Forex Focus  |  MAY 2008

Forex Focus: Allied Currencies by Alexander Sabodin

Forex Focus: Allied Currencies by Alexander Sabodin When trading, who or what can be your ally? Working in the financial markets as a trader can be fascinating, considering it gives you the opportunity to earn money and do so independently. You can trade from anywhere in the world with the help of a computer and the Internet. But any medal has its reverse. Such types of jobs come with their fair share of risks. First of all, there is the danger of losing money. Second, the responsibility of making the buying and selling decisions is entirely on your shoulders; you can’t depend on anybody else. You are essentially on the battlefield alone and fighting your enemies alone. In any battle, you should have allies that help you make the right decisions and keep you away from making the wrong ones, or at least you hope that is the case. When trading, who or what can be your ally? Believe it or not, a tradable that is correlated with another in terms of price movement can be. ALLY CURRENCIES In the foreign exchange market, the USD/CHF currency pair is an ally to the EUR/USD pair. The economics of Switzerland are closely connected with the economics of the countries of the European zone, which is not surprising given that Switzerland is located in the central part of Europe. In addition, if you look at the charts of these currencies with respect to the US dollar, they look like mirror-image twins. Our tactics are relatively simple. If these two currency pairs move synchronously and give confirming signals, we consider it a strong signal and open a position. If we get a signal from one currency pair and the second pair doesn’t provide a corresponding signal, we stay out of the market until we get a confirmation. That’s all there is to this system. HEAD & SHOULDERS Let’s consider two neckline breakthrough signals on the EUR/ USD (Figure 1A) and USD/CHF (Figure 1B). The first breakthrough is fake; it is marked by the number “1.” In a situation like this you could give into emotions and start selling EUR/ USD (pay attention to the long pin), but the USD/CHF told us a different story. These conflicting signals kept us out of placing a trade. In a few days, the USD/CHF breaks the neckline. This is marked by the number “2.” At this point, I don’t have complete confidence to open a position in the EUR/ USD since it lags behind the USD/CHF. If on the next trading day the movement continues in the same direction, then I would consider opening a position.

by Alexander Sabodin