UC – 5 months of sideways price action

06 - UC

Both USD and CAD have been depreciating to most other currencies, and yet neither managed to trade in a good long term trend. Their cross pair has been trading with very choppy price action for the last 5 months.

Every time we come to the boundary of such range, it deserves our attention. At the moment, both USD and CAD are trading at the top of their respective bullish cycles, with USD barely winning over CAD. This move has taken the price right to the top of the flat boundary. The price has got there without any convincing strength, so it is hard to expect a strong bullish breakout.

Given that USD has managed to reach the top of its bullish cycle even on Weekly, without showing any strong price action in that cycle, it does not seem likely that it will keep on appreciating. CAD however, being at the bottom of its bearish cycle on Weekly, has more potential to go higher for a while.

It is very likely that the price will stay in the range, but thanks to its considerable size, we can still trade UC on the short side.

August 17th – AC

17 - AC

CAD is clearly losing its bullish momentum. It is the strogest bullish currency today, but it is unable to make new highs, facing strong resistance in many pairs. There are still many TLs in CAD profile that needs to be broken before the trend reversal is confirmed, but CN is already offering a great selling price.

AUD is the strongest bullish pair today and it is still going strong. The price is correcting on H1 right now, but bullish price action is quite week in most pairs. However, AU and AN look like renewing the highs – all bearish attempts have been rejected in the last 2 weeks.

NC – Sharp Rejection

3 - NC

Very sharp rejection of NZD’s bullish move. Very interesting to see clear divergence on H4 before the reversal. H1 showed a great entry opportunity, thanks to CAD correction in yellow rectangle.

GN – Strong continuation, NC – Possible daily reversal

14 - GN (H1-H4) small

After showing strong bearish move yesterday, today GBP completely reversed and put up a bullish move. Interestingly, half of this move happened in the very early hours, before BOE kept the interest rate unchanged. No matter how much fear mongering media will create, at some point there will not be any trader willing to sell GBP this low. It will be interesting to see if it creates a significant bullish cycle on Daily-Weekly.

NZD has been the most bullish currency in the past couple weeks and now it also starts correcting – possible even reversing. RBNZ will be meeting on 10th of August and unless NZD depreciates by then there is a very good chance of a rate cut. The Market would normally price upcoming change before hand, so we might see a bearish cycle on NZD for the next 3 weeks.

Together, GBN and NZD represent two of the most interesting currencies at the moment, because they have been leading the whole market (together with JPY) recently.

NZD is also interesting because together with CAD it represents the strongest bearish move this week so far:

14 - NC (H4-D1)

The bullish move created by NC at the end of the last week is completely cancelled now. The price is approaching Daily TL.

Looking at NZD profile on H4, many pairs have broken below their recent swing lows.

Looking at CAD, the bullish move this week is very well sustained so far (with exception being CG). However, CAD is slowing down and is very likely to correct in the last couple days, before it can continue higher. Supply is coming at these higher prices virtually on all CAD trading pairs.

GC – Reversal after a strong move

13 - GC (D-W)

13 - GC (Daily Picture)

GC reversed from minor SR zones on Daily. However, CA and CN were rejected from major Weekly support zones.

Interesting to see how H1 was interacting with prior SR levels. First real support came around the middle of the day. If we look at currency profiles, the pause was caused by bullish moves in NZD, AUD and to leser extent CHF. As soon as these other currencies stopped pushing CAD down, it instantly broke through the support.

A bit later price overcame another significant support area from the previous day. Will be interesting to see if the price will come back to retest it tomorrow and it can be key to the future direction of this pair.

Note CJ and CH – both pairs came to a resistance that they were unable to overcome. These If JPY and CHF push higher tomorrow, CAD will have to wait with its ascendance.

Anticipating the future

Depending on trading timeframe that we use, we will also have different breadth of the market that we can cover. Intraday traders and scalpers generally will not closely monitor more than 1 or 2 instruments, simply because the speed with which they receive information for each instrument is too fast, and they can’t handle many markets. Longer term traders on the other hand are more likely to¬†watch many more instruments on higher timeframes, because if they concentrate on just one, it may be hard to find good entry signals frequently enough.

One trading approach is not better than the other, they are simply different. As I mentioned before on this blog, personally my preferred method of trading is watching many markets on higher timeframes and trying to choose the best trading opportunities available.

I prefer to trade using scenarios. I build a scenario of how the future may look like and then support it with technical and fundamental information. As the future unfolds, I see if my scenario is being confirmed. If it is, I have a trade.

Often times, however, I am trying to anticipate what the market might do based on the current price action. This way I am able to open trades at a much better price then most methods would allow. The price for such great entries is that they will not happen often – when I am trying to catch the top or the bottom, I am fully aware that the market can easily defy my expectations and I will be stopped out. But when the price does go in my direction, the return on such trade is many times greater than the initial risk and getting even 20% of such trades right is enough to offer a very good return on that 5th trade that does work out right.

To trade with such method, we have to let the profits run for long term targets. It is not of much use if we accept 5 losses in a row, and then when the market finally moves in our direction, we take 2:1 or even 1:1 profit. In many cases I would only engage in such trades if I see an opportunity to take at least 10:1 profit compared to my initial risk, so that any failed attempts are easily covered by the profitable trade.

At the same time you need a lot of confidence to put new trades as long as the market does not defy the general trading scenario. There were times when I would open 2-3 trades, the market would go in my direction (giving as much as 3:1 profit) and I would move the stop in BE, but because I was looking for a much larger move, I would let the market stop me out. Finally, I would lose my confidence to pursue that particular trading idea just before the big move finally happens.

Let’s take a look at the recent example, CADJPY sell trade that I’ve been holding for 5 weeks now:

CADJPY Sell

You can see how this trade dragged on for 4 weeks, basically giving no return on the risk. Since price has not been breaking the lower support I could not move the trade to breakeven either. As I kept analyzing CAD and JPY currencies, I saw no reason for closing this trade. At no point during these first 4 weeks I could say “I would like to buy this pair here” and so I kept my short.

The trade turned out to be the most profitable during the last week, as CADJPY made the strongest weekly move of any other trading pair, but it was not smooth sailing to reach that point. Because I was anticipating what the future techincal picture might look like in CAD and JPY currencies, as well as anticipating the fundamental difficulties for Oil becoming bullish, and overall fundamental market uncertainty, leading to possible appreciation of “safe heaven” currencies such as JPY, I was able to let the trade go. Even though the market was staling, it was not cancelling either my technical nor fundamental scenarios.

Such entries require very strong trading psychology, as well as confidence in one’s analysis. One comes from the other, really. You are confident in your analysis not because you are 100% certain that it will work, but vice versa – because you KNOW the market might turn against you and you have accepted such possibility without any emotional discomfort. No matter what market might have done during the time that I was holding my CADJPY short trade, it would not be able to hurt me in any way whatsoever.