Historically I’ve focused on trading the spot currency market, but I’ve begun playing around with options on currency exchange trade funds. The ETFs I’m practicing with are offered by Rydex Investments under the brand CurrencyShares. These ETFs hold the underlying spot currency, and derive their value from the spot price. For example, today the CurrencyShares Euro ETF (FXE) closed at $136 per share, while the spot price closed around $1.3618 on my daily candle. Notice the decimal shift to derive the share price. I thought I’d walk through an example trade for today’s post.

As usual, my trade plan begins with a support or resistance trading opportunity. In this example I’m using the CurrencyShares Canadian Dollar ETF (FXC) shown in the chart above. You can click the chart for a larger image. The ETF holds a spot position in the named currency, therefore you can translate spot strategies to an exchange based strategy through these ETFs. You could also use support and resistance on the FXC chart alone, but I like to correlate the ETFs to the spot market. Since FXC holds a trust of Canadian dollars, a trader who is bullish USD/CAD would take a bearish bias against FXC because they are betting against the Canadian dollar. Using the charts, a trader might decide USD/CAD is trading within support. If they decide to commit themselves to a bullish USD position, the trade could be expressed by going long USD/CAD, short FXC, or executing an option strategy on FXC. Let’s look at the pros and cons of each trade strategy.

Going Long USD/CAD

If the trader buys USD/CAD they are committed to the market until either they take profit, or they are stopped out. In this example, the appropriate stop loss is below $1.02. If the trader bought USD/CAD right now, a stop loss of at least 100 pips would be appropriate. Assuming they trade one $10,000 mini lot, the total risk would equal $100 using 100:1 leverage. Additionally, the stop loss would offer no protection from volatility. If the USD/CAD moves lower before it moves higher the trader may be stopped out on what ultimately was the correct position. If the trader is stopped out, and enters the trade again the risk has been doubled.

Shorting FXC

Alternatively the trader could short FXC, however it may be tough to find shares to borrow in order to short. The trader would ideally place a stop loss above supply which exposes the same volatility risk as the spot trade suffers from.

Buying a Put Option

When you buy a put option, you are betting the value of the underlying issue will decline. The strike price declared in the option is effectively the price at which you will be able to short when you exercise the option. The trader will pay a premium when the option is written (opened) which effectively is their maximum loss on the position. For example, I can purchase an FXC put option with a strike price of $96 for a premium of $95.00. This premium is equivalent to a 95 pip stop loss in the spot market on one mini contract, but represents the maximum loss the option will suffer. Even if the market moves 100 points against me, my option is still valid until expiration unlike a stop loss. Ideally, the price of FXC will fall giving my option greater value than a break even price of $95.05 when I exercise it. The best part is this option will expire on April 10th giving the market 39 days to work itself out before the option must be exercised. Unlike a stop loss, the risk is paid up front and you have 39 days to make a profit regardless of what price does between now and then.

There are other advantages to the option we can discuss in a future post. I’ll keep you updated on this example trade as we get closer to expiration.

Best of luck,

Ryan

Routine is very important if you want a consistent result whether you are trading, or learning to play a bass guitar. In fact, I believe routine is important enough to be defined within your trading plan. Traders who fail to maintain a routine are at risk of taking trades against their trading plan, or simply failing to consider all the variables when they plan a trade. Either way, maintain a routine will help you reduce overall risk. This week I failed to maintain my routine, and it almost cost me some pips.

When I trade my Remora Methodology using daily charts my routine goes like this:

1. Sunday: Identify fundamentals for the week
2. Identify a “bargain day” signal
3. Identify a potential entry using support and resistance
4. Identify a profit target
5. Calculate risk
6. Pull the trigger, place the orders or skip it
7. Let the trade run

Last week I had a lot on my schedule, and I forgot to review the fundamental calendar on Sunday. Later in the week, I was trading USD/CAD based solely on a technical setup which put me long near the $1.04 demand level. Unfortunately, I pulled the trigger hours before the FOMC rate statement was scheduled to be released. I was nearly stopped out when the U.S. dollar rallied smartly following the rate statement. Since I had failed to follow my routine, I found the strenght of USD/CAD’s rally totally confusing. I even sent a Tweet during the rally saying:

“What in the world is driving this USD/CAD spike from $1.04?”

Clearly I was confused as a result of not following my routine and lost situational awareness. The bottom line is, I was lucky this trade wasn’t stopped out. Had I followed my routine, I would have known the FOMC was scheduled to release a rate statement on Thursday afternoon. I don’t mind managing trades already in the money during a big news statement, but I avoid entering new ones immediately prior to major news. Let this be a reminder to you on the importance of keeping a routine.

