In 2009, a friend asked for my advice on buying and selling Euro against Canadian Dollar and visa versa. He had a trading bank account somewhere, and as his account balance was relatively high, the bank agreed to offer him a good deal in converting these two currencies to each other (because usually banks charge you over 200 pips when you convert currencies into each other).
I asked my friend to come and sit next to me, so that I could show him what I could see on the charts and give him my reasons about the very important advice I wanted to give him. When he came, I told him that the answer of his question was only one sentence: Do nothing but going short on EUR/CAD.
He had Euro in his bank account. Going short on EUR/CAD meant that he had to sell Euro against CAD. It means he had to convert the Euro he had in his bank account into CAD and hold his money in CAD until Euro went down against CAD, as low as it could.
The question is why did I advise him to do so?
The way that he wanted to trade Euro against CAD was not like what retail traders do. He couldn’t sell EUR against CAD today and change his position tomorrow. That was not possible for him, because he did not have access to a trading platform. He had to call the bank and ask them to handle the currency conversion for him (the bank did not allow the exchanges to be done through online banking for the security reasons). Additionally, although the bank had agreed to offer him a low spread, the offered spread was still high, and so he had to be careful about the number of exchanges.
I considered all of these factors, and gave him a piece of advice that could make thousands of dollars or euros for him, through a few exchanges.
I checked the EUR/CAD monthly time frame, and showed him the very strong short trade setup that were formed on EUR/CAD monthly chart at that time. I told him that, if I were him, I would do nothing but selling Euro against CAD. The short trade setups that were formed there were almost among the strongest setups I had ever seen. Having such strong short trade setups on the monthly chart meant strong down movements of thousands of pips.
Please follow me on the below chart.
When my friend referred to me, the short trade setup that was formed by candlesticks #1 and #2 (I mean the December 2008 and January 2009 candlesticks on the monthly chart) was already formed, and candlestick #4 was about to close. Candlestick #4 which is the April 2009 candlestick on EUR/CAD monthly chart, was closing as a strong bearish candlestick and its combination with candlestick #3 was making another strong Bearish Engulfing Pattern after the first Bearish Engulfing Pattern that was formed by candlestick #1 and #2.
The first trade setup formed by candlesticks #1 and #2 was a very strong Bearish Engulfing Pattern, with a strong Bollinger Upper Band breakout. The candlesticks’ sizes, specially for candlestick #2 was terrific. Above all, a strong “W” or Butterfly Pattern was formed before this trade setup. There was only one negative point for that trade setup, which was the relatively strong bull market that the trade setup was formed on. There were some strong bullish candlesticks, and Bollinger Upper Band was pointing up almost sharply. In spite of this, the candlestick pattern was so strong by itself.
Luckily, the first trade setup was followed by the second one, which was the candlesticks #3 and #4 trade setup. This second trade setup had already confirmed the first trade setup, and if the candlestick #4 closed as a big bearish candlestick, then we could easily ignore the negative point of the first trade setup.
I told my friend that he was so lucky because of having these strong setups on EUR/CAD chart. I asked him to wait for the candlestick #4 to close (it had only a few or few days to close), and then sell EUR against CAD and hold the position until I tell him what to do next. I remember that I told him that it was possible to see some bullish candlesticks after this (specially on the shorter time frames like daily and weekly), but they would not be any problem, because the price eventually follows the direction that the monthly time frame is pointed to.
He sold EUR against CAD and made 3380 pips after 38 months. Let’s say he converted €2,000,000 into CAD when EUR/CAD was 1.5880, and so he hold $3,176,146 CAD in his account (banks don’t offer any leverage to the bank account holders). After 38 months, EUR/CAD price lowered to 1.2500. Then he asked the bank to convert his CAD back into EUR. They did it and his €2 million initial capital turned into €2,540,916. About €540,000 profit in 38 months, without any leverage.
Why I was sure that EUR/CAD wouldn’t go higher? Was it only because of the trade setups that had been formed on the monthly chart?
Yes, it was because of the strong trade setups and candlestick patterns I saw on the monthly chart. I could not advise him to sell EUR against CAD, if those setups were formed on any of the shorter time frames. Why?
Euro was officially introduced as a currency on 1st January 1999. Euro value went down against CAD, and it turned around and formed a support level by 2000.10.01 and 2001.07.01 monthly candlesticks. After that, it went up for a while, formed a high at 1.6989 on 2004.02.01 and started going down again.
Later on, EUR/CAD went up again and reached the 1.6989 level, and even broke above it (the upper shadow of candlestick #1). But, two strong short trade setups formed by candlesticks #1 and #2, and then #3 and #4, below the 1.6989 level.
If it was on any other time frame, EUR/CAD could still go up and form another high. However, the price range between 1.2431 (formed by 2000.10.01 monthly candlestick) and 1.6989 (formed by 2004.02.01 monthly candlestick) was all the money that could flow into this market. It was the highest possible volume of the money that could be in this market, according to the current world economy situation.
It means, when there are strong short setups on the monthly chart, like what the candlesticks #1 and #2, and then #3 and #4 formed, this market had no way but going down, because it was really the end of the fuel that EUR/CAD could have in her tank. No money was ever supposed to be injected to this market from another planet. So EUR/CAD had to go down.
This is what the highs and lows of EUR/CAD monthly time frame, and also its strong setups tell you. No other time frame gives such an invaluable information.
Now, let’s take a look at the trade setup formed on NZD/USD monthly chart.
A very strong “Dark Cloud Cover” formed on NZD/USD monthly chart:
Our short position based on the above short trade setup on NZD/USD monthly chart is over 600 pips in profit now:
(this article was originally published on Sep 27, 2014).
Conclusion:
Monthly time frame is KING 🙂
When there is a strong trade setup on the monthly chart, shorter time frames have to follow, even if sometimes the price fluctuates and goes against the monthly chart trade setup on the shorter time frames.
