The risk contagion appears to be spreading as Norges Bank (Norwegian Central Bank) cut interest rates 50 basis points in lieu of the expected 25 basis points. The Italian bond auction brought in record yields and the USDollar is approaching November 25, 2011 highs. The market sentiment is returning to RISK OFF (“ How to Read Risk “OFF” or Risk “ON” ). Money is looking for safety which is great for forex traders and we can simply look to buy US Dollars.
The USDCHF has shown relative strength over the past 3 months as it has already broken the highs from October 4, 2011. Therefore, we will look for an entry in this pair. Using trend lines to time entries, an entry point into this strong trend is near the .9430 level. ( “ Using Trend Lines to Optimize Entries “ )
(Created using FXCM’s Marketscope 2.0 charts)
The chart above illustrates how the USDCHF was one of the first major pairs to surpass the swing point price level on October 4, 2011.
Moving down to a 1 hour chart, we see a nice price channel has formed.
(Created using FXCM’s Marketscope 2.0 charts)
The 2 green circles represent the 2 points it takes to draw a line. We will look to enter the pair on a 3rd touch of the line (blue circle). As it turns out, there also exists a horizontal support level (purple dotted line) that coincides with the upward sloping black trend line.
This presents us with a good chance at a good risk to reward ratio. Enter the trade near .9430 with a stop just below the trend line near .9390. Look to take profits near the top of the price channel which offers us better than a 1:2 risk to reward ratio.
Additional Resources
Using Trend Lines to Optimize Your Entries
Risk to Reward Ratio Validation
The Professional Trader’s Friend: Trends
---Written by Jeremy Wagner, Lead Trading Instructor, DailyFX Education
To contact Jeremy, email jwagner@dailyfx.com. Follow me on Twitter at @JWagnerFXTrader.
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