Correlations can give great insight into the movements of a particular asset. Below we can visually see the direct inverse correlation between USOIL and the USD/CAD. This correlation exists due to Canada being the United States primary oil supplier. As demand for oil increases so does the demand for Canadian dollar. This drives the correlation pictured below. The USD/CAD is expected to depreciate as USOIL moves higher.
Fundamentally, crude oil prices inevitably go back to a function of supply and demand. As oil is a scare resource, global declines in supply or an increase of demand may raise prices. Political risks must also be calculated. Times of unrest in oil producing regions may cause spikes in crude. Regardless of direction and fundamental opinion, we can take this information and then apply it directly to the USD/CAD.
Taking price into the 4Hour chart on the USD/CAD, we can start to see the development of a descending triangle. This is found by creating support by connecting the November and December 2011 highs with our January 2012 high at 1.0318. Resistance is found near 1.0050 by joining our November 2nd & December 8th lows. Once these levels are found traders may plan for a breakout by bracketing the market with entry orders. Regardless of direction, a breakout trader may be prepared for the next movement on the currency pair.
My preference is to bracket the market with entrys to buy above 1.0340, and sell below 1.0020. Stops should risk 150 pips per position. Our limits should for a profit of 300 pips creating a clear 1:2 Risk/Reward ratio.
Alternative scenarios include price continuing to trade inside of our triangle, prior to a breakout.
---Written by Walker England, Trading Instructor
To contact Walker, email instructor@dailyfx.com. Follow me on Twitter at @WEnglandFX.
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