Tuesday, January 18, 2011

USDCAD—little bounce

In typical knee jerk reaction, the USDCAD bounced from its overnight lows of .9838 based on the non-news of Bank of Canada not raising its interest rate. .9911 has been its high so far. This past Friday's high was .9913.

I bought at .9860 earlier this morning. My thinking was that the pair had been pushed down to ridiculous lows and that there was small risk because the Jan. 2008 low of .9841 and the May 2008 low of .9820 would presumably serve as some kind of support. I also have a little calculation I do when I can't easily see support that had given me a low of .9850. I am not necessarily in the trade for the long-term. Let's face it—the actions that pass for economic policy in the USA, along with a general greenback aversion, have seriously weakened the USD. I took some quick profits but I'm leaving some of the trade on as there's a slim chance the pair could rally to at least parity or better.

Why do I say that? On the daily chart, the pair formed a wedge pattern (or maybe an ending diagonal in Elliott Wave speak). In a declining wedge, prices generally break upwards because the steep angle is difficult to maintain. Things don't usually go straight up or straight down. I don't use any pattern as a signal by itself but the signal would come from a wedge with a close outside the trend line. In this case, one would want to see a close above .9947. Obviously, I did not do that. Breakouts are tricky in Forex. There's a zone of resistance in this area up to parity, consisting of moving averages, price highs and lows, and fib confluence. There's also a slight positive divergence on the daily chart although divergence is everywhere it seems. Therefore, we will have to see.

I don't try to call bottoms or tops but sometimes with what seems like a key low or high, I will take a trade if I have other reasons for doing so, i.e. patterns, divergence, etc. These are higher risk trades by definition since one can't usually call a top or bottom. Even if all the reasoning is right for a reversal, the market can outlast the trader, slowing bleeding them to death with a series of probes lower or higher. This is why if I take these types of trades I usually have a very tight stop. I sometimes set the stop beyond my "real" stop so as to not get taken out in stop hunting but if I do that then I babysit the trade. This is not something I like to do. Babysitting tends to make the trader more anxious than they need be. In addition, you can't just pick a stop willy-nilly because an unexpected event could cause it to be hit. Thus, even when trying to keep a stop from stop hunters, one must consider the risk and not choose a level that would result in too great a loss. The best policy (and one I follow 99.98% of the time) is to set the real stop with the trade. If your analysis is good, the market will usually respect it.

Here's the daily chart:

© Dianne Fecteau, 2010. 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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