Tuesday, March 31, 2009

Aud cad hits resistance, good risk reward in short trade

aud cad daily 31.03.09

This is the daily chart of Aud-cad (Australian dollar-Canadian dollar) pair.

As can be clearly seen on the chart that the pair has been rallying since the beginning of Feb.  After such a huge rally its finally facing resistance in the region of .8670, the previous swing high in mid December 08. Over the last seven trading sessions price has thrice bounced lower from the resistance area. Traders are looking to book profits after such a stupendous move and this resistance gives them an excuse to do so. Daily stochastics studies too are over extended, with RSI & Stochastics both showing heavy overbought levels and signs of exhaustion & that a down move should be around the corner.

 

A very safe area to take a short position, as risk reward ratio is very favourably. This is why I always look at take positions around areas of resistance and support as then I can define my risk very well. If on a closing basis price closes above resistance or below support level, then I book the loss on my trade & get out. This would mean a small loss of 50-120 pips. If one the other hand the trend changes as one expects then after a favourable move in one’s favour you can move the stop loss to where the trade was entered into & then onwards trail the stops along with the price. This way you would ensure that your losses are minimum, or zero and then let your profits run with the stops getting tighter/closer to price as the trend matures. This is the best way to take positions in markets and the way to make money on a regular consistent basis.

 

So I will be taking a short trade here with a stop above the resistance line on a closing basis. Will trail profit till target of about 0.81-0.82 is neared. If on the other hand, the resistance is overcome and price is able to move above conclusively, would then go long instead.