Anatomy of a FOREX Trade

In a recent post I mentioned how the New Zealand dollar was an attractive short trade. So today we're going to take a brief break from stocks and examine this trade idea, particularly since it helps illustrate how profitable FX trading can be.

First, let's look at the big picture. This chart spans about six years. The dotted red line indicates what I believe is a very strong resistance level (about .71, which is the ratio of the NZD to the USD). You can also see I've drawn a Fibonacci retracement series on this graph.


Looking at a shorter time frame (and remember, you can click on any graph to get a much bigger version of the image), you can see how NZD/USD marched from a little over .59 to .71 in the second half of last year. That may not seem like much, but in the world of FX trading, it's gigantic. So the basis of my suggestion a little over a week ago was that the tide was starting to turn on this huge move.


On a minute-by-minute basis, you can see how swiftly this currency has moved recently. Keep in mind the move over the past few days represents only a tiny fraction of the entire upward move. It really only went from about .70 to about .69, which on the surface seems like a mere penny.......virtually meaningless. But it isn't, as you shall soon see.


Below is a table of the profits from this trade. Simply stated, the profits were over 100% in just about a week. Not bad, eh? That's how much movement can happen in the highly-leveraged world of FX. Now, as you know, this cuts both ways. This trade could just have easily torpedoed the same amount of capital in just a short a timespan. What was operating in my favor, I believe was the core change in direction that I speculated was taking place when I made my recent post.


So what now? I have stepped aside for the moment and will wait for another opportunity to enter NZD/USD. There are no guarantees the price will bounce up again, but these markets don't tend to go straight up or straight down. They tend to bobble a lot, which is why it's important to have plenty of extra cash in your account in order to absorb the "margin shock" as the prices move. But if it pushes somewhat higher - like to .695 - I'd be happy to get back in and ride the next move down.

Speaking of moves down, just one stock I'd like to mention is NutriSystem (NTRI) which I suggested as a short very recently, on January 22nd. When I first mentioned it, the stock was at $65. In the short time since, it's fallen to $52, and I see in after hours trading it is losing even more ground, trading below $48 as I am typing this. You can imagine how much well-chosen puts would have soared in price based on this suggestion.


I'll see you tomorrow, after the Fed announcement!