Over the past couple of weeks, I’ve been sharing some trades I’ve done with my One Ticker Trader subscribers.

By trading the Nasdaq and Dow Jones, we’ve been able to generate quick profits with mean reversion – a strategy I’ve been using for decades.

Put simply, when a stock or index overextends in one direction, it’ll snap back the other way like a rubber band.

And it’s in that snap-back (or reversal) where we look to capture profits. With One Ticker Trader, this strategy has helped us bank nine winners in a row.

Today, I’m going to show how we used mean reversion in another of my trading services, The Opportunistic Trader.

This time, we traded the euro through the Invesco CurrencyShares Euro Trust ETF (FXE) for a blended 37.7% gain in a week.

So how did we approach this trade?

The Rationale Behind the Trade

One of the key drivers of currencies is interest rates.

With the Fed jacking up rates all year, the U.S. dollar has become much stronger against other currencies… like the euro.

However, with inflation data coming in lower than expected this month, the market’s narrative began to change…

The market started to factor in a Fed pivot from a hawkish tone to a more dovish one…

Currency traders started to believe the Fed might ease up in the number and size of future rate rises – something that could weaken the U.S. dollar.

As you can see in the chart below, that story saw FXE (the euro) counter-rally against the U.S. dollar through November…

Invesco CurrencyShares Euro Trust ETF (FXE)

Source: eSignal

However, the narrative driving the rally wasn’t showing up in Fed Fund rate expectations. In the next few months, most still expect a cumulative 100 basis point rate rise.

Plus, there were two other things the chart was telling us…

1. After opening higher on November 15, FXE retraced lower throughout the day. That told us that after FXE’s bounce, the price action wasn’t following through.

2. The Relative Strength Index (RSI) was also showing us that FXE was overbought (red circle) and vulnerable to a pullback.

Based on those factors, we entered a short position on November 15 by buying put options on FXE. Note that a put option’s value increases when a stock price falls.

Then, as the RSI reversed out of overbought territory (upper grey dashed line), FXE made lower highs over the following days and closed each day at a lower price…

Fine-Tuning Our Exit

On Monday, November 21 FXE gapped down. Our trade was profitable, and we closed out half our position for a 47.5% gain.

Take another look at the chart…

Invesco CurrencyShares Euro Trust ETF (FXE)

Source: eSignal

We decided to ride this trade longer because we thought a bounce in Treasury yields could push the euro another leg down.

And since we were well into profit territory, we had some space to test if the trade would continue in our direction.

However, another leg down failed to materialize… Yields continued to drift, so we closed out the remaining half of our put options the following day for a 27.9% gain.

All together, we were in and out of the FXE trade in a week for a blended 37.7% gain. And with that money banked, we were ready for our next trade.

As always, I want to be clear that we generated this return by using options.

However, this trade shows yet again that by sticking to mean reversion, we can go into the market and regularly pull out quick and tidy gains.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

P.S. Options can give us multiple ways to profit no matter what the market is doing. That’s how our returns in The Opportunistic Trader are beating the S&P 500 this year by 163%.

And it’s how another of my services, The S&P Trader, puts $1,145 in traders’ pockets on average each month…

In this volatile market, that can make a big difference. That’s why I recently gave an interview explaining how we achieve this. To watch, you can find it right here.

Reader Mailbag

In today’s mailbag, S&P Trader member William shares his thoughts…

Thank you, Larry and staff. I’m only in on two of your recommendations, and both were winners. You are restoring my faith in this service. Last week restored my faith to a degree. But still down for the year.

– William

Thank you, as always, for your thoughtful comments. We look forward to reading them every day at feedback@opportunistictrader.com.