Technical Analysis Revisited

There continues to be a debate on whether or not technical analysis is actually useful. There’s always going to be a group of hardcore technical analysts and another group that just puts TA right next to black magic and psychics. 

Despite what you might think, I continue to present the case that technical analysis is really just a tool to help you develop a rule based trading method. Rather than arbitrarily enter and exit trades based on a long term macro trend, TA enables you to optimize your entry and exits by looking at price behaviours. Another view of TA is that it helps you establish a trading plan – when to enter, when to add to the position, and when to bail out.

At the time of writing this post, I made a post a few days earlier on my take of the USDCAD pair. Here is the original post. I bring your attention to this post as it presents my case for TA very nicely.

Recall: I mentioned before that TA is not supposed to work. Just because you plotted a support or resistance level, it doesn’t mean it will hold up. It just marks a higher probability turning point. It helps you establish a trading plan, sets entry points, plan your stop losses, and your target take profit.

In my original post a few days ago at the time of writing this post, I talked about looking to short the USDCAD pair based the daily down trend. If you took a look at my original post, great! If you didn’t, here is the key chart we will be focusing on for the remainder of this post.

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USDCAD 1-Hour

I marked potential entry opportunities on where I believed the USDCAD would start selling off into. I actually took these trades in real time off the resistance zone and then the two potential supply zones above. There is a subtle difference between resistance and supply. Resistance is based on a series of retouches thus strengthening an area to a certain point before it no longer holds up. Supply is a fresh level marking a potential demand and supply imbalance. With these zones, I established two major entry points really and below is how it turned out.

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USDCAD 1-Hour

USDCAD sold off very drastically shortly afterwards. Did I predict this? Not really, but I was originally in for the trend trade. If you refer back to my original post, I posted some more in-depth analysis on why I took the trade that I did.

What really happened was in the March, 2016 FOMC meeting, the Yellen announced a more dovish outlook reducing the interest rate hike for the remaining of 2016 from four hikes to two hikes citing “global economic risk”. This is never good news for a currency and causing the U.S. Dollar to sell off generating an upwards of 1.5% gain for the Canadian Dollar.

I stress once again that there was no way I could have predicted what Yellen was going to say. However, technical analysis did allow me to plan out how I was going to scale into this USDCAD short trade. I admit I didn’t really rely on TA to exit this trade, but essentially I exited as soon as I saw the selling pressure dying down as I did not want to be caught into a whipsaw action.

Does this mean that if I use TA to plan out my trades, they will all be profitable? Heck no! I do have losing trades and there should be no shame in admitting that. TA is a great way to control your risk and losses. When you ask yourself how long am I going to keep this losing position open for? You can get the answer quite clearly from your chart as you plot out the levels that you plan on trading at and where you decide to implement a hard stop loss.

That’s it for this article. I am definitely looking to have a series going to better explain technical analysis concepts. Just remember, there is no one right way to trade. If you find something that works for you, use it until it doesn’t work anymore.

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