In terms of the best risk to reward trade setups, you will very often get the best risk to reward trading high volatility moves in one direction (Which overshoot due to human emotion) and looking for a contrary trading opportunity in the other direction. Here we are going to look at 2 trade setups EUR/CAD and NZD/CAD.
Trading Bullish or Bearish Extremes
On the charts below, we are going to use price action, Bollinger bands and momentum to look for contrary trading opportunities. In any financial market, traders respond to the fundamentals but will very often push prices too far as emotions come into play and sentiment becomes too bullish or bearish towards a currency pair. If you look at any price chart – short term price spikes caused by emotion tend to retrace as prices return to “fair value” as a bullish or bearish extreme peaks. In terms of EUR/CAD (which we also looked at last week) and NZD/CAD we have seen overshoots to the downside and we now expect prices to retrace.
Swing Trading Advantages
Both setups below give risk to reward of up to 5:1 which means you can get four trades wrong and one right and still breakeven. Contrary trades against the majority will always tend to give you the best risk to reward and also if you are swing trading bullish or bearish extremes you will generally see your trade result quickly win or lose so your money is working hard…
Both setups include the Canadian Dollar which benefited from an above consensus employment report. The Canadian economy last Friday created 259,000 thousand jobs recovering the loss of 212 thousand jobs in January. This was well above the forecast of 98,000 thousand jobs added. The unemployment rate fell sharply, from 9.4% to 8.2% and has dropped to its lowest level since March 2020. This has seen traders buy the Canadian Dollar and there also looking for the Bank Of Canada to possibly be the first G7 central bank to interest raise rates going forward. So why sell the CAD? The good news is on the price and speculators are heavily long so some retracement is likely before higher prices unfold.
We can see on the chart below that after breaking the base of the triangle the EUR moves into an accelerated downtrend (which can be seen by the outer Bollinger bands (orange lines) which become wider showing the volatility increase. Yesterday after making a new daily chart low we closed off the low of the day and today we are trading up on the day above the previous open. Momentum has turned up in terms of the stochastic and RSI with the latter turning up from its lowest reading on the chart.
We think yesterday’s price action could indicate the exhaustion of selling and if we can break nearby resistance we should see a retracement up to levels of resistance indicated above 1.4900. On trade entry, the stop should be below the spike tail low but if we breakout and follow through strongly to the upside the stop can be moved behind the two candle bodies and then trailed up if further strength unfolds.
On the chart below the NZD fell hard on high volatility from the 0.9200 level but confirmed a double bottom yesterday and we are now trading above support with both momentum indicators up. If we breakout above the 0.9000 level we would expect a retracement of the recent sell-off to levels of resistance indicated. On entry stop below the double bottom but if we follow through to the upside strongly stop can be bought up behind today’s low.
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