Anyone trading the Forex is aware of Carry Trades and how the JPY crosses trend in one way and then reverse in the opposite direction all at the same time.
Why is this occurring?
There are specific ‘pip’ levels that are reached where day traders buying in these crosses take profits every day. We can see that by the ’saw tooth’ looking retracements on daily and hourly charts. However, that is not the only time when profits or taken.
There are the longer term players in the market – the positional traders who are in their trades for days to weeks and the long term traders who are in their trades for weeks to months. These longer term traders also take profits, not on a daily basis but rather on a bi-weekly or monthly basis.
We have to be careful with our trades and ensure that if we are trading on a daily basis our stops are not getting taken out prematurely or worse, that our trades are not being entered just before these longer term players decide to take profits. In many cases the total forward movement in the positional and long term trades has gone 500 to 1000 pips or more.
When profits are booked on these positions what we are seeing has nothing to do with market fundamentals. It is merely that the bigger guys have decided to take profits and ’sell’ their long positions, the effect of which can blow the trending path backwards by hundreds of pips.
These longer term players create a ‘domino effect, causing ripples through the market, taking out stop losses at a torrid pace.
This is much like a ‘domino effect’ in which the larger trader, whether corporate,
institutional and private money sells his/her position and causes a massive ripple effect through the market; taking out stop losses one by one in a cumulative manner that ’snowballs’ and can last for about a fifth of the time or less than the time it took to build the initial previous movements forward. Profits are taking at torrid pace, and the subsequent pullback can happen far more quickly than it took to make the entire previous days or weeks forward movement.
We do not want to enter a trade just before a profit taking mode sets in.
How do we know when this will occur? There are signs on our charts of pending profit taking if we are careful to calculate historically how far the forward movement has had a habit of advancing prior to the big profit taking moves. This will allow us to judge whether it’s a good time or not to enter a trending currency pair.
The risk is not only to the Yen crosses however. When profits are booked on the JPY crosses it is often the case that profits will also be booked on the majors on similar longer term advancements. One might wonder why a major currency unit is losing so much ground in view of the strong fundamental data that has caused its strength over the
previous days or weeks.
This is a function of global economics.
The Japanese economy is tightly tied to the U.S. economy by vice or virtue of the fact that Japan, having an incredibly low yield on its Central Bank rate, is a highly favorable haven for financing U.S. debt abroad in the form of U.S. Treasury Bills. Aside from that, the U.S. is by far, Japan’s No.1 export market
For these reasons the USD and the JPY have become what I refer to as ’sister currencies’.
We will discuss macro-economic currency relationships such as this in ensuing articles.
Nonetheless, when the Japanese Yen strengthens on profit takes so too with the U.S. dollar strengthen. For this very reason we must be vigilant and respect the crosses and this relationship.
When the JPY strengthens, either due to macro economic fundamental reasons
or due to profit taking as previously discussed, so too will the U.S. dollar, most of the time.
Profit taking is a real risk in the market at all times. We need to understand why this occurs and most importantly when it occurs.
Jeff Langin is a successful Forex trader residing in Toronto, Ontario Canada. He is the founder of the 1000 Pip Club and 4XSuper Lights. http://www.1000pipclub.com Article Source:http://www.articlesbase.com/currency-trading-articles/profit-taking-in-the-forex-1479730.html