Reversal In The Dollar And How You Can Profit

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Best Binary Broker 2020!
    Perfect for Beginners!
    Free Trading Education! Free Demo Acc!
    Get Your Sign-up Bonus Now:

  • BINOMO
    BINOMO

    Trustful broker.

Reversal In The Dollar And How You Can Profit

The Trade War Escalates

Over the course of the last week the dollar has shot to a new high, hit resistance, and fallen back to support. The move was driven by data, shifting FOMC policy outlook, the FOMC statement, and now, escalating trade war conditions. What we have for certain is a dollar with increasing volatility, the ultimate direction of that volatility is yet to be determined. The underlying fundamentals scream for a stronger dollar, the U.S. economy has so far been resilient while that of the EU, UK and Japan less so. The risk is that, with the new round of tit-for-tariff, the U.S. economy will begin to fell more pain.

This week there is virtually no economic data to sway the market. There is some, don’t get me wrong, but no piece is that important, important enough to shape the market’s outlook and assuage fear of global slowdown. For now, the DXY is still above support and looks like it is in an upwardly biased trend. The index is above the top of a previous range and the indicators are consistent with underlying strength if not upward continuation of trend. The $97.50 looks like a good entry point for new positions, the index may bounce from this level or fall through. A bounce is likely to move up and retest $98.50, a break through of support could lead the index down to $97.50 or $96.00.

The EUR/USD has effected what looks like a nice rebound/reversal in prices. I will caution you though, the pair is merely retracing a recent fall through support to retest resistance at that previous support level. The long-term outlook is for the dollar to appreciate because the EU economic slowdown is worse than in the U.S., the ECB is still expected to reduce rates and stimulate the economy, the FOMC is no longer expected to cut rates three times this year, and the Brexit is coming up. Resistance should be near 1.2000, once confirmed look for the EUR/USD to fall back toward 1.105. If the pair breaks through support a move to 1.2910 is possible.

The USD/JPY sank to a new long-term low in early Monday trading as safe-haven inflows drive the yen. The pair is heading down toward the 105.00 region where it is likely to bounce. This level has provided strong support in the past and there is still dollar strength to consider. Safe-haven inflows can only suppress this currency for so long. Longer-term, I expect the USD/JPY will continue to trade sideways within its multiyear range.

Dollar Collapse Scenarios and How to Protect Yourself

Could You Survive a Dollar Collapse?

Many “experts” warn that the dollar will collapse and lead to global economic turmoil. In this scenario, investors would rush to other currencies to escape further losses. Global trade would seize up because the majority of international contracts demand a dollar payment. Other assets would skyrocket. The worst-hit would be currencies like the euro, yen, and the yuan. Gold prices would soar. Interest rates in the United States would rise as demand for Treasurys fell.

Key Takeaways

  • Although the value of the dollar is declining, the imminence of its collapse may well be far from actualizing.
  • The dollar’s decline in value is attributed to: (1) large debts, (2) excess liquidity and asset bubbles, (3) a huge trade deficit, and (4) less dependence on the dollar as a reserve currency.

Predictions

The authors of “The Coming Collapse of the Dollar and How to Profit from It,” for example, predict a dollar collapse.   But this prognosis is not well substantiated. It also plays on fear. Two authors with great economic credentials wrote this well-known book. Their research into the causes of the current weakness of the U.S. economy is thorough and easy-to-understand. In fact, everyone should read the chapters in Parts One and Two.

The authors’ assertion that the U.S. dollar will collapse because all governments’ currencies collapse is based on only four examples: Ancient Rome, Revolutionary-era France, Weimar Germany, and Argentina. None of those examples are similar to the modern-day U.S. economy.

The authors have not made a well-researched argument to support their conclusion that these conditions will lead to the inevitable collapse of the world’s reserve currency. They state that the dollar is not sustainable as the world currency because it is no longer on the gold standard.

The Declining Value of the U.S. Dollar

It is true that, over the long term, the dollar’s value is declining. Since 2020, the U.S. Dollar Index has fallen by 6%. It could drop further for the following five reasons:

  1. A $22 trillion U.S. federal debt.
  2. Excess liquidity causing inflation or, as is occurring now, asset bubbles.
  3. The unsustainable personal debt of U.S. citizens.
  4. A massive trade deficit.
  5. The strength of emerging market countries, like China. They are becoming less dependent on holding U.S. dollars to keep the value of their currencies low.

