FX Lingo: On the Backfoot

FX Lingo: On the Backfoot

[Post Date]      Barbara Rockefeller

Some FX analysts use the phrase “on the backfoot.” This is a British expression (from cricket) being adopted in the US and worldwide. What does it mean?

A currency is on the backfoot when prices are moving in a pronounced way in a downward direction. On the chart, a big-bar downmove is followed by several more downmoves, some of them also big. Corrective upmoves are small and short-lived. Those who hold the currency are having a hard time preventing downmoves that will jeopardize their stops, or some meaningful recent low, or a support line, or some other indicator on the chart. They feel defensive, hence the “backfoot.”

A currency on the backfoot is not in a full-bore rout. A rout—the opposite of a rally—is when the downmove breaks a recent low or support line and stops are being hit left and right.  A rout is what follows a breakout. But a currency on the backfoot is vulnerable to a full-bore rout.

Those who hold the currency are motivated to prevent any further price declines, which means they must buy more of the currency to shore it up to prevent a rout. The holders have position limits, however, and can not only get psychologically fatigued from defending their position, but run out of money with which to defend it.

It doesn’t take a majority of traders in the currency to pressure a currency onto the backfoot. Just a few big players can decide to sell and because they wield a big capital stake, they can easily overwhelm weak holders and scare off potential buyers. It’s other big players joining the first few that makes the sell-off bars big. A series of big downward bars (such as three black crows in candlestick terms) can intimidate anyone now holding or planning to buy the currency.

Note: Backfoots do not preface every breakout that leads to a rout. Sometimes a single Shock—a major news event—can switch a currency from a strong upward trend into a strong downtrend move in a few hours. The most famous example of that is the British referendum on Brexit in June 2016.