As the EUR/USD heads for the highest value in the history of fire, it would be wise to consider the possibility that the value may break down despite the latest extraordinary action by the European Central Bank (ECB). This may happen because the exchange rate is very volatile right now and could easily be affected by external events.
Most traders seem to believe that with just a tiny change in the EUR/USD exchange rate, the entire market can shift to another direction. The truth is that most currencies move in a predictable way so that there is little danger of a volatile price swing. What this means is that when a currency breaks down, the sellers will quickly take the hit and the buyers will be oversold and vulnerable to further drops.
As we have seen in the past few weeks, most traders fail to take into account that the EUR/USD exchange rate is so volatile and easy to manipulate. There is a lot of fear that is expressed when a market runs up and a lot of people rush to the market hoping to get in before the market moves away from them.
Instead of the “buyers” winning against the “sellers”, the market will likely continue to increase as the EM’s potential moves. Many traders have failed to understand that this is simply what happens in all markets.
Some may argue that an increasing price in EUR/USD will cause the FX markets to move into a rally as a result of the increased demand for the currency. This will encourage buyers to sell the currency for profit and if they are getting a good return on their currency, they may not mind doing this.
However, while the USD is always a profitable currency, when it reaches this high level, it also begins to create a large supply of the currency. If the supply begins to increase, then the price is likely to decrease.
At this point, the trade would be between buyers and sellers who can trade the EUR/USD for USD to profit even more. There is a much smaller risk involved in buying more than you can afford to sell, and the profit is larger because of the rise in demand.
By learning to recognize a safe level for trading, the trader may be able to know how long the EUR/USD can remain elevated. This allows the trader to realize when it is time to enter the market and know how long they need to wait before buying and selling.
Since the EUR/USD has been broken down in the past, many traders still believe that it is going to continue to perform well and remain above the other major currencies. But while the EUR/USD is at an elevated level, it is no longer a tradeable currency because of the dangerous drop offs of supply.
In fact, the only thing that can keep the EUR/USD at this level is global uncertainty. Once all banks stop debasing the currency and the ECB suddenly stops giving out free money, then the trade is over and everyone who took the plunge will lose most or all of their profits.
It may also end up causing a price swing in EUR/USD that is similar to the last “greenbacks” rally. While some currencies will continue to be debased, others will gain in value and some will suffer as a result of global monetary problems.
But right now, the EUR/USD is a hot commodity and is likely to continue to rise for the next several weeks. And remember, the key is to avoid jumping into a trade right now and to wait until a better offer comes along.