How to Find FX Trades with a Larger View of the Global Economy

09/19/2014 9:00 am EST

Focus: CURRENCIES

Tyler Yell of DailyFX.com helps forex traders get into the mindset of seeing the big picture in terms of market fundamentals, set-ups according to the charts, and market sentiment, in order to always have a reference point when markets begin moving.

Building the Large View

Building the large view is all about finding one or two currencies that lead the pack and one or two laggards. The purpose of building the large view is so that you can always have a reference point when markets begin moving and can look to put a trade that is building momentum. Now, the risk in buying the strongest or selling the weakest is that you buy at the top or sell at the bottom but as a major trend reversal is rare, relatively speaking, and stops allow you to focus on momentum.

Learn Forex: A Strong Trend Is Hard to Stop

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Finding the Low-Hanging Fruit

Trading should not be made any harder than it has to be. To become a trader who turns a profit consistently often comes after you have battled internal demons and found a form of analysis that works well for you after dismissing the search for the Holy Grail. The way to make trading a less difficult discipline, it's best to find match a weak currency and sell those versus a stronger currency that you can buy. This combination is often a result of a clear fundamental, technical, and sentiment trend for both strong and weak currencies.

To find a weaker currency to sell against a strong currency, you can look at multiple crosses to see if the currency is getting beat across the board. For example, over the last few weeks, the Japanese yen has been beat across the board along with the euro. Similarly, to find the strongest currency, you can look across the board to find a currency that is beating its components. Currently, this example is the US dollar as the greenback is gaining versus the other majors, currencies like the AUD, JPY, EUR, GBP, and CHF.

Learn Forex: US Dollar Has Become the Leader of the Pack

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So far, we've discussed taking the large view so that you have a default set of currencies to look to buy or look to sell when the market starts moving. These default choices are based on what is clearly weak and what is clearly strong and not trying to buck the trend but planning on the trend to continue. Because we're trading and the future is uncertain, it's important that you have an exit plan or a pre-determined point where a strong currency becomes weak or a weak currency becomes strong and it's time to abandon your current lineup and readjust based on the current market internals.

My approach is to focus on a few key levels of support for a strong currency to hold on a few pairs or resistance on weak pairs. Should those levels break, you can easily see that the framework that you're trading from is changing. An easily adjustable way to identify a shift is with weekly pivots.

By Tyler Yell, Trading Instructor, DailyFX.com

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