Picking Your Spot: USD/CHF Swing Short Set Up

In my experience, corrections are tricky things to identify and even trickier to take advantage of. However, it’s a skill that I believe is certainly worth practicing. There are a number of factors to consider…let’s break down a few of them. 

I’ve found that most trends correct. I am not looking to capitalize on a correction in a sideways, non-trending market. Corrections are often the result of profit taking and I feel that healthy trends correct. So, if there is an up or downtrend that I can verify on a time frame using my 34EMA Wave, I will look to see if it can be bought/sold into.

Two of my favorite ways to identify a correction are the support/resistance provided by my 34EMA Wave and Fibonacci Retracement/Extension levels. Now the 34EMA is simple and visual: Just set up the 34 period exponential moving average on the high, the low, and the close and you have an instant view of market direction, sentiment as well as dynamic support/resistance levels. Fibonacci…well, that is much more subjective but I believe it has the potential to be effective  once you get the idea behind what I call the “last, major move”.

*The LAST MAJOR MOVE is the most recent, significant, sell-off or rally on a time frame that a Fibonacci Retracement/Extension will most accurately identify support and resistance. In my humble opinion, this leaves a lot of subjectivity to that interpretation, but with practice you will eventually learn to see the most recent and un-retraced move on a chart fairly quickly. Fibonacci analysis can also be time frame specific depending upon the last major move e.g. a rally on the 30-minute chart may not necessarily be a rally on the 240.

There could be multiple Fibonacci Retracement/Extensions for any given pair depending upon the recent rallies or declines. Furthermore, new highs and/or lows can invalidate a previous Retracement/Extension and therefore you must be watchful for price movement that could change the analysis you have already done. For example, there could potentially be three different price points at which an initial correction could be seen simply based upon the 34EMA Wave. Volatility will often dictate which is too close and which may be too far. Economic indicators as well as PowerStats may help you identify when these time are. PowerStats: http://www.ibfx.com/Tools/Power-Stats.aspx

Sound exhausting? It’s not too difficult once you get the hang of it.

Let’s take a look at the USD/CHF this morning.

I’ve been watching the downtrend on the 30 and 60-minute time frames and noticed that with the “4 to 6 o’clock” angle on both these charts I could set up a swing short to follow the bearish sentiment on the swissy. The 30-minute chart was tempting because of the swing short’s entry trigger at the 34 period EMA on the low (the bottom line of my Wave) and the resistance of the 1.0300 major psychological level.

 

*Results are not guaranteed, individual experiences may vary. Past performance is not indicative of future results

The 60-minute’s swing short was just above that. Another level of resistance is if the bulls could rally the pair higher through the “00”, which I considered a possibility because of the strength of the U.S. Dollar. In fact, because of the narrow range between the two entries (just 15 pips) the area between 1.0295 and 1.0320 could be a swing short “zone”.

 

*Results are not guaranteed, individual experiences may vary. Past performance is not indicative of future results

This zone approach does however put a strong emphasis on the resistance. The 60-minute 34 period EMA low is offering another layer of confirmation that could be helpful. I would enter Fibonacci.

 

*Results are not guaranteed, individual experiences may vary. Past performance is not indicative of future results

The “last, major move” can be seen with the 0.0 and 100.0 levels on the chart and this rally puts the 88.6% which was previously supported as prices were trading lower – retracing the rally – in a position that now shows resistance. The 88.6% is at 1.0318 and within the swing short zone. If prices rally to this level and can exhaust,  I believe the USD/CHF may press lower to the near-term 1.0266 low.

*Trading in the off exchange retail foreign currency market is one of the riskiest forms of investment available in the financial markets and suitable for sophisticated individuals and institutions. The possibility exists that you could sustain a substantial loss of funds and therefore you should not invest money that you cannot afford to lose. Read the full risk disclaimer and privacy policy on trading at www.ibfx.com.

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August 24th, 2010 in Forex News

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