The escalating problems in the eurozone have caused money to flee in search of safe havens. As a result the single currency has fallen against most of its major counterparts. Since early May 2011 the euro has fallen by more than 16% against the US dollar and it’s a trend that shows no sign of stopping. This article tells you how to profit from the decline of the euro.
The trend is your friend
The phrase “the trend it your friend” is popular among many investors, however it is of particular significance to those employing a trend following strategy. Such traders do not try to forecast or predict specific price levels, they simply ride the prevailing trend until such time as it reverses.
Trend followers use a number of different technical tools to identify a trend and inform their entry and exit points. These include moving averages, trend channels, the Relative Strength Index (RSI) and the stochastic oscillator.
The charts below show the euro versus the US dollar and use trend channels to show both the longer-term trend (thick red and green lines) and the shorter-term trend (dotted lines).
A 2 year chart of the Euro [EUR] vs. the US Dollar [USD]
A 10 month chart of the EUR vs. the USD
Charts courtesy of fxstreet.com
The lower lines on the charts represent support while the upper lines represent resistance, and as you can EUR/USD has a tendency to move up and down within these channels. It’s by no means perfect – no technical indicator ever is – but these channels can be astonishingly accurate at times.
These charts show that both the long and shorter-term trends are currently negative for the euro. In addition the current price of 1.2429 remains well above potential support.
Those looking to profit from the decline of the euro should consider shorting the euro against the US dollar, and using the trend channels to provide entry and exit points. Traders could enter a short position now and place their stop loss at around 1.265, or alternatively wait for a definitive bounce off either a short or long-term channel.
In addition to monitoring the price in relation to the trend channels, traders should also consider watching the stochastic oscillator and the Relative Strength Index (RSI) shown on the chart below.
A 10 month chart of the EUR vs. the USD showing different technical indicators
Chart courtesy of fxstreet.com
If the stochastic oscillator begins to turn, and/ or the RSI becomes overextended to the downside, it could indicate that it’s time to cover your short position and go long.
In my opinion the best way to play the decline of the euro is via a spread bet with a company such as Finspreads or City Index. Incidentally both companies are currently offering a free trading credit to new customers.