Getting back on the horse today with a simple forex setup: the double top. Are traders ready to sell now that it’s breaking lower?
Before you move on, for those who are not familiar with my framework, signals, setups, or acronyms, please visit my discretionary trading framework blog.
There really isn’t much to this trade idea other than the double top formation, which typically is a signal that buyers have lost the edge to sellers. And we can see in the four hour forex chart above of EUR/CAD, the pair is now breaking below the “neckline,” which I define as the previous consolidate area between 1.5000 – 1.5250. Maybe we’ll see more sellers now that not only is a previous area of interest broken, but also a major psychological support level (1.5000).
I also like this position because of the interest rate differential in favor of the Canadian dollar, and the likelihood that oil may have found a temporary bottom. I don’t think that a rally is in order for the Loonie or oil, but I think there can’t be much more sellers around. I could be wrong, but I’ll just have to wait and see. And finally, the data from Europe has been mostly negative lately, which could lead to another quantitative easing move from the ECB in March.
So, I’m shorting on this break and around the consolidation area, with my max stop just above the consolidation area. My max profit target is the previous swing low area last seen in December, which was also a big consolidation area during the Summer of 2014. Here’s what I’m doing:
Short half position EUR/CAD at market (1.4925), stop at 1.5425, profit target at 1.4100
Short half position EUR/CAD at 1.5250, stop at 1.5425, profit target at 1.4100
I’m only risking 1.00% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of about 4.10:1. Of course, anything can happen in the forex markets, so if the story changes I’ll be sure to reassess and adjust quickly if necessary. Stay tuned by following me on Twitter and Facebook!