Currency Secrets

Since the start of the year the USDCAD chart has been range trading between 1.2000 and 1.2700. While this range is no tight congestion, it has formed an interesting slightly upward trending support line this is extremely close to the current market price.

So what will the USDCAD do?

Well, obviously it will do one of two things:

1. Bounce, or
2. Break

Nothing profound there!

Why bounce?

The most obvious reason for why the USDCAD may bounce at the support area of around 1.2050 is due to the fact that from the trend line which it will bounce from it has done so 3 times in the past.

I personally consider a trend line that has had 3 prior touches to be extremely significant.

So what should we be looking for if we are to expect a bounce?

Well, quite simply, a reversal candle.

I personally prefer the more aggressive type reversal candlestick patterns such as the engulfing types, but other notables would include inverted hammers or dojis.

What if we have a break?

If we have a successful break we should see the USDCAD close by today (1700 NY EST) below the support level of 1.2050.

To confirm the break we would need two things to occur:

1. A breakout type candle
2. Two consecutive closes below the trend line

Once we have this we have a confirmed break.

So how am I be viewing this?

One thing I like about the support trend line is the lack of wicks piercing the trend line. See for yourself (click on image to enlarge):

And due to the lack of wicks I wouldn’t hesistate in placing a stop entry order beneath the trend line at around 1.2035.

If I were playing it extremely safe I would place my initial stop at the previous high of 1.2430, but considering that having a 400 pip stop isn’t my style I would reduce it to the high of today (or the day of when the stock breaks) – this will reduce my initial stop loss point to around 70-80 pips.

Anyway, just thinking out aloud. I will see how the USDCAD travels later this morning and determine whether or not such a strategy will be a viable one.

Keep an eye on it.

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):

Continuing on from our interesting discussion on the Fibonacci and Yen last weekend we have an interesting situation occurring on the USDCAD.

Now before I go on I’d better qualify myself by stating this warning: I don’t have much Fibonacci experience… I’ll be learning just as much as you with this style of trading.

Read on at your own risk!

Okay, for those of you crazy to follow…

According to the trading idea I mentioned in my first Fibonacci post if a currency fails to close 5-10 pips below a Fibonacci retracement zone then I would place an entry stop order at the day’s high (for reversals UP) or day’s low (for reversals DOWN).

If we have a look at the daily chart of USDCAD and identify the major peaks and troughs we see that the USDCAD has *perfectly* closed on the 50% retracement zone sitting at 1.2356.

So… today I will place an entry order at yesterday’s high… being 1.2418 and place an attaching stop loss at 1.2352 (the day’s low)… for ease of calculation I’ve rounded the entry price up to 1.2420 and the stop loss down to 1.2350.

The order is only good for the day, and I will keep using the day’s high unless we have a close BELOW the 50% Fibonacci retracement zone.

Once every two-three months I like to gauge which currency is the strongest and weakest out of the top currency crosses (AUD, CAD, EUR, GBP, JPY, CHF) against the USD.

The reason I do this is that it helps to know which currency to open a position in if a negative or positive economic report is released by the USD, and to open a position that would best take advantage of the strong/weak USD economic report.

As an example, if the AUD has decreased 10% against the USD over the last 3 months, and the EUR has decreased 15% against the USD then if the USD were to release a negative report it could safely be assumed that the AUD will likely rally further than the USD as it hasn’t depreciated as much as the EUR.

Of course this is not always the case and here are some things to be mindful of:

• Does the economic report influence JUST the USD or are there other repercussions against the currency you are considering to trade?
• Does the currency you are considering to trade have any economic releases soon?
• What does the chart say?

There are many ways to gauge which currencies are the strongest/weakest against the USD. Here are some methods that I’ve used:

• Rate of change of the CLOSE over the last 20 trading days (or 60 trading days)
• Rate of change of a MOVING AVERAGE of the CLOSES over the last 20 trading days (or 60 trading days)
• Using channel lines

The method that I prefer is the rate of change of the moving averages coupled with the channel lines. I plot a 20-day moving average and then obtain the rate of change of this moving average over the last 20 days and 60 days. I then just compare the raw figures of these stats to see which currency has the highest number and which currency has the lowest number.

Once I have the two currencies that are the strongest and the weakest against the USD I then plot their charts to determine where resistance and support lay, as these technical zones override any arbitrary rate of change figure.

Here is a table showing these stats (note that the USD is the BASE currency for each currency cross – makes it easier to identify):

CURRENCY >> ROC(SMA(20),20) % >> ROC(SMA(60), 60) %
AUDUSD (2.07) (0.67)
CADUSD (0.99) (0.84)
CHFUSD (3.19) (2.54)
EURUSD (3.36) (2.65)
GBPUSD (3.64) (1.13)
JPYUSD (1.35) (2.53)

As you can see from the above table ALL currencies have weakened against the USD over the last 20 and 60 days (according to their moving averages). The strongest currency over the last 20 days against the USD has been the CAD, over the last 60 days it has been the AUD. The weakest currency over the last 20 days against the USD has been the GBP, whereas over the last 60 days it has been the EUR.