Traders are selling US dollars. Here's why.
Extreme highs in US dollar pairs are causing contrarian traders to short USD. Learn how historical price action is guiding this trend amid current extremes.
Key points
- 77% of IG traders in USD/JPY hold short positions after +14% gains YTD
- 82% of IG traders in AUD/USD hold long positions under 0.6400
- Timing is meaningful to historically mean reverting markets
Will price extremes revert to long-term averages?
Above 149.00, USD/JPY is through YTD highs and closing in on 30-year highs above 150.50. AUD/USD is back under 0.6400 hitting a year-to-date low. As a result, client sentiment is favoring a reversion off of extremes with 77% of clients short in USD/JPY and 82% long in AUD/USD.
Traders are taking a contrarian stance because historically, foreign exchange markets are mean-reverting. Under this hypothesis, when pairs are at extreme levels one can anticipate a reversal toward longer term average prices. Even so, the time horizon for any reversion can vary greatly which is especially important to consider when trading leveraged products. For example, when AUD/USD was at 0.6400 last October, it fell lower to 0.6200 before climbing back toward 0.7000.
How to trade US dollar
- Open an account to get started, or practice on a demo account
- Choose your forex trading platform
- Open, monitor, and close positions on USD pairs
Trading forex requires an account with a forex provider like IG. USD pairs can be found in IG's platform under the 'USD Pairs' pairs tab. Many traders also watch major forex pairs like GBP/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.
You can help develop your forex trading strategies using resources like IG’s Trading Academy. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.
Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing.
This information has been prepared by IG, a trading name of IG US LLC. This material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. No representation or warranty is given as to the accuracy or completeness of the above information. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. See our Summary Conflicts Policy, available on our website.
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