All of these forces drive down the value of the dollar.

How to Hedge to Protect Yourself

Some of the ways to protect yourself from a potential dollar collapse are also good ways to protect your assets from the far more likely dollar decline. First, keep your investments diversified away from the dollar by making sure you hold foreign mutual stock and bond funds and some gold.

The authors of “The Coming Collapse of the Dollar” suggest, like many others, that you hoard gold and other hard assets. Their recommendation to buy gold, precious metals, and shares in gold mining companies is narrow and flies in the face of modern portfolio theory. The authors also concede that one of them, James Turk, could profit from a gold boom since he publishes the “Freemarket Gold and Money Report.”

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Best Binary Broker 2020!
    Perfect for Beginners!
    Free Trading Education! Free Demo Acc!
    Get Your Sign-up Bonus Now:

  • BINOMO
    BINOMO

    Trustful broker.

They also recommend short-selling stocks of companies that a falling dollar will hurt. This is also called timing the market and is not recommended for the average investor.

If the dollar were to utterly collapse, as they predict, it would wreak devastation upon the world’s economy in ways that are unimaginable. Owning gold might be the best way to go, or it might not. A well-diversified portfolio and constant attention to key economic indicators are a better way to protect your finances than putting all your eggs in one basket.

How should you protect yourself from the global economic turmoil? This high level of uncertainty could occur from any sudden shift in the world economy. The best defense is to be mobile. That means keeping your assets liquid so that you can shift them quickly. Don’t tie a lot of money up in real estate, which could tie you down. It’s also difficult to sell when the real estate market goes south. You could even lose money if you didn’t get renters.

Invest in yourself and your knowledge. Stay on top of the global economy. Understand investing. And it’s never a bad idea to keep your passport updated, just in case! You can be safe in a dollar collapse if you also follow five steps that protect you from an economic crisis.

Market Reversals and How to Spot Them

Capturing trending movements in a stock or other type of asset can be lucrative. However, getting caught in a reversal is what most traders who pursue trendings stock fear. A reversal is anytime the trend direction of a stock or other type of asset changes. Being able to spot the potential of a reversal signals to a trader that they should consider exiting their trade when conditions no longer look favorable. Reversal signals can also be used to trigger new trades, since the reversal may cause a new trend to start.

In his book “The Logical Trader,” Mark Fisher discusses techniques for identifying potential market tops and bottoms. While Fisher’s techniques serve the same purpose as the head and shoulders or double top/bottom chart patterns discussed in Thomas Bulkowski’s seminal work “Encyclopedia of Chart Patterns,” Fisher’s methods provide signals sooner, giving investors an early warning of possible changes in the direction of the current trend.

One technique that Fisher discusses is called the “sushi roll.” While it has nothing to do with food, it was conceived over lunch where a number of traders were discussing market setups.

Key Takeaways

  • The “sushi roll” is a technical pattern that can be used as an early warning system to identify potential changes in the market direction of a stock.
  • When the sushi roll pattern emerges in a downtrend, it alerts traders to a potential opportunity to buy a short position, or get out of a short position.
  • When the sushi roll pattern emerges in an uptrend, it alerts traders to a potential opportunity to sell a long position, or buy a short position.
  • A test was conducted using the sushi roll reversal method versus a traditional buy-and-hold strategy in executing trades on the Nasdaq Composite during a 14-year period; sushi roll reversal method returns were 29.31%, while buy-and-hold only returned 10.66%.

Sushi Roll Reversal Pattern

Fisher defines the sushi roll reversal pattern as a period of 10 bars where the first five (inside bars) are confined within a narrow range of highs and lows and the second five (outside bars) engulf the first five with both a higher high and lower low. The pattern is similar to a bearish or bullish engulfing pattern, except that instead of a pattern of two single bars, it is composed of multiple bars.

When the sushi roll pattern appears in a downtrend, it warns of a possible trend reversal, showing a potential opportunity to buy or exit a short position. If the sushi roll pattern occurs during an uptrend, the trader could sell a long position or possibly enter a short position.

While Fisher discusses five- or 10-bar patterns, neither the number or the duration of bars is set in stone. The trick is to identify a pattern consisting of the number of both inside and outside bars that are the best fit, given the chosen stock or commodity, and using a time frame that matches the overall desired time in the trade.