Best of luck this week!

Ryan

Over the years I’ve seen the Canadian dollar do some bizarre things, but today’s price action was just plan loonie. If a trader can have an arch nemesis, mine is any currency paired with the Canadian dollar. Earlier this week I blogged my suspicion that USD/CAD would find it’s footing around the $1.04 level. Today, the currency pair sold down to $1.0395 followed by a vicious rally. Where the daily chart winds up closing may be a game changer regarding trend on the long time frames. Bargain hunters beware.

Personally, I played this trade totally wrong. I read the demand level incorrectly and placed my long order at $1.0440. In retrospect, I should have played the round number tightly, and demanded a better price. Using last week’s low, $1.0410 would have been a much better long play. Regardless, I was expecting my trade would be stopped out this afternoon, but to my surprise the dollar rallied.

I didn’t expect the response to be as decisive out of $1.04 as it was. While the rally was impressive, USD has yet to clear the daily high supply zone which concerns me on a long position. If USD/CAD fails to clear and hold the $1.06 handle, I don’t think the bulls will have much long term success. On the daily chart, you’ll find the next significant demand level around $1.03, a long way to fall. Still, the USD/CAD has found buyers along $1.04, which is also a 61.8 percent retracement on the move from $1.02 to$1.08. It feels like a zone of indecision to me. Tomorrow the market will see Canadian Retail Sales data, and U.S. CPI data, which may help break this currency pair loose.

Since I botched the entry so bad, and my plan was poor overall, I decided not to look a gift horse in the mouth. I took profit on both lots a few moments ago putting another 47.8 pips in the till. My attempt at trading the weekly low was a short term trade idea, so I figure why give my arch nemesis a chance to fight back? Had I played the round number correctly, I’d be more than willing to hold this trade longer.

I hope your having a great trading week, best of luck!

Ryan

In 2008 USD/CAD broke lose of $1.04, and rallied faster than a space shuttle with a third booster rocket to $1.30. Falling from orbit, dollar steadily slid back to test $1.04, and traders every where waited for the next shuttle launch, but it never came. Instead, supply and demand evened up, and USD/CAD has traded in a painful range between $1.08 and $1.04 for two quarters. Over the last four weeks however, dollar has popped out of $1.04 with some conviction, and now rests on a setup I like to call the “back nine”.

The back nine is simply a trend line test, following the breakout that caused a trend line to fail. It’s nothing fancy, but USD/CAD hasn’t shown anything with a long bias in several months so in my opinion the technical setup is significant.  Pulling Fibonacci ratios from the $1.30 high, to the $1.02 low a potential long term target for USD/CAD could be $1.13. For bargain hunters, this could be handy to keep in mind. If USD/CAD continues to move higher, and bargain days become available, the long term target could offer a good long trade. Anything could happen coming out of the holiday weekend in the United States tomorrow, but keep this long term picture in mind as you trade the price action over the coming weeks.

What do you think about USD/CAD? Do you think it has the fundamental strength to hold this demand level? Or are you still a bear? Share your comments with us below, I’d love to hear them.

Best of luck,

Ryan

Today I want to share the story of Sung C. from California. Sung approached me about six months ago looking for a mentor, and he is one of the few people I’ve agreed to work with one-on-one. Occasionally I agree to mentor people one-on-one if I believe they have the commitment it takes to become a professional grade trader, and I believe Sung has what it takes. Sung had traded other markets, and had lost real money. When he asked me to mentor him he told me currencies felt like a better fit to his personality, and he knew he needed some help. I worked with Sung one-on-one over four one hour sessions. We found a trading style that fit his personality, schedule, family time and hobbies. We developed a trading plan, and when training was complete, I cut him loose to find trades on his own. He would email me every trade he took, and I continued to coach him via email. The first couple months Sung lost money in his demo account. He demo traded because he knew what it felt like to loose real money, and he was committed to demo trading until he was solid on paper again. Sung didn’t let the first few months get the best of him. He remained commited to his trading plan, open to learning from his mistakes and kept on trading. Last week, I was thrilled to recieve the following email from Sung:

Hi Ryan,

I just wanted to write you real quick and let you know how excited I am about my first plus month!  January was the first month I turned a profit in paper trading!  I was up 167 pips and $259.25 in the virtual account!

