As we welcome 2021, it will be wise to look back at 2020 and gather our thoughts. Despite a challenging year for humanity, 2020 was relatively easy for forex trading. That is if you capitalized on the opportunities presented.
While it is always easy to comment on hindsight, the circled region of volatility was expected. If you followed my forex forecasts regularly, this was a period when uncertainty caused by the COVID-19 pandemic brought fear and risk aversion into the market. At the risk of sounding like a broken record, I cautioned against the assumption of trends. The telltale signs of alternate flips of red and green candles, coupled with the extended lengths, which indicated that the EUR/USD was trading beyond the usual range, gave us the red flag for caution. This was even more obvious in our premium analysis where we present color-coded information about the bullish and bearish weeks of currency pairs. In our premium correlation analysis, we could see the S&P 500 crashed and entered a period of increased volatility. This further showed the turbulent nature of the market.
If you navigated that period with strict money management and prudent trading, you would probably break even or even made some profit. Alas, should one persist with improper forex trading techniques of indifferent top and bottom picking or excessive risk taking, a margin call would not be a surprise. I feared this would be the case for many as our premium retail forex sentiment analysis suggested that many traders were entrenched in short positions, disregarding the obvious signs.
The period after the crash was much easier to handle. Except for a couple of consolidation periods, a bullish position would have made hundreds of pips. In fact, I congratulated our premium analysis subscribers in a few previous forecasts as many had harvested pips in the range of hundreds. Having said so, as always, one should not get ahead of one’s self. Nothing is guaranteed in forex trading.
From a sentiment point of view, 2020 proved to be the year that reminded us more than ever about the need to monitor global developments constantly. Forex trading goes beyond trading what you see on a chart. That information alone is insufficient as it lacks vital context. The intricate dynamics between the various financial assets and sentiment should be understood.
We know through media coverage that the crash in March was mainly because of the worsening pandemic. Death and destruction were out of control. Political tension and questionable medical response in the US exacerbated the situation. The country was not doing well in its fight against COVID-19. This probably led to the weakening of the USD as seen in the earlier phase of the EUR/USD climb.
As the world felt its way forward, lessons were learned and vaccine research gained traction. This contributed to the remarkable recovery of the stock markets. Industries positioned to take advantage of this new business climate such as technology, fueled rallies. As we approached the last quarter of the year, the vaccines were almost ready and by then, the EUR/USD was rising for another reason.
Risk appetite increased.
Money flowed from safer assets such as USD into riskier ones such as the euro. This led us into 2021.
You may be confused about why a currency rose or fell as it did, but ultimately the reason is very simple. The financial market is not dictated by charts or statistics. These are tools that attempt to make sense of what is happening. Sentiment is the major factor that drives the market. As long as the majority consensus towards a financial asset is positive, its price will go up because of demand. This is the reason why I employ a knowledge-based approach towards forex trading for the past decade.
The Path Ahead
With the COVID-19 vaccination underway and vaccine production capabilities being stronger than ever, investors are feeling upbeat. Many analysts predict a continuation of bullish conditions as long as the situation remains stable. A word of caution though, COVID-19 is still spreading and deaths are high. Vaccination will take many months or even years before we can see a significant improvement in the pandemic figures.
The recent appearance of COVID-19 mutations is a potential trigger point for risk aversion. The UK variant seems to be more infectious and if the numbers climb, investors may become apprehensive. This may lead to a reversal of the trends we saw for the past few months. Our premium correlation analysis has yet to show any significant signs of risk aversion but no one can predict tomorrow.
We need to remain vigilant of any market surprises and without doubt, proper money management is a must.
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