Currency Secrets

If there’s one thing that most of you should probably know by now and that is that I just love congestions.

Why?

Simply because you can easily define support and resistance points.

We have popular patterns such as:

• pennants
• flags
• triangles
• ranges

And all these other fancy names that revolve around the market doing something but going nowhere.

It also makes my job at making money all the more easier too.

So what has me so excited about the USDCHF & AUDUSD charts?

On the USDCHF chart we have a pennant forming on its hourly chart (click the image to enlarge):

On the AUDUSD chart we have sideways congestion, with anticipation of a breakout to the downside (click the image to enlarge):

Oop… USDCHF breaking out.

Outta here.

While I’m on the bandwagon with congestions I may as well talk about an interesting congestion forming on the USDCAD.

If you look at the daily chart of the USDCAD you can see that it is forming a nice tight consolidation with resistance that is downward trending and support that is somewhat flat (bearish pennant formation?).

We also have popular support around the 61.8% Fibonacci retracement.

What to do? What to do?

As there are too many price spikes through the support zone that currently sits around 1.2290 I wouldn’t place a sell entry stop order there (for fear of being spiked in). What I might do is wait for a successful BREAKOUT candle close below this trend line and then go at market with my sell order.

By waiting for a confirmed break I would also be reducing where my initial stops are placed.

How?

If I were to place a sell entry stop order around 1.2285 based on where the current support trend line lays I would have to place my stop loss order above the resistance line which sits around 1.2365… an 80 pip stop loss!

Yuck.

So… by waiting for a confirmed break I can reduce my initial stop loss by placing it above either the last peak formed inside the consolidation, or 10-15 pips above the broken support trend line (change of polarity – what was once old support now becomes new resistance)… I’d probably prefer the last peak formed inside the consolidation.

So by being patient and by possibly giving away a few pips I can increase my position size and make more!

But what else can we do? Any sell limit orders??

Hmm… to find a good place for my sell limit orders I need to first of all look at where I’m going to get out.

By looking at the hourly chart the stop loss zone would be above the downward trending trend line which hasn’t been spiked, therefore I’d feel comfortable placing a tight stop loss around this zone possibly at 1.2380.

Now that we have that established I try to find an area where price has been frequently (and I refer to price here as to peaks and troughs), and I try to get this zone as close as I possibly can to the stop loss zone.

1.2370 wouldn’t be a good area as this has only had one peak zone in the last few days.

1.2360 isn’t bad as this has *nearly* had three touches in the past few days… possibly reduce this to somewhere between 1.2350 and 1.2360… maybe 1.2355.

Therefore, we have 1.2355 as our sell limit entry price with stops around 1.2380 (25 pips). Nice.

One last word of warning, I made mention of the USDCAD being close to the 61.8% Fibonacci retracement… if the USDCAD does happen to break the pennant formation watch for any whipsaw that might see the USDCAD remain above 1.2267 by today’s close.

Again… there are no concrete reasons as to why the USDCAD *would* rally from this zone as this hasn’t been a bouncing zone in the past, but as other major forex players live and die by these fancy numbers they become self fulfilling and that’s why we need to minitor them.

USDCAD Daily Chart (click to expand):

USDCAD Hourly Chart (click to expand):

Well I’m glad I didn’t take too much notice of the AUDUSD change of polarity yesterday, otherwise I would have missed out on making some pips!

When I peered at the AUDUSD on an hourly chart I saw a beautiful sideways congestion that was just begging me to trade it (resistance was around 0.7700 with support around 0.7670).

At the time I noticed the sideways congestion the AUDUSD was trading around 0.7680-85, so I decided to place a buy entry stop at 0.7665 with a stop loss at 0.7705 (40 pip stops) as well as a buy entry limit order at 0.7695 with a stop loss at 0.7710 (15 pip stops).

My buy entry stop order was hit at 0200 NY EST and as it bounced I became fearful that the market was going to go to the upside (thinking that the change of polarity WAS going to take effect), so I cancelled my buy entry limit order… after seeing how high the AUDUSD went, as well as what happened after the event I kind of wish I hadn’t of cancelled that order and had stuck to my original plan.

(The AUDUSD went as high as 0.7696 according to Oanda’s chart (which is mid-priced) meaning that the highest bid price would have been 0.7695 – my entry buy limit order would have hit it right on the head… and I’d be up 60 pips!)

Oh well, at least by recording events like this I can give my mind the experience which will help reinforce myself.

Question: Does the change of polarity principle work with charts that have sloping trend lines?

This is a good question as I’ve only used the “change of polarity” principle on charts that have exhibited flat (or near flat) trend lines.

As of yesterday’s close the AUDUSD has parked itself slightly above its previous downward trending resistance line which it broke on 16th June.

So can we expect to see the AUDUSD rally based on this “change of polarity” principle?

Unfortunately due to my lack of experience with keeping an inventory check of changes in polarity with sloped trend lines I cannot sufficiently answer this question.

I guess the best thing we could do is just see what happens… and then we can all learn from the experience!

Continuing on from the theme of Monday’s Find What You Love I thought I would provide a quote from a book I recently read…

Find your passion: the work that stimulates, fascinates, and endlessly challenges you. Identify what you find meaningful and rewarding, and pour yourself into it. If your passion happens to be the markets, you will find the fortitude to outlast your learning curve and to develop the mastery needed to become a professional. If your passion is not the markets, then invest your funds with someone who possesses an objective track record and whose investment aims match your own. Then go forth and pour yourself into those facets of life that will keep you springing out of bed each morning, eager to face each day. (pp 316-317)

This book truly is an excellent resource on the psychology of trading. In fact when I purchased this book I had also purchased another popular book (recommended by the bookstore owner) on the psychology of trading. Whilst I began with the “popular” book first I began to get a little disinterested in it and decided to read a couple of pages of the other book.

And I’m glad I did… as I COULDN’T PUT IT DOWN!

I had to read this book in its entirety before re-reading the “popular” one again (and even then I still struggled)!

I highly recommend this book to new and experienced traders a like and now that this book is in Adobe PDF format you instantly get your grubby little hands on it!

Go there now and grab your copy.