Gabe Velázquez
Online Trading Academy
The emotions of fear and greed are clearly identifiable on a price chart if you know what to look for. This is important if we want to spot the traders that are usually selling at the lows of a move, or the ones chasing the market by buying just as the market turns down. In order to do this, we must learn what configuration, or pattern best represents these two emotions.
When looking at a price chart, most traders look at the overall direction of the market, and are conditioned to trade in that same direction. In certain market cycles, these tactics would be fine, however there is a time when a trend reaches a fever pitch and that’s when greed shows up on a price chart. The weekly chart of the US Dollar Index below illustrates that when a strong move (the picture of greed) comes into a large institutional sell order, the most probable result is that all the late buyers will simply have to suffer as the market retreats.
Over the last three months the US Dollar Index has been in an extremely strong uptrend and buying in this uptrend (early on) was very profitable, but as I stated earlier, knowing when the trend was likely to change is a function of market psychology. This entails looking for the last greedy buyer to enter the market. In this example this meant that supply was nearby.
As we can see on a lower time frame chart of the DXY, the picture of greed is seen a little clearer.
When looking for the fearful seller to buy from (especially when the market has been dropping for some time), the picture looks like the mirror image of greed,with one exception, the emotion of fear is much stronger. For a trader that understands this, it means opportunity.
On the chart below we can see that the Swiss Franc Futures contract has been a steady spiral downward. In addition, the majority of traders in this currency were probably short and very negative on the prospects for this nation’s currency to turn around.
Similar to the Dollar moving higher, moving to the short side of this currency early in the trend paid handsomely, but there’s a time when the pessimism is too much. This is when all the longs have given up and everyone is short, convinced that the currency is going to be worth very little. This tends to happen just as we approach a strong demand zone.
And just as before, in the smaller time frame we can see the picture that represents the fearful seller, or in this case then it may also be the last short seller that’s convinced the Swiss franc is going a lot lower
In the final analysis, trading profitably is a function of buying low and selling high, anticipating when the market will turn, and doing this with high probability. Knowing who’s on the other of side the trade, and what that picture looks like is part of this process. I hope this helps to better recognize this so that you can be on the right side when the market turns.
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Editors’ Picks
EUR/USD: US Dollar to remain pressured until uncertainty fog dissipates
Unimpressive European Central Bank left monetary policy unchanged for the fifth consecutive meeting. The United States first-tier employment and inflation data is scheduled for the second week of February. EUR/USD battles to remain afloat above 1.1800, sellers moving to the sidelines.
GBP/USD reclaims 1.3600 and above
GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.
USD/JPY gathers strength to near 157.50 as Takaichi’s party wins snap elections
The USD/JPY pair attracts some buyers to around 157.45 during the early Asian session on Monday. The Japanese Yen weakens against the US Dollar after Japan’s ruling Liberal Democratic Party won an outright majority in Sunday’s lower house election, opening the door to more fiscal stimulus by Prime Minister Sanae Takaichi.
Editors’ Picks
USD/JPY gathers strength to near 157.50 as Takaichi’s party wins snap elections
The USD/JPY pair attracts some buyers to around 157.45 during the early Asian session on Monday. The Japanese Yen weakens against the US Dollar after Japan’s ruling Liberal Democratic Party won an outright majority in Sunday’s lower house election, opening the door to more fiscal stimulus by Prime Minister Sanae Takaichi.
Gold: Volatility persists in commodity space
After losing more than 8% to end the previous week, Gold remained under heavy selling pressure on Monday and dropped toward $4,400. Although XAU/USD staged a decisive rebound afterward, it failed to stabilize above $5,000. The US economic calendar will feature Nonfarm Payrolls and Consumer Price Index data for January, which could influence the market pricing of the Federal Reserve’s policy outlook and impact Gold’s performance.
AUD/USD eyes 0.7050 hurdle amid supportive fundamental backdrop
AUD/USD builds on Friday's goodish rebound from sub-0.6900 levels and kicks off the new week on a positive note, with bulls awaiting a sustained move and acceptance above mid-0.7000s before placing fresh bets. The widening RBA-Fed divergence, along with the upbeat market mood, acts as a tailwind for the risk-sensitive Aussie amid some follow-through US Dollar selling for the second straight day.
Week ahead: US NFP and CPI data to shake Fed cut bets, Japan election looms
US NFP and CPI data awaited after Warsh’s nomination as Fed chief. Yen traders lock gaze on Sunday’s snap election. UK and Eurozone Q4 GDP data also on the agenda. China CPI and PPI could reveal more weakness in domestic demand.
Three scenarios for Japanese Yen ahead of snap election Premium
The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.
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