Grexit? How We, Forex Traders, Can Take Advantage of The EURO Crisis
“Grexit” is an ugly term for Greece department from the EURO zone. Now what is even uglier is that it may become a reality. Read on to learn how the upcoming election in Greece will affect the situation, what can happen and how we, forex traders, can take advantage of it.
Scenario 1 – The radical coalition “Syriza” wins, and payments to creditors will be stopped
Alexis Tspiras (leader of the Syrizia coalition) made a lot of promises before the election. He didn’t get tired to repeat, that in case his party wins the election, Greece will stop fulfilling the agreements with creditors. However, the question “Will it really happen?” cannot be answered even by top economists. I doubt it and believe he will be forced to make compromises. Otherwise, there will be not much left to govern for him.
But still, there is a realistic chance that it happens.
Now, let’s take a look what will happen if this scenario takes place
G7 central banks would intervene heavily and build up a firewall to support stock markets and the EUR. However, there is a great chance that this firewall will be insufficient, and my analysis suggests that the EUR can drop against the USD to 1.2000 under this scenario.
How to take advantage of it
If it happens, I will build up rather large short positions on the EURUSD and some long positions on USDCHF. However, the long positions on USDCHF are rather risky, as I expect the Swiss National bank will try to keep the CHF as low as possible.
Scenario 2 – The conservative coalition wins the election
Well, in this case not much will happen directly after the election. However, it won’t make the economic situation easier at all, and the big chaos will not take place. At least, not immediately. The conservative coalitions will renew their promises, that they will fulfill all contracts with creditors, and that they will do whatever it takes to make sure everything is alright.
What will happen?
It’s difficult to say, because a few weeks ago when it was clear that there would be a new election, traders already started to price in a possible exit of Greece from the EURO zone. Probably, we will see some price moves in both directions followed by a larger move as soon it is easier to foresee what will happen next.
How to take advantage of it
As Greece in any case will need further financial support, the EURO will lose against the USD, but it might not happen directly after the election. May the EURO will even gain some strength in the short term. As long as the price does not move clearly south, or north, I will stay on the sideline until it’s clear where the price moves.
Scenario 3 – Uncontrolled “Grexit”
In case political leaders and central banks fail to make the right decisions or react too late, a disorderly Greek exit can take place. It would result in a complete chaos and excessive volatility across stock markets and the foreign exchange market. Nobody really wants this scenario to happen, because nobody can predict what happens after. The end of the EURO? Recession? Another financial crisis 2.0?
What would happen?
If it really happens, the bottom would be completely out. Sure, central banks would try to intervene as much as they can, but they could not stand their ground. The sell volume from all sort of market players would be simply too massive. I deem this scenario less likely to happen than others, but if it takes place, we may see the EUR at 1.0000 against its major counterpart – the USD.
How to take advantage of it
Though, it is not 100% morally correct to take advantage of such a forex apocalypse, I would probably take a mortgage on everything I own to build up massive short positions against the EUR.
Whatever happens after the election, it will cost taxpayers a lot of money, because Greece will in any case need further financial support. And it is not only Greece, who will need more money. Spain and maybe even Italy will need large financial support too. As I hope the political leaders will be able to make right decisions, I am not completely certain that they will.
If you have a possibility, take advantage of EU zone crisis and make money. I know I will!
When central banks step in the market, we might see massive and very sharp price movements. I am certain that when they start to intervene, they will come out with both guns blazing to make sure market players understand their message “We are here to hold our ground.” But will they be able to do so? Probably yes, but keep in mind that one of us, forex traders, managed to break the bank of England.
In other words “Everything can happen.”
Advice for my clients
Election is on Sunday, which means when the market opens everything will be very chaotic. My advice is to keep Shark 7 and Thor II disabled until the city guys step in the market (London open). Further I recommend you to decrease the risk per trade. Though, both systems can handle high volatile conditions and will disable trading temporarily in case things get too wild, we might see unexpected price gaps from up to 100 pips, which might be difficult to handle.
If you use ProFx 2.0, trade only with the market and ignore counter trends. Place stop orders with the initial order (or immediately after, in case your broker does not allow you to place them at the very same time). As great volatility is expected, I recommend increasing SL and TP levels by at least 100%.
I strongly believe next week will be very interesting to trade forex. I wish you to get your piece of the cake as much, I wish to get my. Now, I have to go. I have to transfer some more margin to my broker accounts.