The following is a case study by Christopher Lewis in what a global
trader could look at when searching for the big picture view on a
potential set up. While you may or may not be reading this in real
time, this is a great exercise in finding the potential in those great
trades that are looked back on with the ‘how did I miss that one'
perspective.
Most forex traders know that the Usd is the most dominant and liquid
of all global currencies. It has no peers, and is unlikely to ever
seriously be challenged as the King Of Currency until such time as
global trade ceases to be completed in Usd denominations. It may be
ragged around the edges, it may be a fiat currency (living off the
trust of others and backed by little other than goodwill), but its
impact on forex trade is immeasurable.
The value of any cross pair that does not have the Usd on one side
or another of it (synthetic pairs), are a reflection of the percentage
gain on each of the cross pair currencies against the Usd. Synthetic
cross pairs move only as a consequence of the moves in the Usd based
major. For example, Eur/Jpy value = Eur/Usd x Usd/Jpy. The same is the
case for Gbp/Cad, and in this case example we are looking at the Gbp
losing ground against the Usd at a faster rate than Cad will lose
ground against the Usd. Therefore we create a potential short on Gbp
against Cad, or Short Gbp/Cad.
The daily chart of Gbp/Cad
This is the technical case for this set up. Prices are at the 50%
retracement of the last move down from 1.9300, and have formed a
shooting star, Pinocchio Bar, Exhaustion bar, or whatever reference
point is in vogue for an exhaustion play. Note also that this is the
third daily close like this in the last four days. Certainly, this pair
looks extremely tired.
We then pay attention to the gap formed in August. This should serve
as a barrier, following the technical law of probability. The gap has
been filled, and a lot of times will then serve as support and
resistance that creates extreme volatility as fair value is fought
over. The 1.78 area has a long history in the last year or two or
being a major spot.
