The dollar is on the rise after Friday’s weak US jobs report which traders think will keep the Federal Reserve’s tapering on course. The report showed the smallest increase in employment in nine months. Nonfarm payrolls rose by 194,000, dramatically lower than the 500,000 expectation.
This was another in a string of examples of US assets rallying on poor economic data, because of the expected reactionary monetary policy.
The dollar has been ranging after reaching a 12-month high. The psychological response of such a high may have resulted in profit-taking. However, the trading pattern has actually been supporting a continued rally.
The holding pattern since reaching the annual high has been in the shape of a pennant, seen to be a continuation pattern, due to its symmetrical shape. Buyers and sellers appear to be equal in their determination. However, given that the trend is up, bulls hold the advantage.
Since the pattern developed after the dollar index surged by over 150 pips—the majority of which was accomplished in just four sessions— the current standoff appears to be controlled by bulls.
The five-day advance presumably led to some profit-taking which has probably been weighing on the price. When long positions are closed, demand falls and at the same time, supply increases.
But, rather than falling, prices have held as new bulls have entered the game, increasing their weight on the demand side of the scale.
Looking at the big picture we realize that the dollar recently completed a massive double bottom. This helps understand why a flag was created here. The dollar needed to “rest” after its exertion. This happens when there is profit-taking and it allows for new traders to come in and carry the dollar higher.
Trading Strategies
Conservative traders should wait for the upside breakout, penetration of which would overtake the pennant high, then wait for a pullback to test the pattern’s integrity, before risking a long position.
Moderate traders would wait for the same breakout pattern, with the upside move, followed by the return-move, for an entry closer to the presumed support, if not for confirmation of the trend.
Aggressive traders could enter a long position now, as long as they accept the raised risk that comes with the higher reward of moving ahead of other traders.
Trade Sample – Aggressive, Long Position
- Entry: 94.30
- Stop: Loss: 93.80
- Risk: 50 pips
- Target: 95.80
- Reward: 150 pips
- Risk:Reward Ratio: 1:3
Note: This is just a sample. You must develop a plan that addresses your budget, timing and temperament. Until you learn how to do so, you may use our samples, for educational purposes. If you have the illusion that you’ll make money, consistently, you will end up with neither education nor money. Guaranteed. No money back.