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A CAD/CHF Long with Sky-High Reward

By ,
12 November 2013 17:20 GMT

Talking Points:

  • The False Breakout in CAD/CHF
  • Inverse Head and Shoulders on Daily Chart
  • How to Enter and Execute This Trade

Readers will have noted my more cautious tone of late, and it is helpful to explain why. No matter how good a trader one becomes, the markets will always do what the markets will do, including granting some periods of success and some extreme dry seasons.

(Being selective and cautious in the markets has paid off generously, however, as evidenced by these results since late-October, which can be seen on the Straight Talk Trading Blog.)

Nonetheless, such spates tend to be balanced by dry seasons, and it is important not to get carried away with images of some “Holy Grail” of trading. It is often when traders become euphoric with their personal equity curves (and start thinking of increasing their risk sizes) that the market sneaks up and takes everything back and more.

Especially after a good run, defensive trading is the way to go. In fact, trading floor managers will often rein in traders who have exceptional short-term results because they have seen this pattern unfold again and again before.

There are also traders who try to predict their own equity curves, skipping trades after a long good spell, hoping to miss the losers. I am not one of these traders. Ultimately, since no one can really predict what will happen next in the markets, this can be a tricky strategy (although, in some cases, it can be surprisingly effective).

All the while staying selective and cautious, we look today to CADCHF, which provides the most interesting trade opportunity at the moment.

The weekly chart shows a false breakout to the downside in the last couple of weeks. Since false channel breakouts in the direction of a trend—in this case, down—are a sign of a potential reversal, the long side of CADCHF looks interesting, especially since there are a few hundred pips of potential profit there.

Guest Commentary: The False Breakout in CAD/CHF

A_CADCHF_Long_with_Sky-High_Reward_body_GuestCommentary_KayeLee_November12B_1.png, A CAD/CHF Long with Sky-High Reward

The daily chart below shows a potential head-and-shoulders pattern developing. Of course, the right inverted shoulder is almost entirely imaginary at this point. However, it is worth noting that in spite of spiking up to touch resistance, price has been moving sideways for about nine days. This suggests that there may be a weakening of the bears, and also helps the case for a long.

Guest Commentary: Inverse Head and Shoulders in CAD/CHF

A_CADCHF_Long_with_Sky-High_Reward_body_GuestCommentary_KayeLee_November12B_2.png, A CAD/CHF Long with Sky-High Reward

The main concern at this point is the large bear candle currently developing, however, when compared to the other arguments for a long position, it merely suggests that the support zone should be calculated a little lower to account for momentum. This has been done on the four-hour chart below.

Guest Commentary: Carefully Calculated CAD/CHF Support Zone

A_CADCHF_Long_with_Sky-High_Reward_body_GuestCommentary_KayeLee_November12B_3.png, A CAD/CHF Long with Sky-High Reward

As price pulls back to retest the declining lower channel on the weekly chart, there may be an opportunity to enter. The zone of support is estimated from the trend line averaged over the period and adding a small buffer zone, making it 0.8657-0.8706.

The trigger for this long CADCHF trade would be found on the hourly chart (not shown) and would come in the usual form of a pin bar, bullish engulfing pattern, or bullish reversal divergence. It is true that this trade is counter the weekly trend, however, even a small bullish weekly bar would potentially provide excellent reward for risk on this trade.

By Kaye Lee, private fund trader and head trader consultant, Straight Talk Trading Blog

provides forex news and technical analysis on the trends that influence the global currency markets.
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12 November 2013 17:20 GMT