Monday, November 2, 2009

USDCAD—Why the chop?

Early this morning I wrote that it would be wise to expect chop today in the USDCAD because the weekly chart showed the pair bumping up against a significant, downward sloping trend line. It was also at polarity.

Looking at the hourly timeframe on the point and figure (P&F) chart, you can see another reason for the chop. It has reached a significant congestion area.

Whereas in other types of charts price change takes place with the passage of time, P&F charts record only price action. It’s an uncontaminated picture of supply and demand since the chart doesn’t change unless price changes by a predetermined amount. A column of 0’s mean price is going down; a column of X’s means price is increasing. My charts are three-box charts. This means price must decline at least three boxes before I start another column of 0’s or increase by at least three columns before I start a new column of X’s. It’s a bit tricky to learn (at least it was for me; I remember gnashing my teeth for several months) but I find the charts an invaluable tool.

In any case, when you look at this hourly P&F chart you see the high concentration of X’s and 0”s across the rows to the left of where price is now. This was an area where buyers and sellers were fighting it out, neither side gaining enough strength to make a decisive breakout until you see the long column of 0’s.

Not only is the pair is back in this congestion area. On the P&F chart it rose above a downward trend line from August. It’s our own little action movie—we don’t know for sure whether it will prevail or not against these headwinds. Just as the prior congestion area took a couple of weeks to form, we could see the pair buffeted here for a week or so.

I picked up two more small positions this morning when it dropped to 1.0740. Their stops are now at 10 pips above breakeven. Obviously I’m bullish on this pair. But I reached that opinion based on price action and I can change that opinion based on price action. On the hourly candlestick chart we’ve had a series of lower highs and this is a warning signal that it could be ready to retreat again, possibly all the way back to the lower trend line on this P&F chart (1.0520). Here’s the hourly P&F 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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