I often hear new traders state that they are buying a currency pair because the price is too low or selling a currency pair because the price is too high.
The GBP/AUD lows in October 2009 and January of 2010 were good examples. Many bought because they determined that since the market was at a 25-year low, it “had to” move up. If you look at a daily chart of this pair, you can see where there was a nice bounce up off of those lows.
Click to Enlarge
However, the fundamental picture had not changed. The only change was the number of traders who were convinced that the market had sold off enough and was due to rally. It did rally, but right up to a nice place to sell before the market moved through those lows to even lower lows.
This brings us right back to the title of this piece. There is no such thing as “too high” or “too low” when it comes to prices in the financial markets, unless of course the price is zero. There is a good reason that a market trades at 25-year lows, and until that reason changes, traders should assume that lower lows are in store. This may be the trend of the year, so we want to take advantage of these moves by trading with the trend instead of assuming that we can predict the end of the move.
So the next time you hear about a market reaching a multi-year high or low, don’t start looking for the end of the move. Rather, look for a place to jump on board in the direction of the move and ride it out for as long as possible. There is no telling just how long that move will last.
By Thomas Long of DailyFX.com
DailyFX provides forex news on the economic reports and political events that influence the currency market.
