What Separates Stocks from Currencies
Trading currencies is different from trading stocks. Largely because trading currencies is a zero-sum game – when one currency goes up, another must go down. Correctly identifying key turning points between currency pairs is vital to making money in this market.
So being bearish in the currency markets is no great transformation. That’s just the way it is and the way it will always be.
Something both asset classes do have in common, however, is an extensive futures market – covering individual currencies and major stock indices. Whether you’re trading currencies on the spot market or shares of individual companies on exchanges, there is valuable information to be gleaned from the futures markets.
I particularly like to look at open interest. It signals sentiment extremes which can sound the alarm on new trade set-ups. That’s because sentiment extremes tend to reflect levels at which a trend may have reached its end – the most profitable point at which to enter a trade in the opposite direction.
Open interest is simply defined as the number of open futures contracts on an underlying currency or index. When the number of open contracts becomes lopsided toward either the long side or short side of a trade, it’s likely that an extreme in sentiment has been reached. That’s when you should prepare for a shift in the other direction.
And since open interest is measured historically, today’s levels can be compared with the level at another point in the past. Additionally, day-to-day swings in open interest could be near-term tip-offs.
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