4 Ideas for Trading Forex with ETFs

07/14/2011 7:00 am EST

Focus: FOREX

These ETFs give investors and traders simple and immediate access to some of the world’s major currency pairs, and all have compelling set-ups unfolding now.

Currency trading is being touted all over the financial media as the new game for investors to play. Get a foreign exchange account, slap in your $5,000, and leverage it up 50:1.

But like the “wild, wild west,” you could lose it all in one trade and then have to write a check as well.

I suppose you could do this, but there are currency ETFs that allow access to the foreign exchange markets through your current brokerage account, and four of them are set up for compelling trades right now.

Currency Shares British Pound Sterling Trust (FXB)

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The Currency Shares British Pound Sterling Trust (FXB) mirrors the pound sterling/US dollar exchange rate. It has been moving lower since making a high on May 1. Recently, it gapped lower and could not recover that gap on Tuesday (July 12).

With the Relative Strength Index (RSI) pointing lower and the Moving Average Convergence Divergence (MACD) negative, it looks to be headed lower still.

The first support area is at the 38.2% retracement of the move higher from May 2010 until May 2011 at $156.81 and then $153.93, a 50% retracement of that move, and then support at $153 lower.

You could short this with a stop at $159, or as I did on Tuesday, buy put spreads for September. I chose to buy the September 157 strike and sell the September 153 strike for a debit of $1.24.

Currency Shares Euro Trust (FXE)

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The Currency Shares Euro Trust (FXE) mirrors the US dollar/euro exchange rate and is breaking six-month support/resistance. Shorter-term support can be found at the 38.2% and 50% Fibonacci retracement levels of $137.23 and $133.69, respectively.

This can also be traded by shorting FXE or buying put spreads. I would suggest the 138/133 put spread for September, which closed at $1.62 earlier this week. (As always, be sure to check current pricing before executing any trade.)

NEXT: ETFs Tracking the Swiss Franc and Japanese Yen

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Currency Shares Swiss Franc Trust (FXF)

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The Currency Shares Swiss Franc Trust (FXF), mirrors the exchange rate of the dollar against one of the world’s strongest currencies, the Swiss franc. This ETF is set up to break out higher above resistance at $119.50 after breaking the $118.78 level. It has been in an ascending triangle pattern with a rising RSI and a MACD that is about to cross positive. The pattern breakout has a target of $126.50.

Currency Shares Japanese Yen Trust (FXY)

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The Currency Shares Japanese Yen Trust (FXY) mirrors the exchange rate of the US dollar against the Japanese yen. This fund is also breaking resistance over the $123.50 area. Unfortunately, it is also breaking above the top of the Bollinger bands, and, as exhibited by the blue circles (there are 17 of them), every time it has breached the Bollinger band, it has retraced back to at least the mid-line, if not the bottom band.

Taking the short trade at $124.25 and looking for the mid-line target of $122.43 or $121.13 at the bottom could turn a good profit. It is a break out, though, so keep Tuesday’s high as a stop.

By Greg Harmon of Dragonfly Capital

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