Confused markets create trading difficulties

By Kathleen Brooks, Research Director

Forex.com

So what is making everything so hard? On the one hand we have a sovereign debt crisis gripping Europe. The EU's leaders don't seem to be willing to agree on a solution and now the very existence of the Eurozone seems to be under threat. Also the US could be about to default in two weeks if the politicians in Washington don't come up with a plan to lift the debt ceiling, which is already a whopping $14.3 trillion.

Add to this the Libyan crisis and a slowdown in China and you have the recipe for disaster. Basically, the markets are confused. The euro should be falling, right; because of the sovereign debt crisis and especially now that Italy and Spain have been brought into the fray? Well, yes and no, the euro has shown incredible resilience versus the dollar, but has reached record lows against the Swiss franc. So you will only make money selling the euro if you managed to pick the right pair to go short.

The dollar is another example. Its status as a safe haven has been all but eradicated in recent years, yet if there is any good news from the current political discussions between the Republicans and the Democrats, for example, if they reach a deal on the debt ceiling - then the dollar falls. Instead of boosting the dollar, traders continue to sell it as riskier currencies like the euro, the Aussie and the Kiwi dollars all rally.

Confused markets are the scourge of traders. They can eradicate gains and make you doubt yourself. They are definitely not the place for fundamental traders. You may have spent hours weighing up the economic data, reading every article you can get your hands on, yet you still can't make money.

Expand your FX trend indicators list

This is when traders need to add some new tools to their kit. Technical analysis is about the best defence you have to combat confusion in the market place. Let's take EURUSD as an example. Rather than cloud your mind with 10 arguments why the euro should fall (all could be correct, by the way) take a look at the charts. A daily price chart of EURUSD would show you that the pair has been trading sideways for a while but remains in a long-term uptrend above 1.4000. Right, but what about the short-term?

This is when you need to do your research. Pivot points, relative strength indices (RSI) and moving averages will come in very handy to help you follow choppy markets. Any internet search will give you a brief explanation on all three indicators (and there are plenty others to use if you get a taste for it). Essentially moving averages and pivot points use average price data over certain time periods, while the RSI is a good indicator of trend.

In the short-term you may want to surrender your trading powers to the technical indicators to try and navigate these markets. For example, if EURUSD is trading below its pivot point, it may only drop another 30-40 points, before having a pull-back, then trading sideways and then moving lower once more.

These technical indicators aren't perfect, but they do give you an unbiased look at price movements, away from the headlines and contradictory newspaper reports. But for those who have been burnt recently and find the markets a little too hard to bear, take a step back. There is nothing wrong with not trading for a day or two to clear your mind, before hopping right back on the band wagon.

Alternative trades

An alternative to currencies to trade is gold. It has surged in recent weeks, and some big trading houses are now predicting further gains towards $2,000. When the US and Europe look like they are going to be struggling for some time to come then the precious metal is likely to remain in demand.

Or you could follow China's lead. The world's largest foreign owner of US Treasuries has recently slowed down its purchases, which suggests it is keeping its money in cash (or masses of FX reserves) until the current problems pass.

The current markets are tough to predict, but if you are armed with the right knowledge then you can still protect your gains.