Buying the Bottom…Hopefully
Today the IMC blog initiated a long position in the Canadian dollar/New Zealand dollar spread at 4.75 cents (premium Canada). Initially, the position will be liquidated on a two-consecutive day close below 3.75 cents.
We are now monitoring on the 75-day Moving Average. The last few closes above the 75-day MA have been followed by further gains of several hundred more basis points in this spread. Therefore, a close back above the 75-day MA for the first time since the end of May would be a green light to add more.
However, instead of setting parameters to automatically add on the close above the 75-day MA, we will assess the situation after it occurs. We will need to see how far above the 75-day MA the Canadian dollar/New Zealand dollar spread closes, whether or not it experiences a pullback, and what size of countertrend moves the spread makes in order to get a feel for the volatility. That way, we will be able to make a better-informed decision on entry and initial exit levels. This will also give us a better feel for the reward-to-risk potential on the trade.