The USD/CAD is a perfect example of why the Directional Bias must be respected. The Directional Bias – if you haven’t already heard or read about it – is the market trend or psychology of the daily chart. I choose the daily for this because I feel it is the most well-followed and therefore most psychologically relevant time frame. Some time frames (and price levels) are simply important because they are well-watched.
The USD/CAD has certainly had a negative sentiment which organized into bearish momentum BUT DID NOT transition the market back into a downtrend. (IF however you/I determined it was a fresh transition – one that was newly formed – taking a bearish Directional Bias would be aggressive.) Pull of a daily chart of the USD/CAD and view it within a one-year lookback which means you include 52 weeks within the chart view. The angle of the 34EMA Wave while angles slightly downward would not qualify as a “four to six o’clock” angle and therefore the Directional Bias is not bearish but rather in a distribution market trend.
Respecting the market trend means – for me – that I will consider my entries only after I have identified the Directional Bias and then identified the specific time frame’s market trend that I want to set up for a potential trade.
In the case of the USD/CAD I have been very leery about taking swing shorts on anything but the shorter-term intraday time frames like the five, 15, and 30-minute charts. This is because the distribution market trend on the daily increases the likelihood that prices will bounce as they near prior support between 0.9849 and 0.9836, which were the January 12 and 18 lows respectively.
In distribution, price action often begins to exhaust at prior floors and ceilings so with the daily’s Directional Bias indicating distribution, the closer prices got to 0.9849 – 0.9836, the closer to potential support the pair got. This effectively limits the potential downside for any longer-term short. This includes the 60, 240-minute, and daily time frames.
Today’s USD/CAD is fueled by, well, fuel. Energies, specifically. With the dollar’s strength pushing commodities prices lower, including crude oil, the loonie has little reason to strengthen and add to that the dollar’s rally and the loonie falls behind. It’s a perfect storm for a USD/CAD comm-doll which works off the loonie-greenback-crude oil triangle.
The idea behind my “hesitant” shorts which would be taken only on the short-term time frames is so that when prices bounce sharply higher as they are doing today, quick(er) adjustments can be made. Of course, the daily itself was ripe for a distribution fade entry long but I realize that this aggressive entry style is not for everyone. As an alternative, consider the “Between the Greens” entry for the five-minute to take advantage of today’s USD/CAD strength
By the way, ignore the lows of a distribution market trend and, well, just take a look at what the USD/CHF already did…
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