I had a few setups pending this month already as I saw a bunch of bargain days but they never triggered.  I also had analyzed a few and I only saw a 1:2.8 ratio or less and so i didn’t take the trades.  So far, I have no trades for the month and I’m ok with it!

This is great!  Thanks once again!

- Sung

In a few short months Sung was able to improve his trading performance and come out a winner in January. He did it though resolve, commitment to his trading plan and selecting only trades that offered him the best risk-to-reward ratios. Sung is well on his way to becoming a professional grade trader, and I couldn’t be happier for him. If you are struggling, I hope you find inspiration in Sung’s first profitable month. Ask yourself, what are you doing that is contributing to your loosing streak? How many currency pairs are you trying to trade? Look carefully at your trading plan, is it clear? Could you explain your trading plan to someone else in less than 5 minutes? If not, it is too complex in my opinion. Analyze your trades, do you risk to much or do you take questionable trades? Are you sticking to your profit targets, if not why? Are you afraid to loose money? Perhaps you are risking too much money per trade. My advice to you is simple; commit to one trading strategy for at least six months, write down your trading plan, journal every trade, and trade no more than four currency pairs until you are consistently profitable. If you still need some help, let me know.

Best of luck this week,

Ryan

In Sunday’s Game Plan I was looking for an AUD/USD long anticipating the Royal Bank of Austrailia (RBA) would raise their interest rate. Often news trades happen the day prior as traders attempt to price in their expectations. I got long at $.8790 along demand, and I bailed out just prior to the rate statement due to a technical setup I call the “back nine”. When a trend line is broken the market often returns to test an extension of the broken trend line, I call this test a “back nine” setup.  If you don’t play golf the term “back nine” refers to the last nine holes of an 18 hole course. When a back nine setup occurs it often represents an opportunity for bargain hunting traders to join a breakout at a discounted price. The back nine also represents a chance to salvage what is left of my golf game before I end up complaining about faulty irons at the clubhouse bar. In this setup I knew I was long against the dominate price action so I took profit at the back nine, just prior to the rate statement. That turned out to be a good decision because the RBA surprised the market and didn’t raise rates. So why is AUD/USD still the focus for today’s Technical Tuesday post?

I’m bringing this up in case you are still eying the supply level at $0.88. In my opinion, this supply level is probably going to be a lame duck given the RBA didn’t raise rates. Traders are dumping Australian dollars faster than Rush Limbaugh can bust a move to Lady Gaga’s Poker Face. I think there is serious downside risk for the Australian dollar at this point, bulls beware.

Best of luck,

Ryan

Howdy Traders!

There will be no video this week, I’ve been on the road and unusually busy, but I’ll resume my weekly trading videos next week. This week I’m starting a new column called the “Sunday Game Plan”. This weekly post will highlight trading opportunities I see for the week ahead, and what is on my watch list. This week I’m starting off with a currency pair I’d wager a lot of you don’t watch, U.S. Dollar / Singapore Dollar or USD/SGD. The setup I’m watching is a classic double-top pattern that is testing a supply level set six weeks ago. Although the supply level doesn’t have a large base to it, the currency pair did fall 260 pips after a quick turn near the round number of $1.41. There is a slew of fundamental event risk on tap for the U.S. Dollar this week including manufacturing data, home sales, and everybody’s personal favorite non-farm payroll data. It will be interesting to see if the equity market can recover some of it’s losses this week, which may cause the flow to be negative for dollar. The risk to shorts at this supply level is obviously that U.S. Dollar may continue to appreciate, it has been slaughtering currencies left and right for the last few weeks.

AUD/USD Also in Play

I’m also interested in AUD/USD this week. I’ve written my thoughts on my FX Street blog which can be found at this link: http://blogs.fxstreet.com/dayjobtrader/

Best of luck!

Ryan

Howdy Traders,

This week’s video deals with a losing trade, the CFTC’s proposed regulations, and combining technical reasons to trade with fundamental reasons to trade. I hope your having a fantastic weekend, and best of luck next week!

Canadian loonie lost ground against the United States dollar and Japenese Yen today following mixed fundamental data, and a drop in oil. The market consumed data from Canada’s housing sector as well as the Bank of Canada’s Business Outlook Survey, which is released quarterly. The fundamental data was mixed and speculation over Canada’s economy recovery continued, especially after last week’s disappointing employment data. Canadian building permits fell -4.6 percent in November versus an expected fall of only -2.6 percent, a decline attributed to decreases in non-residential building permits. Meanwhile, residential permits rose 9.1%. CAD’s losses put the currency into an area I refer to as bargain hunting territory, giving me something to ponder for today’s post.

