A reader’s trade—USDCAD

A reader (and a big thank you to any readers I may have) sent me an email in which she expressed frustration with getting stopped out of trades. She attached a chart from this morning with the words, “I am attaching today’s CNDUSD mess.” I wrote her that I’d analyze it if I could post the analysis on my blog. She graciously agreed. Here’s her three minute chart showing the trade taken at 7:32 AM (EST) this morning. First, the right trade in hindsight is notoriously easy to spot. After all that’s what many so-called gurus do as they show you how to trade—use charts from the past. Unfortunately, we don’t get to trade with hindsight. But since I’ve been following the USDCAD so closely lately and posting my own trades hopefully everyone will bear with this after the fact analysis. Here’s the picture of her trade she sent me. She bought thinking it was a breakout and then was stopped out at 34 pips loss. One thing—this is a tight stop which is good. But tight stops only work if the entry is meticulously selected.

First, when trading any time frame you want to keep the longer ones in mind. Since she was trading the three minute chart, she’d want to keep looking at the 15- and 30-minute as well as the hourly chart. You want to be sure where you are within a broader price movement. Never ever take a trade based on one time frame only.

A look at the hourly chart shows a nice overall uptrend so her thoughts about going long were appropriate. But look at the candle just before the one where this trade was being contemplated. It shows a lower high. This is a hint the pair might be getting ready to catch its breath or perhaps even retreat. The prior two candles had upper wicks on them as well—another hint that higher prices were being rejected. This is what we get from charts—hints that allow us to put together possible scenarios of what’s unfolding. Here’s the hourly chart:

Returning to the three minute time one can see a range starting to develop. Not being in this trader’s mind, it’s difficult to know if she noted this. Since she was focused on going long it’s possible that she didn’t. This is a big issue—we know we want to go long based on one set of clues—there’s an uptrend, etc. As a result we tend not to let information in that might be contrary to what we’ve decided the pair might do. This isn’t just traders that do this (it's called confirmation bias) but it’s a financial hazard for traders. Whether she noted it or not, she waited until she saw what she perceived as a breakout candle and bought.

After a brief instant, the pair happily turned down, merrily blowing through her stop, and coming to rest in the 1.0695 area. Lingering there just long enough to grab a quick cup of coffee it turned up and climbed to a point where she would have had a 34 pip profit had the entire action not resulted in her being left as road kill on the trading highway along with who knows how many others. This is the kind of action that leads traders to believe the market has it in for them. It doesn’t.

What went wrong? As I’ve already explained we had some clues from the hourly chart. In addition, she was trying to trade a breakout. Breakouts can work but they often don’t, at least not on the first try. A quick rule for safely trading them is to wait until there’s a throw back to the point where they broke out. This wouldn’t have helped this trade but it would have reduced the loss somewhat.

Looking closer at the three-minute chart below we see a hangman candle right after the breakout candle. This is another hint that all isn’t rosy. This adds to the hints on the hourly and begins telling a story. The long red candle after the hangman forms a three candle evening star pattern which is bearish. The trade clearly isn’t as viable as one would hope. Should she have bailed out there? Perhaps. She had another chance to bail out when it broke and closed below the uptrend line. However she probably had this line in mind when she set her stop not far below that and tried to allow for some slippage.

Was there a better place she could have set her stop? The only logical places on this chart for a stop are just below the upward trend line, 1.0690 or 1.0650 which it tested twice over night. But the last one was 120 pips below her entry point. She might have found that steep.

So was there a better entry? Yes, I think so. By going back to the hourly chart she could have waited for a close above the breakout point and bought on that candle. Many traders set rules for breakouts—e.g. the pair should close n number of time periods or x percent of price above the breakout point. Or she could have bought when it began hesitating around 1.0710 and set her stop at the 1.0650. 60 pips isn’t a lot to risk in the volatile Forex spot market. Given the warning signals and given the fact that the pair had gained more than 100 pips overnight, the best thing might have been to wait.

But what if she had a job to get to and couldn't wait? Then the trade might have gotten away from her. Some, perhaps even many, do. That’s life. Believe me, there will always be another trade that meets whatever criteria you set for it. Those are the ones you need to wait for.

As for my two USDCAD trades that I wrote about this morning—one is up 375 pips and the other is up 162 as I write this at 4:52PM EST. I just lightened the first one by 20% to take that profit. It’s nice to see a little risk aversion—it’s good for the USD

Here’s the 3-minute chart I referred to above:

© Dianne Fecteau, 2009. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.

My purpose in writing this blog is to show you how one trader, me, makes trading decisions and survives while trading Forex. One of the biggest problems I had when I first started trading was trying to apply the “rules” to actual trades. Another was the psychology—limiting losses and letting profits run. If you study my blog you’ll see how I deal with both those issues. So my writings are not trade recommendations but rather educational in purpose. You have to decide on your own approach to trading. Remember that trading is risky.