Wednesday, November 4, 2009

USDCAD—Correcting or resuming trend?

USDCAD has happily moved below the first correction level I listed yesterday at 1.6045-55. It’s now approaching the second one at 1.0580. RSI also dropped down below where I would have liked to see it go and is moving towards oversold.

I’ve made hundreds of pips with this pair over the last couple of weeks. I’m currently out of all positions. It’s time to back up and think about where we are with this pair:

1) There has been a run up for just over two weeks, from a low of 1.0208 to 1.0988.
2) It’s in an overall downtrend since March.
3) There are many dollar bears out there. What this means is that sentiment is generally against the USD.
4) Commodity prices are generally up. The loonie is a commodity currency.

All of these factors suggest bear market. As I wrote yesterday, the last couple of weeks could have been only a correction. As I also wrote the last couple of days, the pair was encountering strong resistance. If that’s what this is—resistance and the pair is reversing trend—then dropping back is normal. However I would be remiss if I didn’t write that 20 days is not enough to suggest a reversal of a seven month bear trend.

On the three-hour chart, the pair needs to get above 1.0681 to have a candle with a higher high than the last candle. Since this candle is still forming it’s not clear whether it will do this or not. Until it does, the pair is in a downtrend on this time frame, with lower highs and lower lows.

On the one-hour chart, the pair needs to get above the high of the last candle at 1.0636 to reverse the downtrend on this time frame. RSI is also oversold in this time frame.

Neither the 30- 15- nor 5-minute charts show RSI oversold. On these charts smaller candles are indicating indecision. This is common when a pair is approaching a support level. That’s why it’s called support. Buyers will come in at these levels; some sellers get nervous and take profits which means they’re buying as they unload their positions. The low this morning so far has been 1.0601 so it’s also hesitating at a round number. None of this is unusual.

It’s not quite at a level I indentified as support (1.0580). In the spot Forex market, activity tends to begin just shy of support levels. There’s no guarantee it will reach my level before turning up. There’s no guarantee it won’t reach it and continue traveling down to the next one.

If I buy here then I need to put my stop below 1.0580. Since that’s a support level one wouldn’t want a stop right on the level. You have to allow room for the spread and slippage.

The logical correction levels below this point are:

1) 1.0580, the purple line and the one it’s approaching
2) 1.0515, the uptrend line from the October low on the 3-hour chart. This has moved up from yesterday’s position at 1.0455
3) 1.0378

If the pair closes beneath the trend line at 1.0515 on an hourly time frame or above, then I may short rallies depending on what the charts show. If the pair approaches the low of 1.0208, I’ll need to also carefully study price action. Here’s the daily 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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