EUR/USD: Is a bottom in place?
- Being a contrarian trader is never easy, but EUR/USD might offer a great setup
- A falling wedge pattern encourages bulls to take a position
- The margin for error when buying the EUR/USD is very slim, so money management is paramount
Europe and the euro are in trouble. How else can anyone call the circumstances, given Russia’s invasion of Ukraine, the ongoing energy crisis, or the upcoming Italian elections?
All these factors, and some more, generate uncertainty in financial markets. Therefore, the common currency, the euro, had a hard time bouncing from the lows.
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Under such pressure, the safest play was to stay short the euro. But no matter how you look at the euro, some signs of a possible bounce cannot be ignored.
How about the EUR/USD? Is it time to go long, or is it safer to keep selling every bounce?
A possible falling wedge should warn bulls
Starting with the technical picture, some reversal signs already exist. A possible falling wedge pattern points to an upcoming reversal.
Because a falling wedge can also mislead. Sometimes, a so-called falling wedge pattern ends up as a running triangle – a continuation pattern in the underlying trend’s direction.
For it not to be a running triangle, the bottom must hold. Hence, the current lows in the EUR/USD exchange rate should act as a line in the sand. More exactly, as an invalidation level.
Should the market break those lows, the bullish wedge pattern gets invalidated.
But can the EUR/USD move lower still?
Is it a good time to be a contrarían?
Sure it can. After all, anything is possible in the FX market.
Nevertheless, many traders prefer to take a risk and try to pick a top or a bottom. These are contrarían traders.
Having a contrarían opinion is great, as long as the market follows. This way, the trader may actually pick a top or a bottom.
In reality, such a trade is way riskier than others. So to avoid being caught in the wrong direction, contrarian traders use smaller positions to bet against the underlying trend.
What can go wrong?
The margin for error when being a contrarian trader is so small, that even the slightest market move should force the trader to cut losses. In this case, if the EUR/USD makes a new lower low, thus reinforcing the bearish trend, then the falling wedge pattern is invalidated.
Bulls should be aware of the risk involved in buying here. But so should be bears, as the EUR/USD’s inability to make new lows should attract more contrarian traders.