Here comes the first actual TA of this blog. What we are going to be looking at is a channel and trendline break or bounce in the NZD/USD currency pair.
First some background info:
It might surprise people how big the NZD (New Zeeland Dollar) is in currency trading considering how small the country is, but the fact is that the NZD, because of its high central bank interest rate, is one of the most popular currencies to use for "carry trades". I will not discuss what a carry trade is here, but please read up on it as it is a very interesting trading method and it is good for any trader to understand how the carry traders continually force a currency pair like NZD/JPY up, and how the so called "credit crunch" of this years summer threw the exchange rates of this pair into a wild swing in part because of the scare it caused among such traders. Although these things are bordering on fundamental analysis, they must still be respected by anyone interested in fx trading.
However, NZD/USD is the pair we are looking at, and as I mentioned before we have the rate approaching a possible channel and trendline break or bounce situation.
Look at the chart and you will see 3 trendlines. The bottom one shows the currently prevailing support line, and the two middle ones show the cone shaped channel that we can see forming. As you can see, the price is approaching the lower lines and specifically the intersection of them. This is the point of interest for this trade. Note that I will assume that the price will keep on moving towards the the intersecting lines, if the price simply goes back up from now on there will be no trade opportunity.
When the price has approached the lines, the question is whether the price will bounce back up, break through the trendline, or simply go horizontal. I do not dare say if it will be one or the other, but what I can plan for is if I will buy if it bounces back up within the channel and if I will sell if it breaks through.
A thorough technical analysis will give indications as to why both scenarios are possible. To begin with it can be seen that there are many indicators lining up at the same place. For example the lower Bollinger-Band line, the 50 and 200 SMA (Simple Moving Average) are all located at about the same place as the intersection of the two trendlines. Since any of these indicators can contribute to a bounce, you can see why a bounce at this point is very likely. But this also shows how a clear break through all of these lines, would signal a strong technical break which implies further downward movement.
The MACD is, according to me, giving hints of a downward movement. As you can see by the MACD graph, the last two tops have a downwards trend, whereas the actual price has an upwards movement over the same tops. MACD is supposed to be an indication of the momentum of a price movement, and a so called "MACD divergance" which is what we are looking at now, indicates that there is a weakness in the upwards pointing price channel.
At the same time the Stochastics indicator can help us determine if the currency pair is overbought or oversold. Traditionally a cross from above the 80 to below indicates that the pair is overbought and is about to return to normal (ie. falling value) and vice versa for the 20 level. This applies to us because when (or if) the price has approached the trendline intersection, and the stochastics is at or below 20, and crosses back over, it is a indication that the price will return up from oversold levels, thus strengthening an upwards bounce.
That concludes the current technical situation. To summarize:
If the exchange rate breaks through the SMA´s, the bottom BB-line, and both trendlines. I will go short this pair. Since the trade has not quite been set up (price has not, and might never approach the two trendlines), It is hard to specify an exact price, but if the price crosses below the 200 SMA then pretty much all technical supports within reason have been broken. If we take the SMA value and give ourself a safe margin, that would put an entry price for going short around 0.7350.
If the price reaches the trendlines and these hold back the price (along with the other lines) and the price moves back up, I will go long this currency pair. Like I explained above it is hard to specify the entry specifics before the trade is completely set-up, however looking at the chart and all the lines, and giving the price some margin, I would estimate that an appropriate entry point is between 0.7500 and 0.7550.
Something that should never be underestimated is exit strategies. Honestly, anyone can find entry points through technical analysis, but it´s what to do after the entry that is the tricky part. Where should stops be? How do you take profits?
For a trendline break or bounce, the general rule for stop-losses is of course somewhere on the other side of the trendline. The other indicators (such as SMA´s) complicate this somewhat, but in general putting a stop on the farther side of the lines you are working with should work. I won´t specify anything until I have actually decided on an entry point however.
Exit points can also be simplified in this specific case. When it comes to the break of the bottom lines, a general TA rule of thumb is that the price will move the size of the channel the price is breaking through. This puts the take profit price somewhere around 400 pips away from the break, which is great. As for the bounce, the other side of the channel in which the bounce occurs is the logical take profit goal.
In general about stops and profit goals, always consider the profit/loss ratio. What is the ratio between the maximum loss (stop-loss) and the possible profit? Always try to get a ratio of at least 3/1. Successful technical traders actually have a surprisingly bad success percent on trades (50% isn´t uncommon), but this is made up for by going for trades where the likelihood of explosive price movements is bigger than on average if things go right, ie. a good profit/loss ratio.
Usually I like to look at the bigger and smaller time frames just to see if there are any surprises or bigger/smaller forces that can have an impact on my trade. I didn´t find anything of worth noting on those charts however, and I didn´t want to waste any more space on that. But try to do that yourselves.
Thats pretty much all I wanted to say about this set-up. Tomorrow I will update you on the price changes and what this implies for the trade. Hopefully the price will slide down to the trendlines shortly or within a few days and then I can set-up all the orders for the trades. If I am unlucky, the price just goes back up from right now and I miss out on a trading opportunity. These won´t be wasted however, since trade set-ups that are about to happen but become nothing is very common and only by learning to stick to your analysis only can you get the best trades.
Just incase there is a massive downwards price movement overnight I will set a entry for the short trade at 0.7347 with a stop-loss at 0.7453. That means I am risking 105 pips which is quite a lot, but at the same time the take profit level I will set is at 0.7023 (the width of the channel minus a little margin). Giving me a profit/loss ratio of 4.1 which is excellent. Of course you need to keep yourself updated on the price action and perhaps update the profit goal and move up (never down) the stop to give yourself a guaranteed profit if the trade moves far enough in your favor. By the way you might have noticed that I avoided using multiples of 10 on my orders (like not using 0.7350 or 0.7000) this is because research I have read shows that a majority of people put their orders on these numbers so I want to stay out of the irregularities of action that might occur on such values.
Sorry about the long post, talk to you soon!
/Henkos
0 comments:
Post a Comment