Supply and Demand Forex Trading Strategy: Case Study of Oil andCanadian Dollar - ForeXposed

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Saturday, February 25, 2017

Supply and Demand Forex Trading Strategy: Case Study of Oil andCanadian Dollar

In 2007-2008 we saw how commodity prices especially oil reached the highest record because the value decline of dollar encourages demand for high yield for investment funds in the financial markets. And if the dollar goes down, then the majority of the funds will move towards commodity markets.

Years ago we saw:

  1. The trader takes risks (risk appetite trade) by investing on AUD, CAD, NZD, and EUR.

  2. The decline of USD value against almost all major currency since The Fed cut interest rates to close to 0% in order to stabilize the crisis of credit market and property sector.
The rising of oil price give a highly profitable for energy exporter countries, especially Canada. So do not be surprised if in 2007 the return value of Canadian Dollar (Looney) is high, as shown in the following chart:
Supply and Demand Forex Trading Strategy: Case Study of Oil andCanadian Dollar


By utilizing the information about oil prices, we can take trade decisions be more sharp and objective, based on comprehensive data.

Let's create a simple analysis and application in daily trading activity:

  1. Use chart of Oil to do the technical analysis:
Supply and Demand Forex Trading Strategy: Case Study of Oil andCanadian Dollar


On the chart of Crude Oil do the identification to find the support and resistance area (supply/demand). Oil prices technically show a pullback from the highest price of this year.

  1. Use a Sentiment Indicator (COT Index) for Crude Oil in looking to Large Speculator condition on playing his cards:
Supply and Demand Forex Trading Strategy: Case Study of Oil andCanadian Dollar


Although RSI  seen oversold and the price is at the lower of Bollinger Bands (BB), the COT for Large Speculator index is at level 40, mean in a neutral condition.

  1. Use a Sentiment Indicator (COT Index) to Canadian Dollar (Globex):
Supply and Demand Forex Trading Strategy: Case Study of Oil andCanadian Dollar

The Chart above indicates the ‘Looney’ bearish conditions (see the index in the lower window), oversold (RSI), and the price is at the lower BB. This indicates that the Looney is in process of bottoming due to the selling action by Large Speculators a few weeks ago.

  1. Based on the information of the three things mentioned above; technical analysis always starts from the identification of supply and demand. At UCAD chart looks how this pair is on previous supply area.
Supported by information from other financial markets, we can conclude the following:

  • Oil is oversold and has big chances to strengthened on a short term. The rise in oil prices will have a direct impact on the rise of Canadian Dollar.

  • The Canadian Dollar in the futures market is in a bearish condition/bottoming, as a result of previous sale action, the chance for reversal is big.

  • UCAD is in supply area and topping.

  • The lurch of decisions that have high probability and low risk/high reward obviously ‘Sell UCAD’ in supply areas (resistance).
That is an example of how we use these pieces of information available on the various financial market for supporting the decision of the trading on the forex market. As we were playing the puzzle to get a clearer picture, so that what should we do in the financial market.

There is no market that stands on its own, all is in connection with each other. We should be able to sort out information and trying to find out where's the smart money goes.