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Busch: Currency Trade Reminder - Don't Put It On Unless It Lines Up

Beijing, China
Sam Diephuis | Getty Images
Beijing, China

Sunday's flash PMI report on China shows the importance of maintaining discipline in your trading strategies.

When I recommend trades for CNBC’s Money in Motion and in the Busch Update, I try to present a playbook for how to trade an event instead of just providing levels to buy or sell. Clearly, the FX markets are complex and have numerous moving parts to them that necessitate flexibility to remain profitable for traders. This is why you need several areas to line up to give you the edges to not only get the trade on, but also to have it be profitable. Here’s what I presented on Friday and here’s the link for the video:

Playbook for Sunday's HSBC PMI

10:30 PM ET on April 22, HSBC release their flash PMI for China.

This number reflects SME and is broader than the official China PMI.

It has been below 50 (contracting) for 5 months in a row unlike the official number that has been over 50 for last 3 months in a row.

MARKET IS SHORT AUD AND LOOKING FOR RATE CUTS. GOOD TIME TO FADE IT IF CHINA DATA SURPRISE TO UPSIDE.

Playbook:

  1. If HSBC PMI>50, THEN BUY AUD/SELL USD
  2. IF HSBC PMI<49, THEN SELL AUD/BUY USD

I THINK #1 HAS BEST OPPORTUNITY AND MOST LIKELY TO SURPRISE MARKET.

BUY AUD/SELL USD

  • ENTRY 1.0375 (CURRENT SPOT)
  • S/L 1.0290
  • T/P 1.0630

To be clear, I believed the market was short AUD and could’ve had a strong reaction to an upside surprise in the HSBC number. The Chinese PMI number was 49.1 and therefore the trade should not have been put on. On its own, the 49.1 was not enough to generate a reason to sell the AUD and the market actually bought AUD after the print. However, the consistent negative newsflow drove Risk-Off trading today led the market to sell AUD.

Overall, we must maintain the discipline to follow our trading strategies and ensure that they line up before we put our trades on.

Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a contributor to CNBC's Money in Motion Currency Trading.You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch .

Tune In: CNBC's "Money in Motion Currency Trading" airs on Fridays at 5:30pm and repeats on Saturdays at 7pm.

Learn more: The essential vocabulary for currency trading is on Key Currency Terms. Top strategies are broken down for you in Currency Class.

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