The Never-Ending Euro Crisis Is Great For Trend Following

I am sick and tired of writing about the Euro crisis. I’ve written at least 50,000 words over the last 2 years on the euro crisis – the equivalent of a book.

I wish they would just solve the problem already – or split and go their own way. I can barely bring myself to even think about it anymore. I’m just tired of the slow pace of this crisis. It’s like watching paint dry. Still, I do like one result of the euro crisis – it’s been throwing money at Trend Followers for the last year.

The direct impact of the crisis has actually been quite small. There has not been a string of banks failing, no world wide depression. But for the euro Currency price movement, the crisis is more like an ATM than a reason to panic. Check out what it’s done for the Swiss franc.

Germany’s no-win Euro Crisis means win-win for Trend Followers

As traders, we only care about the price movement of the markets. We can’t make money on fundamentals, we can only make money on how the prices actually move. So what has the euro crisis done to the price movement? The euro crisis has two huge impacts on market prices:

The currencies are moving in near lockstep with each other

The price movements are largely reactions to political statements and actions

Nearly all of the “fundamentals” impacting the currency markets right now rely on political decisions. There are a few obvious ways to resolve the crisis, but none of them is pain free.

In every solution, there are winners and losers. But in nearly every case, Germany is a loser. Can you see the steam coming out of their ears right now?

Almost no matter what happens, Germany ends up worse off than it is today. And this gives us insight to why this crisis has lasted for over 2 years. Look closely at the table, and put yourself in Germany’s shoes.

Germany has no incentive to solve the crisis

Any solution to the crisis would probably be worse for it than what’s happening now. With the euro at 1.3500, the German export machine (exports make up 40% of GDP for Germany) does very, very well. So keeping the crisis going boosts the German economy while putting off the day of reckoning for its banks, or avoiding the possible inflation that might come from a solution.

How Trend Following makes a Killing on the Euro Crisis

Here is a question: Where is the euro today compared to where it was on Jan 1, 2011? The euro is within just a few points of where it started the year! That’s right – all of this worry, all of this market movement – and the euro is within 200 pips of where it started the year.

11 months of panic and front page headlines end up being a few hundred points of net change. But while the net change has been small, the path of prices has been downright juicy.

The early part of the year was very nice for medium trend followers (like TF101) in the euro. The current euro trade is working out well so far. These are huge, wonderful price moves. We’re glad to see them.

If you look back to the table of possible outcomes in for Europe, you can see the outcomes have massively different price implications for the euro itself. If Germany and France kick out Greece and Italy, the euro goes up to 1.8000 minimum, probably in a matter of a few weeks. If Germany and France leave the euro, the euro goes down to 1.1000 or even lower, probably in a matter of a few days.

That’s a 60% different in prices.

As different “solutions” become the current front runner, the euro moves in the direction of either 1.8000 or 1.0000. So in the current situation, the euro is moving lower, and the Trend Following 101 system is short. So far, so good. The trailing stop will tumble nearly 200 points next Wednesday.

We will see what happens, but so far so good. This trade seems like it has room to go much lower.

New Gold and Oil Trades: Will they be Trend Trades?

Well, we can’t tell yet. If your account is over $20,000, you should have had a new gold trade Wednesday morning. You’ll be long Gold.

You’ll also be long Oil if your account is over $75,000. I know – not everyone has an account this large.

Being long commodities in general is a good idea. I pointed out why we are looking at a Golden Age of Trend Following for the next 10 years. There is going to be a lot of money made being long commodities over the next decade.

Grains: Riding the Market Trend Lower

Even though being long commodities will be generally profitable, the trend-following system is nimble enough to catch down trends too. We’ve recently become short the micro-Grains, like Corn, Wheat, and Beans. The beans trade is really performing. Over the next few days, the stops will move down in Corn and Wheat as well. I am looking forward to these trades becoming profitable over the next few days.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.