Before using the strategy, you need to understand the conditions in which the market operates.
If you enter the market solely to make money, you will lose it. In order to get something from the market, you need to be able to develop along with it. When conditions change, strategies that previously yielded results stop working. A typical example is trading robots. In history, they demonstrate tremendous effectiveness, but in reality, they are not so good, and their use often leads to a loss of deposit. Just the conditions have changed. The market is developing, but you are not. Is it any wonder that money flowed from your pocket into someone else’s?
Everything is constantly changing in the market, but it continues to obey economic laws. To understand the conditions under which you trade, you need to try to answer a few questions:
- At what stage of the cycle is the economy?
- is it slowing down or accelerating?
- what will central banks do?
The longer the business cycle, the more likely it is to end. At the slightest sign of a slowdown in GDP, the central bank can lower interest rates, which is a bearish factor for any currency. On the contrary, accelerating the economy is an occasion to tighten monetary policy and strengthen its course. Why is the principle of a “strong economy – strong currency?” The basis of fundamental analysis? Because only a strong economy can afford high-interest rates, like a magnet attracting investors. After all, you will begin to place money in a bank at 5%, if in the next they offer 10%?
Looking at the dynamics of the US GDP and the eurozone, you can easily understand why in 2017, the euro was actively growing against the US dollar, and in 2018 the situation turned 180 degrees.
Two years ago, the European economy grew faster than the US, but the massive fiscal stimulus and trade wars from Donald Trump radically changed the situation: US GDP accelerated, and its European counterpart, on the contrary, began to lose steam. The dollar strengthened significantly against the euro thanks to the divergence in the monetary policy of the Fed and the ECB, and higher Treasury rates than their counterparts from the Old World. Investors saw that the American economy is stronger than the European one, but in 2019 the situation changed again.
The depletion of the fiscal stimulus effect leads to the fact that US GDP growth rates return from abnormally high (almost 3% in 2018) to normal (2%). The states are ready to update the record for the duration of economic expansion (expansion), and the inversion of the yield curve signals the approach of a recession. In such circumstances, the Fed should lower rates, which leads to a weakening dollar.
Economic cycles and Fed rate dynamics
If against such a background, the eurozone economy managed to recover, and the ECB began to normalize monetary policy, then the euro could grow. Alas, the problems of the currency block are exacerbated by Brexit and the trade wars. A significant part of the demand for European products comes from Britain and China, so the slowdown in the GDP of these two countries places a heavy burden on Germany and its neighbors. When growth rates of both the American and European economies are reduced, the probability of consolidation of EUR / USD is high.
Thus, if 2017-2018 became years of a pronounced trend for the main currency pair, then in 2019 it tends to fluctuate in a limited range. The “buy and hold” principle does not work; trading strategies on recoveries bring losses. On the contrary, traders who are content with modest profits are in chocolate. They managed to change along with the market.