Before using a strategy, one needs to understand the conditions under which the market is operating
If you’re in the market only for earning money, you will lose yours. To get something from the market, you need to know how to develop simultaneously with it. When there’s a change in conditions, those strategies which used to be profitable are no longer efficient. Trading robots are a bright illustration of that idea. They are very efficient when analysed based on history, but in reality they don’t prove to be as good and the use of them often results in deposit losses. Just because conditions have changed. The market is developing and you aren’t. So, is it really a big surprise to see your money flow from your pocket into someone else’s one?
The market is constantly changing, but it is still subject to economic laws. To understand the conditions you are in, you need to try to answer a few questions:
- what is the current economic cycle?
- is the economy slowing down or speeding up?
- what will central banks probably do?
The longer an economic cycle is, the higher the probability that it will end soon. A central bank may lower interest rates at the slightest threat of a GDP slowdown, which is a bearish factor for any currency. On the contrary, the acceleration of economy is a reason for tightening and consolidating a monetary policy. Why is fundamental analysis based on the principle that a strong economy means a strong currency? Because only a strong economy can afford high interest rates, which attract investors like a magnet. You won’t place your money in a bank at 5% if a neighbouring bank offers a rate of 10%, will you?
Looking at the dynamics of the US’s and Eurozone’s GDPs, we can easily understand why the euro had been actively growing against the USD in 2017 and why the situation reversed in 2018.
Eurozone’s and US’s GDP dynamics
Source: Bloomberg.
Two years ago, the European economy was growing much faster that the US’s one but Donald Trump’s large-scale fiscal stimulus and trade wars changed the situation dramatically: US GDP accelerated while its European counterpart started losing ground. The divergence between the Fed’s and the ECB’s monetary policies and higher rates on US treasury yields consolidated the dollar against the euro. Investors saw that the US economy was stronger than the European one, but in 2019 the situation changed again.
The exhaustion of fiscal stimulus effect results in US GDP growth rates retuning from extremely high (almost 3% in 2018) to normal values (2 %). The States is ready to update the value of the longest recorded economic expansion while the inversion of the yield curve is signalling an upcoming recession. Under such conditions, the Fed is supposed to lower rates, which leads to the weakening of the dollar.
Economic cycles and Fed’s rate dynamics
Source: Bloomberg.
If the EU economy could recover and the ECB started normalizing its monetary policy amidst those conditions, the rate of euro could grow. Alas! The currency bloc’s problems are aggravated by Brexit and trade wars. Britain and China account for an important share in demand for European goods that’s why these countries’ GDP slowdown gravely affects Germany and its neighbours. When the growth rates of the US and EU economies slow down, the consolidation of EUR/USD is more likely to take place.
So, if the years 2017-2018 were those of a clear trend in the main currency pair, the year 2019 may make it fluctuate in a limited range. The “buy and hold” principle doesn’t work here and trading strategies based on recoveries are loss-making. On the contrary, those traders who are satisfied with moderate profits are in clover. They’ve managed to change with the market.
P.S. Did you like my article? Share it in social networks: it will be the best "thank you" :)
Useful links:
- I recommend trying to trade with a reliable broker here. The system allows you to trade by yourself or copy successful traders from all across the globe.
- Use my promo code BLOG to get a 50% deposit bonus on the LiteFinance platform. Simply enter this code in the appropriate field when funding your trading account.
- Telegram chat for traders: https://t.me/litefinancebrokerchat. We are sharing the signals and trading experience.
- Telegram channel with high-quality analytics, Forex reviews, training articles, and other useful things for traders https://t.me/litefinance
Price chart of EURUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
