For many folks, trading currencies is out of their comfort zone.

So they stick with something they already know, like stocks.

But ignoring the foreign exchange (forex, FX) market can be a mistake. Those folks are missing out on some great opportunities.

Last year, my Currency Wizard advisory generated a 42% return.

Compare that to the -1.1% return of the Eureka FX Hedge Fund Index. That index gauges the performance of nine leading forex hedge fund managers.

By any measure, that’s a huge difference.

Our outperformance is due to my decades of trading the currency market. That success is one reason Jack Schwager featured me in his book, Hedge Fund Market Wizards.

So today, I want to share my knowledge by running through a recent trade we did in Currency Wizard…

A Bullish Setup

People find currency trading confusing because there is so much data to digest.

Commodity prices, interest rates, and inflation can all impact currencies. In fact, any factor that will affect the economy – including politics – can bleed into currency prices.

But at its heart, a forex trade is simply a bet that one currency is going to outperform another.

Our trade earlier this month backed the U.S. dollar (USD) against the Japanese yen (JPY).

Take a look at the chart of USD/JPY below. (Note that if the price is rising, that means the USD is rallying against the yen. And vice versa.)

USD/JPY Spot Price

Source: eSignal

In this trade, there were several bullish signals in play…

First, USD/JPY was in a long-term uptrend.

The 10-day Moving Average (MA, red line) was tracking above the 50-day MA (blue line).

(The current leg of this uptrend dates back to March 2022 when the Federal Reserve started to raise rates.)

But that by itself wasn’t enough to trigger a trade.

So we focused on shorter-term signals as well:

• The Relative Strength Index (RSI) had just bounced and rallied off support (orange circle). This showed buying momentum had turned positive and was climbing.

• The USD/JPY bullishly reversed higher after touching its 50-day MA.

Beyond that, a raft of fundamental factors stood behind the trade.

In particular, interest rates…

It’s no coincidence that this current uptrend began when the Federal Reserve started raising rates in March 2022. Money flows to where it can get the best returns. That, in turn, drives up that currency.

The Fed raised rates 11 times by a full 5.0% (up to 5.25-5.5%) while Japanese rates remained practically dormant. The Bank of Japan (BOJ) increased rates from -0.1–0.0% to 0.0–0.1% in March this year.

This was its first and only rate rise in 17 years.

That added a big tailwind to the USD.

This growing difference in rates caused the USD to appreciate 40% against the yen since March 2022.

Inflation was another big factor behind our trade.

Strong economic data saw the market steadily walk back rate cut expectations in the U.S. this year from seven or eight to just one or two.

That added further strength to the USD.

Meanwhile, factory output data in Japan slowed dramatically with its worst quarter since COVID.

When a Setup and Fundamentals Align

These factors all combined to trigger our USD/JPY trade. We bought the USD in anticipation of its rising against the yen.

Our entry price on May 3 was 152.86.

As you can see on the chart, the trade went our way right from the start…

Take another look:

USD/JPY Spot Price

Source: eSignal

USD/JPY continued to rally, fast approaching our target level of 155.86.

Our trade was already in good profit when USD/JPY reversed off its highs of the day (just below our profit target level).

So we decided to bank our profits early… We exited the trade on May 8 at 155.60.

The trade lasted just five days.

To understand our profits better, think of this trade in terms of the USD.

At the entry of our trade, you could exchange $1.00 USD for 152.86 yen. Five days later, $1.00 USD had increased in value. You could now exchange it for 155.60 yen.

This enabled us to generate a handy 1.8% return in less than a week.

A 1.8% return might seem small on its face…

But if you make 1.8% over five days and repeat that trade over the year’s 252 trading days, you’d be up 90.7% over the year.

That smashes the return of any index.

And it shows the kind of rewards on offer for trading currencies if you can stick with it. It’s these kind of yearly returns I aim to bring my Currency Wizard subscribers – so I’d encourage you to check it out if you’d like to learn more.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict