By Larry Benedict, editor, Trading With Larry Benedict
After a lost decade, the currency market burst back into activity last year.
Rapidly rising interest rates saw the U.S. dollar soar against other global currencies.
Last week, we looked at how the Fed’s tightening actions set off a near 25% fall in the euro. Then we followed that by checking out a euro trade that generated us a 37% gain in a week.
We also saw how the U.S. dollar’s rapid rise caused the Japanese yen to take a big hit. It lost around a quarter of its value last year.
Big moves like these can lead to outsized profits. However, there are plenty of smaller moves that can also produce tidy gains.
For example, let’s take a look at the trade we closed out recently on the Invesco CurrencyShares Japanese Yen Trust ETF (FXY)…
Top-Heavy Yen
On the left-hand side of the chart below, you can see where FXY bottomed out in late October after its massive fall.
From there, FXY rallied along with two bullish signals…
The Relative Strength Index (RSI) formed a ‘V’ and rose out of oversold territory (lower grey dashed line).
And the 10-day Moving Average (MA, red line) crossed above the longer-term 50-day MA (blue line). Both then trended higher…
Invesco CurrencyShares Japanese Yen Trust ETF (FXY)
Source: e-Signal
After rallying through January, however, FXY’s up move petered out when the RSI broke lower (orange line) from overbought territory (upper grey dashed line).
FXY’s fall accelerated as the RSI dropped into the lower half of its range.
Then, FXY bottomed out and rallied in March. The RSI again recovered from oversold territory.
This time, FXY peaked at a lower high. The RSI also rolled over, showing buying momentum was drying up.
This price action was hardly surprising given the yen had rallied over 6% from its March 8 low. That’s a big move for any currency in such a short time.
But beyond the chart action, we were watching other factors…
Rate volatility was ticking higher with the 2-year yield rallying off its lows. The yen looked top-heavy at those levels, especially if rising rate expectations started to factor back in. So, it looked vulnerable to a fall.
On March 27, we opened a short position on FXY by buying a put option. (Note that put options increase in value when a stock price falls.)
The trade went against us the next day. But FXY soon gapped lower.
Take another look…
Invesco CurrencyShares Japanese Yen Trust ETF (FXY)
Source: e-Signal
With inflation data coming in slightly softer than expected on March 31, FXY started to find short-term support.
To avoid the possibility of it rallying against us, we closed out our position by selling our put options for a quick 17.4% gain. That’s a tidy profit in just four days.
As you’ll also note, we generated this gain from a move that barely looks like a blip on the chart.
But therein lies the opportunity of trading currencies…
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A New Window of Opportunity
In this case, we generated this return in a short period by using options.
However, options aren’t the only way to trade currencies. You can also trade currency pairs directly.
And right now, that kind of trading is seeing a new window of opportunity.
All these rate changes… challenges to the U.S. dollar’s reserve currency status… and even the potential for a “digital” dollar release… have been creating swings that traders can profit from.
So, if you’d like to learn how forex works and the best strategies to trade with… I’m going to show you. This Wednesday, April 19, I’m holding a special event called “Currencies in Crisis.”
There, I’ll share my own experiences and strategies that I’ve successfully used to trade over $500 billion in currencies over my 35 years in the markets.
And with the currency markets offering the most potential I’ve seen in more than a decade… this event couldn’t be coming at a more opportune time.
So please plan to join me this Wednesday evening. You can sign up for this event automatically by going right here.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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