On August 27 I recommended buying the Australian dollar vs. the Canadian dollar. It didn’t turn out so well. Although I have not had many losers, this one prompted me to examine the trade in greater detail. As I’ve explained I follow very closely a richness indicator which tells me when a market is cheap or expensive vis a vis its primary anchor. Let’s look at what that was telling us for both the Canadian and Aussie dollar on that day (first the C$):
and now the A$:
– so if we looked at one against the other:
It was cheap but it failed. Why? The A$ continued to fall and stayed cheap but the C$ completely held in while its anchors declined (that’s why the bars later turned red in the C$ chart).
A New Test
I have a new indicator to study the momentum of a pair spread – a mean reverting oscillator that should line up with the rich/cheap indicator. If it doesn’t then stops must be tight. Here’s how it looked over the trade period:
The C$ was relatively oversold according to the oscillator. I don’t want to confuse the issue by adding another indicator but this new variable will serve as a good check going forward. It need not be perfectly in sync but it should not be widely divergent.
