DailyFX.com -

It is important to distinguish taking a trade founded on current conditions and one that is dependent on future developments. When you do the former, the probabilities of the trade playing out increase dramatically - though some of it see it as being 'late to the game'. Alternatively, positioning for something that we expect may happen can offer deeper value but it also increases the risk that the circumstances have not fully developed to support the trade.

Investing and trading is about taking calculated risks. That means we have to find that equilibrium where we are confident enough and the return potential is sufficient enough to take a trade. I have been following the underlying current in risk trends for months - if not years. The most recent bout of volatility has caught my attention, but I'm not ready to call it evidence of a systemic change. Then again, I do not want to be asleep when the tides to change.

This is the thinking behind the EURJPY short (137.20, Stop 138.70) I've taken this past week. This is pair that is highly tuned to risk aversion specifically. If sentiment does turn, the yen crosses will offer many different trades, but this one has additional fundamental pressure to retreat even if markets level off.

I am looking at both EURUSD (below 1.3500) and USDJPY (below 100.50) with a similar mind. Should we take further steps towards a full-scale 'risk aversin' these are pairs that will readily lead the way. And, they could also retreat in a 'status quo' scenario - EURUSD because of monetary policy deviations and USDJPY due to the BoJ's moderation on stimulus policy.

There is also something to be said about pairs that are minimally reliant on risk trends - as prominent a driver as it can be. GBPUSD will be one to watch as the focus is on interest rate expectations, and UK 2Q GDP and BoE minutes this week can stir the pound. US 2Q GDP, NFPs and the FOMC decision the following week can do the same for the dollar.

My existing long USDCHF and AUDNZD trades (my Top of 2014 set) fall outside of the traditional risk environment as well. My intentions are further and more distant for these, so I will keep an eye on them.

What kind of Trading best suits you? Technical or Fundamental? Short-term or Long-term? Take our Trader Survey and find out.

Sign up for John’s email distribution list, here.

Related Articles
  1. Forex Education

    Four Currencies Under the Spotlight in 2016

    With currencies having become the “tail that wags the dog,” in terms of their impact on the global economy, these four currencies will be under the spotlight in 2016.
  2. Forex Fundamentals

    These Currencies Are The Biggest Losers Of The Stock Downturn

    Here’s a list of the hardest-hit currencies amid the global stock market mayhem.
  3. Forex Strategies

    Will the Euro Continue to Rally? (EUO)

    The euro is rallying. Should investors chase this performance or is the real opportunity on the other side of the trade?
  4. Investing News

    China’s Forex Reserves Dropped Significantly

    China’s forex​ reserves dropped by a record $93.9 billion at the end of August to $3.56 trillion because the Central Bank has been selling dollars to provide a cushion to the falling yuan​
  5. Forex

    The Pros and Cons of a Fully Convertible Rupee

    Amid the rising economic power of India, the talks of making the Indian currency fully convertible are gaining momentum. We look at the pros and cons.
  6. Forex Fundamentals

    Chinese Yuan an Unlikely Reserve Currency

    As the world's second largest economy, China's challenge to America’s dominance includes a push to make the yuan (RMB), the world’s reserve currency. Whether it can do that now is unclear.
  7. Economics

    How Currency Enforcement Helped Sink The Trans-Pacific Partnership (TTP)

    One particular barrier to trade that has received much attention of late and caused delays in negotiations of the TPP is exchange-rate manipulation, by which a country artificially devalues its ...
  8. Forex

    Top U.S Forex News Sites

    Breaking news moves forex markets. Here are the top U.S. sites for tracking forex news.
  9. Investing

    Financial News Comparison: Bloomberg Vs. Reuters (BAC, GOOG)

    Access to financial information has grown with the expansion of digital news. Bloomberg and Thomson Reuters lead the pack, claiming a majority of the business information market.
  10. Economics

    Who Benefits From South Korea's Lowered Interest Rates?

    South Korea is the latest country to cut interest rates in an attempt to stimulate economic growth.
Trading Center