Trade Of The Week: Canadian Dollar

Hi, and welcome to Trade of the Week. A busy week featured a whole casserole of good trades, bad trades and quite a few missed trades. Today I’m going to look at a trade that didn’t work out.

Any seasoned trader will tell you that taking losses is all part of the job; the trick is to limit the losses and to analyse the reasons for the loss. On Tuesday I wrote about my Dilemma With The Loonie and how I fancied selling the USDCAD to target parity. The dilemma was that some strength had crept into the US Dollar and that with nervous stockmarkets this could continue.

Strategy
The daily chart showed the USDCAD in a firm downtrend. However, Dollar strength had taken the rate above the support and resistance line at C$1.0650, and briefly above the downtrend line and C$1.07 big figure. My strategy was to watch the closing level; if resistance levels held firm and the price closed below C$1.0650 then I’d open up a short bet.

The tricky bit about trading the resistance lines was that it flew in the face of my normal strategies, with the Parabolic SAR, MACD and RSI all rising on both the daily and 30-minute charts.

Where To Put Stop And Limit Levels
I had a choice here; the downtrend line was roughly C$1.0680, the 50-day moving average was at C$1.0706 and the previous day’s high was C$1.0715. I could have placed a tight stop just the other side of the trend line, but I reasoned that if I was looking at a 600-pip move down to parity I could afford to give a few pips. I decided to place my stop loss at C$1.0710, far enough above the big figure to escape the odd spike, but near enough to get me out if I was wrong.

My limit strategy would be my standard T1 at +30 pips then run the balance with my stop loss initially at break even, then trailing down at a safe (50-pip) distance.

Outcome
The price closed on Tuesday at C$1.0637, showing a failure to hold above C$1.07, the trend line and the C$1.065 S&R line. The following morning the price opened higher, but I figured this was no more than the usual early morning monkey business and sold £5 at C$1.0670.

Had I overslept I’d probably have missed the trade, because by nine o’clock the price had broken C$1.07 and by 9.30 I was stopped out. My fears of a stockmarket collapse triggering Dollar strength had been borne out, sending the USDCAD above C$1.08 at the close.

I took a 40-pip hit on £5, giving a loss of £200; an irritation, but all part of trading. More importantly, what did I learn from the trade that will help me next time?

First off, one of those horrible little ditties that equity managers used to sing, “If in doubt, stay out.” I expressed my doubts in the article, but was a bit too keen to get in on the trade. It’s the old maxim about not having a pre-conceived idea, but paying careful attention to what the market is saying. My normal indicators were showing short-term dollar strength, and the fact that the price had returned above the C$1.0650 resistance should have made me hold off at the very least.

On a fundamental point, having expressed concerns about the equity markets I should have held off until they had settled down. I traded USDCAD before the FTSE opened; if I’d held off, the rapid sell off in shares would have confirmed my fears.

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