Before we get into the article, I’d like to say… Happy Birthday Collin!! He’s been a great friend and mentor, I wish him another age of happiness and success wish many many more to come!
For this week, just thought I would share a brief process of how I derive some trade ideas.
Note that I have left out the details of my analysis because it would be too long to explain, but you can use your own analysis to derive a bias for yourself. Doesn’t have to be the same as mine, I could be wrong afterall. I just want to show a short process of how I derive the technical context for trade ideas.
Many ways to generate trade ideas, some use a bottom up approach by looking at the micro picture, before checking the macro picture for context. Others do a top down approach by looking at the macro picture to form a context before looking for a setup on the micro level.
I’m going to do an example of a top down approach. I sometimes use this to form more solid context for my short term trades, but for swing trades, having a broad context to define my trade is a definite must for me.
This is because I believe that the technical picture of one market is sufficient for a short term trade. However, for me personally, holding a trade for the longer term takes more conviction and I find the conviction in the broader analysis. I will be using a bit of inter-market analysis to form a bigger picture for my swing setup. For some traders, the technical picture is sufficient to form the basis and conviction for a longer term swing trade, and that’s totally fine. Many ways to make money from the markets.
Usually to find swing trade ideas, I’ll do an analysis of some key charts. Some of the key charts I observe are the USDx and EURGBP. These 2 help to frame the context of my EURUSD and GBPUSD trades. You could use the AUDNZD chart or USDJPY chart to form your context for trade ideas on the related crosses as well.
So let’s take a look at the USDx.
As you can see from this monthly chart, there appears to be some reaction to the 50% level of this range we’re in.
Zooming in, the picture is beginning to look more bullish to me. The strong move up, followed by this consolidation, seems to call for a continuation up. In this case, i’m anticipating a breakout higher.
The EURGBP looks like it’s done a bit of an over extension to the downside, reached an area of interest. So a move up can be expected soon. This means a long EUR, short GBP bias.
So with a strengthening bias on the USDX long term, coupled with our bias for EUR and GBP in the mid term, a short GBPUSD swing trade as the likely scenario with 2 context factors in our favour. A weakening GBP and a strengthening USD. This way, if I am wrong on one of my context factors, the other factor can still help my trade.
Taking a look at the GBPUSD, we’ve run up very far yesterday, after we find some sellers, a move down can certainly be expected. Trend is clearly down, there is a lot of space downside, uncharted territory. Note that as we go into uncharted territory, psychological levels of support and resistance will be more important. We have blown through the previous supports of 3120, 3200 and 3240, which I thought would act as resistance. Now a stophunt above 3350 is on the cards. So now I will wait for GBPUSD to form a price structure around this region, and wait for it to either stophunt above and drop back into the structure, or for it to break down from this structure before I get in short for a swing trade.
In forex, I seldom ever hold trades over the weekends, so I will close them on friday night. This is a personal risk management rule because the weekend gaps for forex can be very large. I do not expect a 2009 type of scenario from GBPUSD right now, price hasn’t been behaving the same way. If I did expect that, then I would certainly hold my short trades over weekends.
Continuing with a broad picture analysis, taking a look at the WTI, we’ve cracked under the $46 mark, which indicates to me a higher chance for a sell off into $40. The setup for a short on WTI isn’t very clear to me. So instead of directly trading the WTI, I will use the USDCAD as a proxy for this trade idea.
Using USDCAD as a proxy
So with USD strength and crude oil weakness, long USDCAD is the likely play here in my book. The CAD is positively correlated with oil because the CAD economy is a large exporter of this commodity. As oil price drops, CAD weakens, hence pushing the USDCAD exchange rate higher.
Taking a peek at the USDCAD chart, you can see price has been in a consolidation for about 2 months, this means the next move should be a decently large trend move. This is a concept which Collin taught me long ago when he introduced Toby Crabel’s work to me. Contraction in volatility is usually a pre-cursor to an expansion in volatility. So since USDCAD has been in a state of contracting volatility, what comes next would be an expansion of volatility in the form of an extended move. Usually the start of a new trend. This concept is direction neutral, meaning it doesn’t tell you if it’s going to expand up or down. The direction bias has to come from other forms of analysis. This is a very useful concept, because it allows you to anticipate future opportunities, giving you time to plan how you want to take advantage of them.
Overall, this setup seems to be nicer than on the WTI itself.
If we do head up, my potential targets upside for the long term swing are 3640, 3700, 3750, 3800
I’m already stalking retracement entries on this right now, it’s not easy to catch a good entry, so a breakout entry might be required to catch this move, we’ll see. This will be something I would consider holding over weekends as there is potential for a very large trend move.
So there you go folks, just a quick glimpse over my shoulder as to how i form some of my trade ideas.
Good trading everyone!