The second trend reversal pattern that Fisher explains is recommended for the longer-term trader and is called the outside reversal week. It is similar to a sushi roll except that it uses daily data starting on a Monday and ending on a Friday. The pattern takes a total of 10 days and occurs when a five-day trading inside week is immediately followed by an outside or engulfing week with a higher high and lower low.

Testing the Sushi Roll Reversal

A test was conducted on the NASDAQ Composite Index to see if the sushi roll pattern could have helped identify turning points over a 14-year period between 1990 and 2004. In the doubling of the period of the outside reversal week to two 10-daily bar sequences, signals were less frequent but proved more reliable. Constructing the chart consisted of using two trading weeks back-to-back, so that the pattern started on a Monday and took an average of four weeks to complete. This pattern was deemed the rolling inside/outside reversal (RIOR).

Every two week section of the pattern (two bars on a weekly chart, which is equivalent to 10 trading days) is outlined by a rectangle. The magenta trendlines show the dominant trend. The pattern often acts as a good confirmation that the trend has changed and will be followed shortly after by a trend line break.

Once the pattern forms, a stop loss can be placed above the pattern for short trades, or below the pattern for long trades.

The test was conducted based on how the rolling inside/outside reversal (RIOR) to enter and exit long positions would have performed, compared to an investor using a buy-and-hold strategy. Even though the NASDAQ composite topped out at 5132 in March 2000 (due to the nearly 80% correction that followed), buying on January 2, 1990 and holding until the end of the test period on January 30, 2004 would still have earned the buy-and-hold investor 1585 points over 3,567 trading days (14.1 years). The investor would have earned an average annual return of 10.66%.

The trader who entered a long position on the open of the day following a RIOR buy signal (day 21 of the pattern) and who sold at the open on the day following a sell signal, would have entered their first trade on January 29, 1991, and exited the last trade on January 30, 2004 (with the termination of the test). This trader would have made a total of 11 trades and been in the market for 1,977 trading days (7.9 years) or 55.4% of the time. However, this trader would have done substantially better, capturing a total of 3,531.94 points or 225% of the buy-and-hold strategy. When time in the market is considered, the RIOR trader’s annual return would have been 29.31%, not including the cost of commissions.

Using Weekly Data

The same test was conducted on the NASDAQ Composite Index using weekly data: using 10 weeks of data instead of the 10 days (or two weeks) used above. This time, the first or inside rectangle was set to 10 weeks, and the second or outside rectangle to eight weeks, because this combination was found to be better at generating sell signals than two five-week rectangles or two 10-week rectangles.

In total, five signals were generated and the profit was 2,923.77 points. The trader would have been in the market for 381 (7.3 years) of the total 713.4 weeks (14.1 years), or 53% of the time. This works out to an annual return of 21.46%. The weekly RIOR system is a good primary trading system but is perhaps most valuable as a tool for providing back up signals to the daily system discussed prior to this example.

Trend Reversal Confirmation

Regardless of whether a 10-minute bar or weekly bars were used, the trend reversal trading system worked well in the tests, at least over the test period, which included both a substantial uptrend and downtrend.

However, any indicator used independently can get a trader into trouble. One pillar of technical analysis is the importance of confirmation. A trading technique is far more reliable when there is a secondary indicator used to confirm signals.

Given the risk in trying to pick a top or bottom of the market, it is essential that at a minimum, the trader uses a trendline break to confirm a signal and always employ a stop loss in case they are wrong. In our tests, the relative strength index (RSI) also gave good confirmation at many of the reversal points in the way of negative divergence.

Reversals are caused by moves to new highs or lows. Therefore, these patterns will continue to play out in the market going forward. An investor can watch for these types of patterns, along with confirmation from other indicators, on current price charts.

The Bottom Line

Timing trades to enter at market bottoms and exit at tops will always involve risk. Techniques such as the sushi roll, outside reversal week, or rolling inside/outside reversal–when used in conjunction with a confirmation indicator–can be very useful trading strategies to help the trader maximize and protect their hard-earned money.

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Best Binary Broker 2020!
    Perfect for Beginners!
    Free Trading Education! Free Demo Acc!
    Get Your Sign-up Bonus Now:

  • BINOMO
    BINOMO

    Trustful broker.

Binary Options Trading School
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: