Paper trade: Short USD/CAD @ 1.0573, Stop 1.0640, Target 1.0415

Taking a first position in USD/CAD short here at 1.0573 on a 4-hour moving averages cross-over (Figure 1). I’ve also placed a limit order to add more at 1.0519 below Fibonacci support (shown in Figure 1). Reason for this trade is that USD/CAD is moving away from an upper bound channel with a overbought stochastic reading, as shown in the daily chart of Figure 2. I’ve also considered going long AUD/USD, but AUD/CAD trend remains bearish. So I chose to short USD/CAD instead.

Secondly, crude oil (and gold too) looks to be bouncing off an oversold level with a rapid move in 2 days from 72.43 to 77.39. Coincidentally, INO.com posted an intermediate term cyclical analysis video with a bullish outlook (affiliate link). They put out a better case than I do.

USD/CAD might make a short-term upward bounce here because of a short-term oversold condition. However, there’s evidently a lack of buyers in the past few hours (Fig. 1). The price has been sitting on support a bit too long in my view. Thus, I’m expecting it to break without a meaningful retracement (hence the short entry). A confirmation would be a break below 1.0530. Thus I have a limit order to short more below that price.

I am risking 0.1% of my account on this trade.

As you may have noticed, these charts are from Metatrader. I’m switching over to the MT4 platform as of today. Having played with its charting features for the past few hours, I’m quite satisfied with it so far. Although my needs are low as I was fine with the Oanda platform too (arguably the most simplistic platform out there).

USD/CAD, 4-hour

USD/CAD, daily

Why I shorted CAD/JPY @ 88.57 instead of long USD/CAD @ 1.0251

CAD/JPY failed a major resistance level at 90 and has edged out an obvious intermediate-term downtrend (Fig 1). USD/CAD is also bouncing off a major support at 1.0200 (Fig. 2). And crude oil is below $80 on a slippery slope. As such, shorting loonie seems like a good move at the moment according to my FTC trading setup. Yet, here is why I am opting to short CAD/JPY and not long the more popular USD/CAD currency pair.

Figure 3 shows a 5-year, weekly chart of CAD/JPY (top) and USD/CAD (bottom). Evidently, the exchange rate of CAD/JPY is still in a depressed mode since the fall of September 2008. It’s also clear on this chart that why I say 90 is a major resistance level. Beside from being a nice round number, CAD/JPY has failed to break above 90 twice since August 2009.

As for USD/CAD, the picture isn’t as clear. 1.0200 is definitely a very strong support because it marks the top of a 6-month range in the first half of 2008. Yet, the downward slope in the long term since 2005 is not to be ignored. As such, I do not dare to bet on a bounce on this pair at this price.

Moreover, the intermediate-term move on both of these pair is giving us a confirmation. CAD/JPY is now testing a falling trendling (Fig. 1). Whereas USD/CAD is testing a falling support. Thus, I am shorting CAD/JPY under pressure. Going long on USD/CAD now would be like betting it to bounce on a slippery slope.

CAD/JPY, 3-hour

USD/CAD, 3-hour

CAD/JPY and USD/CAD, weekly chart

Paper trade: Short AUDCAD @ 0.9583, Stop 0.9670

Gold price made a 15 point jump over the weekend to 1160 and is consolidating now (Fig. 1). Crude oil tested 84 and is back down to just above 83 now. Yet, AUDCAD is still struggling to break above 9600 (Fig. 2). You would have thought that AUDCAD should mustered enough momentum to break above this key resistance with all these gold bullishness and oil bearishness. Thus, I am giving this AUDCAD short setup as described previously another try. I am only risking 0.16% on this trade. It is half of my usual initial entry. First because it is a FTR (reversal) setup and second because I am in a 3% drawdown. So my risk manaegment rules dictate that I trade halved size.

This setup is according to the monthly and weekly chart, so it could take a while, and probably more tries, before it shows its hands. I will keep shorting it as long as it’s below 9600 on the weekly. Limited by the amount at risk according to my risk management rules, of course!

Gold (GC futures), 4-hour left, daily right

AUD/CAD, 3-hour

Paper trade: Short AUDCAD @ 0.9489, Stop 9540

I’ve been stopped out of all my Aussie shorts on the breakout today. But my setups for AUDUSD and AUDJPY are still intact as the resistances are still safe. Having failed so many times in shorting AUDJPY (first try, second try), I am taking a conservative approach on that particular play. Although those setups are ripe for entries, I’ll wait til the test of resistances hold first before entering short again in AUDJPY and AUDUSD. Which begs the question of, why AUDCAD, and why now?

First of all, I still have conviction about my Aussie short because of the setups as discussed previously and the fact that gold price is holding the 40 day ema at 1135 at the moment. That 40 day ema has worked well on the uptrend in the past few months. So it should be respected if gold is indeed in a downtrend now as I surmise.

So why short AUDCAD instead of the popular AUDUSD? Simply because AUDUSD broke out of a short term range whereas AUDCAD is still holding as seen in the AUDCAD 3-hour chart of Figure 1. This shows AUDCAD is weaker even when gold is making new short term high.

AUD/CAD, 3-hour

For the big picture, see Figure 2 for the weekly chart of AUD/CAD. We see that 0.98-0.99 has always been the turning point for a massive 1000+ pips selloff. We’ve hit 0.99 back in November and the slide is already in progress.

Secondly, we see from Figure 2 that AUDCAD bounced off the 40 week ema in late December and ran up to 0.95 from 0.92. 0.95 is a decidedly important round number resistance as it was also a peak in April of 2007. You know, the time before the economy started to crack as shown with the topping in the markets.

AUDCAD, weekly

Now that I’ve established that the trend is pointing down. I still need to time my short entry.

Figure 3 shows the daily chart of AUDCAD. In view of the above discussion, we have a good chunk of resistance above 9550 as marked by the purple box in Figure 3. This is the all important safety net for this short entry. As long as AUDCAD stays below 9600, this long term setup remains intact. And don’t forget the broken uptrend line.

AUDCAD, daily

Lastly, notice the RSI trends in both the 3-hour (Fig. 1) and daily charts (Fig 3.), they are both showing negative divergences. Figure 1 is my timing for this entry, see the current negative RSI divergence marked by the downward trend in RSI versus the toppy price.

In summary, here are my signals for this FTC setup:

1. Weekly chart shows downward trend.
2. Big resistance above current price on daily.
3. Broken uptrend line on daily on retracement from weekly chart.
4. Intermarket relation with gold testing 40 day ema at 1135.
5. Negative RSI divergence on 3-hour chart.

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An introduction to my Forex Trend Continuation Setup (FTC)

After many trials and errors with paper trading the forex market for a month, the first of my trading setups is finally taking shape. So I would like to document this approach here after a well executed trade this week (illustrated below).

This trading setup is based solely on technical analysis. Here’s an overview of the steps:

1. Define a long term time frame for identifying setup.
2. Draw the major supports and resistances.
3. Add a momentum technical indicator.
4. Add a trend indicator.
5. An entry is signaled by an agreement of the trend and the indicator at the support or resistance price level. Do not enter yet.
6. Define a short term time frame for timing, use this for the following steps.
7. Draw the supports and resistances on this short time frame.
8. Place an order when the price breaks the short-term trend to be aligned with the trend on the longer one.
9. Exit when the entry conditions are gone (not necessarily reversed).

This is very vague. So here’s a real example in practice.

Figure 1 shows steps 1 to 5 on the daily chart of CAD/JPY for a short entry. The entry point is the bar before the marked vertical line on Oct 21. See that CAD/JPY tested the descending resistance line (step #2) with a negative RSI divergence (#3). The trend as suggested by the moving averages is a choppy downtrend (#4). Thus, the conditions were met and a short entry is signaled.

CAD/JPY

For timing the entry, Figure 2 is a 3-hour chart of CAD/JPY with the entries and exits marked. Yellow triangles are entries and red dots are exits. I entered a full position after CAD/JPY made the initial dive and then retraced to the previous support (now resistance) line. It bounced right off that line strongly (left side of figure). I entered at market price once we made a hammer candlestick (negative signal) the bar before. Stop was placed at 88.0, near the recent high and at a round number resistance.

CAD/JPY, 3-hour

For the exit, I had a manually adjusted hard stop to be a couple of resistances away. I kept it loose on purpose because this position was my biggest winner. (Let your profits run). But once the RSI on the daily passed below 50, I took a more conservative approach on the exit stop. Then once CAD/JPY tested 84.50 and hung around 85.0, I tightened my stop and was taken out at 85.30. Note that my original target was 84.0, so I thought testing 84.50 was close enough.

Also note that this setup is expected to be executed recursively. It is meant to be run so that you’re stacking up your winning position if the conditions and the trend is in your favour. This is actually where the power with this setup kicks in. I’ll continue with the CAD/JPY example to illustrate this point.

Notice in Figure 2 that I added to this CAD/JPY short at the (second from the right) yellow triangle point on the chart at 86.3 for 50% more units. The down move was still intact as shown in Figure 1 at the time. Using the same setup, I added more units to this position. And by adding 50% more to my position, I was able to ride that last wave down for +200 pips on these extra units. Otherwise, I would have exited at 85.30 on the consolidation around 85.0 and left with nothing on the market for the last big wave.

The timing as shown in Figure 2 for this addition isn’t the same as for the original entry. But it’s obvious enough on the figure with the same markings which I used. Simply refer to Figure 2 for a visual explanation on the timing for this entry.

In case you haven’t noticed on Figure 2, but I just re-entered this position with half the size using the same setup. Since this third entry is still in progress, I can’t comment on it just yet. We’ll see how it goes.

Finally, for ease of referencing this trading setup later on, I will call this particular setup, FTC (forex trend-continuation). Right now it’s version 0.1, a first publication release but still in beta testing with my paper trading. Once the setup has proven itself, I will use it in live trading with real money. Then I will christen it with a version 1.0, and perhaps a better name. In the mean time, I expect more refinement to this setup as I continue to try it out on paper trading.

Check my FTC tag for more sample applications of this trading signal.

Update Nov 18, 2009: I’ve changed the name from FTCS to FTC as I now have a FTR setup.