moving in lockstep.
Given the above and knowing the potential for further interest rate
divergence, which we discussed when we first signalled the trade, it is
reasonable to believe that the AUDNZD pair should fall.
The Japanese Yen
The USDJPY pair continues to advance after breaking out of the pennant that completed formation on October 30th.
The rise seemed to stall yesterday but the upward trend is intact. Apart from
anything else, this is the last week of the month, and the Japanese Yen is a
real merchant currency. It has functions way beyond those contemplated by us
currency traders, whose only object is to anticipate directional movement in
order to make a profit.
Nevertheless, the upward trend, as mentioned, continues. The breakout
from the pennant is well under way and has cleared
the first potential resistance (point 1 on the chart). It is now negotiating
the second one, at around the 101.50 level.
“Broad framing”, or thinking
in probabilities
It must always be borne in mind that descriptions of individual trades,
such as those above, are only for the purposes of what we call “studying the
anatomy of a trade”. The calls above were made, not because we can see the
future, but because the circumstances were recognised as representing High
Probability (HP) trades.
Success in trading is dependent upon the trader being able to structure
activities so that each individual transaction has the potential only to cause
a loss that is small relative to equity amount, should it go wrong. Risk control and money management are central to this. There will
be losses and these must be borne, both from the monetary and psychological
point of view. This is what Mark Douglas (“The Disciplined Trader”) calls
thinking in probabilities, and what Daniel Kahneman (“Thinking, Fast and Slow”)
classifies as “broad framing”.
Knowing, or being told these facts, of course, is only part of the
story. Implementation requires discipline and the correct mind set. The
OmiCronFX algorithmic routines, and all the other aspects of what we teach, are
designed to allow this to happen, so that consistent profits are the result.
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