Taking a holistic look at CAD, the fundamental and technical pictured combined isn’t that bad. The business survey points out that more than 70% of firms surveyed expect their sales volume to increase over the next twelve months. Other interesting tidbits from the survey include the following:

• 42% expect higher machinery and equipment spending.
• 54% expect their employment levels to be higher.
• 42% expect prices of products or services purchased to increase.
• 38% expect prices of products or services sold to increase.
• 61% expect an inflation rate of 1 to 2 percent.

The inflation data is interesting considering almost half of the firms surveyed believe their cost of goods sold will increase, but only 38 percent expect to pass that on to the consumer.  The Bank of Canada points out that while firms expect output prices to grow at a faster rate than the last twelve months, some firms may have trouble increasing prices to match the higher cost of goods.

“On balance, firms also expect their own output prices to grow at a faster pace than over the past 12 months. For many firms, this reflects the end of a period of price discounting, as they plan to keep prices stable or try to partly reverse past discounts to restore profit margins. Some firms plan to pass on part of the higher cost of inputs to customers, although, for others, the ability to raise prices is limited, given soft market conditions.”

-          January 2010 Business Outlook Survey, Bank of Canada

Overall, the survey suggests that Canadian executives are rather optimistic about the next twelve months.

Sweet, Sweet Crude

Another interesting chart related to Canadian dollar is the West Texas Intermediate Crude daily chart. Last week WTI broke through resistance at $82, and today $82 is being tested as support. Should $82 hold and oil continue higher, loonie may benefit.

Data on Tap

Tomorrow Canada will see Trade Balance data, which is expected to show a positive gain. The market also expects to see trade data from the United States which makes me more interested in CAD/JPY than USD/CAD today.  Both USD/CAD and CAD/JPY have moved into what I call bargain hunting territory, but CAD/JPY would be free of fundamental influence from the dollar. Trading cross pairs to remove fundamental pollutants is something I talk about in my book, Making Money in Forex. The next twenty four hours could provide a decent example of this process in action.

Of course, I could be totally wrong. It is hard to ignore the speed of today’s CAD/JPY sell off. Today’s price action wasn’t a meandering Sunday stroll into bargain hunting land, rather it was fierce 100 pip slaughter fest taking only five hours to fall.

Best of luck,

Ryan

The United States Dollar Index monthly chart is the most interesting chart I’ve looked at today. The dollar has successfully beaten up most major currencies in December, and appears to be ending 2009 with a solid bull pattern along demand established in 2008. The market appears to be content betting on an accelerated recovery in the United States, but the question remains, will this trend continue or is this a dead cat bounce? The Dollar Index is trading at resistance near $78.00, and could easily turn lower from here.  So far, it appears the market has pushed above this resistance on the weekly chart. With the markets in holiday mode, and volumes thin, it is hard to tell at this point whether the break above resistance at $78 has teeth or if dollar is simply benefiting from thin volume.

Personally, it is hard for me to picture a long term trend of dollar strength. The United States Congress seems set on “saving billions, by insuring millions” through health care reform, while aggressively spending every dollar they can collect or print. That being said, price is never wrong, so if the market wants to go higher in the short term I’m happy to ride along. This week, the market will get data on United States third quarter GDP, durable goods, and existing and new home sales.  Considering the current sentiment seems to be banking on an accelerated U.S. recovery, any shockers in this data could take the wind out of dollar’s sails. So how could we play this?

CAD is the only major currency that hasn’t been totally slaughtered by the dollar over the last few weeks. It has remained stuck in a consolidation range just above the key price pivot of $1.04. This morning the market saw retail sales data from Canada that wasn’t on par with the expectations of a hot recovery in progress. The retail sales numbers came in on target, but core retail sales slipped 0.2 percent. Automotive sales at new car dealers rose 3.6 percent however non-automotive retail sales slipped 0.2% in October. Declines were also seen in food and beverage (-1.2%), pharmacies and personal care (-0.9%), and beer, wine and liquor store sales (-2.2%).  I suppose one could argue if the economy is improving, the need for Crown Royal or Grey Goose Vodka would indeed drop. Canada will release GDP data on Wednesday, but that is it. With the retail data at expectations or below, that may open an opportunity for the dollar to gain ground fundamentally on the loonie this week. It is worth noting, all of the gains made by the loonie overnight were erased by dollar bulls during New York trading today.

Keep an eye on the USD/CAD, this pair is bound to breakout at some point.

Best of luck,

Ryan