Its going up, why are you shorting it?

Shorting euphoria.  Why should we do this?  I am often asked in the trading room why I am shorting something that is spiking “to the moon”.  I have to re-explain it every time.  We have often talked about how the market is a giant oscillator that rises and falls like the waves of an ocean or a tide.  Surely everyone knows the theme…. “buy low, sell high” and it works the same in reverse…. “sell high and buy to cover later.  The simple truth is that there are times that currencies are experiencing euphoria and SHOULD be shorted.  Think  about it like this. Price is spiking.  It is exhibiting great strength, we are up 9,10, 12 bars straight up on a 15 minute chart and price is so very far from the moving averages.  We must realize that there are traders that have gone LONG  hours or days ago (perhaps when price was really far to the downside) and they are searching for an opportunity to EXIT their positions with gains.  It is a simple truth, at some point supply WILL indeed overcome the current demand.  Somewhere, someone will recognize the current opportunity and take advantage of it.  I decide to join that party, it is that simple.

Take a look at ANY currency pair and study the hourly charts and you will see these oscillations of up and down. Its just too easy to see.  How many times do we have to look at it?  How many days of trading have to go by before we see this simple fact?  Looking at euphoria in times past…. ask yourself what were traders thinking as price was spiking to the moon?  Some were elated.  They were dumping positions and getting rich on the spike.  Some were fearful, for they were short and were getting squeezed and having to cover at higher prices as they got hurt.  Some were too afraid to short, or to start shorting because “its going to the moon”.  What can we see hours later?  What can we see perhaps 24 hours later?  Price has completely reversed and gone down considerably.  Happens all the time.

Look at this one hour chart below of the usd yen and see that this is just one example, I could give endless examples of this:

We can see the price on the left of the chart is too far from the MA’s. We were at a moment of yen weakness. It doesn’t last. Hours pass. We are now at a point of rapidly gaining yen strength, and price is getting very extended to the downside. We hit a 50% fib level of the last 2 day run.  We hit a 200 MA on the hourly. We hit a psych level (88.00)  What happens next?  Time goes by…. we are back into yen weakness and price has memory. We can see traders drove the price right back towards the top. just a few pips away from recent highs. Price is once again extended way to far from the MA’s and another sell off ensues.  The end result? well, HOURS later we break support, race right back down to the support level of 87 and attack it again.  This time it DOES NOT hold and we race towards the next figure (86.00)

So, my point is this… take an hour or 2 and study some charts either hourly or 15 min. and notice how often price gets into the 2 places:  Euphoria, or “panic selling”.  Look at the chart “signs” that price is exhausted. Notice the signals of reversal. What should we do when we are presented with these opportunities?  In my opinion, I need to look for places to buy when prices are way to cheap, and wait for the market to oscillate to the other side. Sometimes this can take hours, sometimes days.  In my opinion, I need to look for insane price spikes and build positions short and wait until the euphoria is over and price comes back down to earth.  DO remember that there are times we can guess wrong and price goes higher. So never do this with size that is beyond your means of handling. It should always be done in accordance of what you can comfortably handle so that you don’t get hurt.  This is an important key.  I always do this in small sizes so that if price continues, I can build in and get a better average price.   Thanks for reading and till next time happy trading.   Michael Storm.

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  • An enjoyable read, on an important technique – well done.
    mark m~~~

  • Gerarfx

    Thank you very much Michael, I learn a lot from you…and I much appreciate your way to analyze the market.

    The best for you.

  • shallom

    i have really learnt a lot from you and sophia great thanks to casey
    will join u soon

  • Guysud

    Merci pour ces bons conseils , malheureusement, je ne sais pas l'anglais suffisamment pour traduire correctement tous vos bons conseils , si vous pouviez le traduire en anglais serait le ciel , je n'ai pas de site FRANCE comme apprendre le forex me passionne, à l'aide votre ” prime ” je vais toujours la barrière de la langue . Guy (de France) .

  • Dkoster77

    That is all too true. As the saying goes, what goes up must come down.

    In this way, on the shorter time frames, your simple trading method has taught me well.

    However this does not always apply as in the case of longer term trading and trend trading. As an example we are presently seeing dollar weakness due to fundamental shifts. Hence in these instances if one has the stomach for high risk, as in daily term trading, one can catch a trade and ride the trend from one station to the next. Then as is the case they would be best served to manage the trade on the shorter time frames looking for the technical shifts that present themselves.

    We are presently seeing this with the EUR/USD and the USD/JPY for example.

    Micheal as you know I cherish your wisdom and knowledge and the gracious way you share it with us. Your teaching and writings have improved my trading a thousand fold. I am extremely glad that I signed up for your video programs on Trade On Track. And I feel blessed to have discovered Casey's Winners Edge Trading site.

    Best regards,

    Daryl Koster