Less than 2 weeks ago, we closed out our 2 USDNOK short trades for a good profit after being bullish the Norwegian krone against the dollar for an extended period of time. In the following week, we initiated a long position on the same pair, expecting a bounce from our entry price.
You may be wondering why we did not immediately publicize this on our trading journal. That's because we were incredibly busy and had little or no time to put out another piece on such short notice.
On 2 May 2016 (last Monday), we went long USDNOK at a price of 8.0350. Less than 42 hours later, the long trade was closed out for a profit of 1,120 pips, or +1.39%. In this piece, we talk about this trade, why we flipped from being bearish to bullish USDNOK, and how we managed to do it on such short notice.
Before we continue, it is important that you understand all of the trading content we put out on these pages are real trades on a real account that we trade ourselves. We're using real capital and trading live prices. You can find out more about our trading system here. You can also view our entire trading journal here. In publishing such articles, we want to help traders from all walks of life better understand how successful traders approach the markets, and translate ideas into actions.
Trade & technical details
As mentioned earlier, this particular long trade on USDNOK was a relatively quick trade, especially compared to the 4 weeks our previous shorts were exposed in the market. This is primarily due to our objective for this trade, and also because prices went very quickly in our favor (big impulsive moves).
In the chart complex below, we have spelt out the technical and trade details and will therefore not be repeating ourselves here. We will however note that this long trade was highly technical in nature and was motivated by factors such as positioning and technicals, instead of fundamental forces like our previous shorts on USDNOK were. There was almost no fundamental basis to this trade.
We warned about the dollar
Before we go deeper, recall that we were bearish USDNOK for more than 2 months prior to last week's long trade. We documented our reasoning and bases in our first trading piece on this pair, so please read that for a memory refresh and better contextual understanding.
As mentioned in the last section, our long trade had almost no fundamental basis and was purely motivated by market positioning and technicals. This is important for readers to understand because it helps define why we we able to flip from heavily short to heavily long the dollar against the krone, and do so in a matter of days with little deliberation.
On our official Business Of Finance Facebook page, we were publishing content which preempted followers on a possible strong impulsive move higher in the U.S. dollar. A capitulation of dollar shorts, so to speak. Our warnings came true.
On that Monday itself when we initiated our USDNOK long trade, we published the following chart which we have attached below for reference. This particular chart outlined why we had strong reasons to be short term (or even medium term) bullish the U.S. dollar, and therefore bearish most other assets (currencies, precious metals, commodities, risk, ect...) which had been heavily bought against USD in the weeks and months running up to May.
This is what we call a strong combination of technicals and positioning; both potent forces which have full ability to violently move markets very quickly. Regular readers will know that we pay great attention to these factors whilst having a good idea about the fundamental environment in which the markets trade in. This approach was beautifully exemplified in this trade.
The USD (proxied by the U.S. dollar index) had been one of the worst performing global assets YTD, having being sold by the market on the heels of a myriad of reasons, including but not limited to a deterioration in U.S. macro data, and a noticeable shift in Fed language.
Bearish momentum in the dollar bred short positioning and exposure on the greenback and longs in other currencies (the focus on discussion) and assets.
The long basket included EMFX (Turkish lira, South African rand, Mexican peso, and the likes), a couple of DMFX which, until the drawdown in USD performance started, were heavily shorted (GBP, AUD, CAD, and EUR). The precious metals complex was also a heavily longed asset class during this year's dollar underperformance, and that has been reflected by the surge in gold and silver prices (both on the top 5 list of best performing global assets YTD).
Cutting to the chase, what we had was a market that was heavily short the dollar, and long other aforementioned assets.
In fact, according to the latest CFTC COT report, large speculators (momentum chasers) were the most net short USD since 2013! When positioning reaches such extreme levels, we take note. Adding credence to our argument for a short to medium term (at the very least) bounce in the USD was the record net long positioning on silver futures by large speculators.
Traders have never been more bearish the dollar through their positions in a very long time. This is the definition of a crowded trade. We wanted to capitalize on any sort of short squeeze.
In our eyes, the confluence of strong technical support on the U.S. dollar index (USD proxy), technical resistance on gold and silver (PMs in general), and extreme market positioning (crowded trades) was an incubating ground for a sharp rebound in dollar performance.
Fast forward 10 days, we saw exactly that. While the charts presented in this piece do not cover the price action beyond last Wednesday, any active trader and market participant will know that last week saw a very strong and impulsive up move in USD. Currency pairs which had been trending strongly in the dollar's disfavor, reversed their respective courses abruptly.
This led to the eventual (but expected) capitulation in short dollar trades, including shorts on USDNOK. Oil prices also took a moderate hit (higher dollar, lower commodities), further weakening the NOK and propelling USDNOK higher.
This has been a brief explanation of why we were willing to flip from short to long on USDNOK within a matter of days. It makes logical sense given the context that we provided ourselves with, and worked out brilliantly.
The most important takeaway for traders and investors is the concept of not falling in love with any position or bias. The markets make it too easy for us to fall into this trap, especially when old trades or positions have been highly profitable and are deep in the money; it's psychologically hard to exit large winners and flip the other way.
The ability to turn on a dime, when presented with new information, or when your trading system or methodology tells you to do so, is an instrumental skill good traders have. It is also an ability that is difficult to learn.
Once again, subscribers to our Premium Signals Service were kept updated in real time on all of our positions and had exclusive first hand insight to our trading activity as it unfolded. Many of them were short USDNOK with us and have profited heavily as a result. Congrats to those that did!