Tuesday, November 17, 2009

USDCAD—Chop-chop-chopping along

Yesterday, I wrote that I went long at 1.0473. I was stopped out at 1.0445 for a loss of 28 pips. I entered a long at 1.0433 which profit stopped out at 1.0443 on a dip. Undeterred, I tried another long at 1.0453. As of 6:15 AM EST it’s up 123 pips. I took some partial profits off the table at 120 pips this morning. Two questions probably arise from this little tale.

1) Why did I keep going long?
2) Is this pair really going anywhere?

The answer to the first is, in part, because of the close analysis I have been doing on this pair. I have spent hours tracking it, calculating various zones of support and resistance, and using a number of approaches that, if I wrote about them all, would have this blog too wordy to read by anyone but those with no life whatsoever. My belief is the pair is basing. However, that’s just opinion. I will happily throw it out if I find sufficient evidence otherwise. So far I haven’t.

Think for a moment about what basing means in terms of behavior. It’s trying to find a bottom and it’s chop-chop-chopping along while it does so. So far the bottom is in at 1.0208. It’s not re-approaching that level, despite the dips. When basing, a pair is reversing trend. This is a slow process; the longer it goes on, the better it is for eventual recovery. Each time this pair dips, buyers are coming in at higher levels than before. So the pair climbs. Then some buyers get nervous and decide to take quick profits. The pair drops. But new buyers come in. They’re becoming aware of movement. And they want to grab some pips. This is our little drama that’s played out every day in the markets. Price moves up; price moves down while it’s seeking out a direction. This is what basing feels like.

Getting back to the first question—why did I keep going long—the answer is found in this reasoning. If basing means ups and downs then I’m going to buy the downs. That means I look for reasonable entry points so the stop, if it gets hit, doesn’t bother me too much. Yes, all losses stink. Unfortunately, you can’t trade without them. But I can keep them relatively small.

On the three hour chart, the pair held a price that was also polarity. I found this encouraging. I bought again. I still was stopped but I had already moved my stop to above breakeven. Because it reversed again, just about the point it stopped me out (how often does that happen, kiddos?), I bought again. There’s also divergence between price and RSI. Before I left my desk yesterday, I moved my stop to just above breakeven. This allowed me to sleep well. This morning, voila, up 120 pips. The market rewarded my persistence because the market is what gave me the clues that led to my being persistent.

For the second question—is the pair really going anywhere—the true answer is who the heck knows. Yes, there are those who will tell you absolutely yes or absolutely not because the cycle is blah-blah or the Elliott Wave count is such and such. Those are clues—they’re not definitive answers. All we should do as traders is gather our evidence (which must consist of more than one clue or theory) and decide what amount of loss you can live with. Then find your entry and make your trade.

Here are the general clues I’m working with:

1) I still see the pair as in uptrend from its 2007 low.
2) Weekly closes have held well above the recent low of 1.0208
3) There’s serious support (based on my calculations) in the 1.0325/50/75 range
4) One can argue an EW count that supports an upward movement

In addition, even if it’s not basing at all—it’s in some sort of minor correction before fulfilling the doom and gloom crowd’s belief that the USD will be worth nada in the coming months, it has slowed its rate of descent and some chop-chop is definitely taking place. This means pips are available for the taking. Can anything change my mind it’s basing? I’ve said so repeatedly. I work very hard at not getting attached to my beliefs.

Here’s the three-hour chart:

© 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.

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