Does long term and short term technical analysis change perception on a trading position (USD/CNY)?

By Nathan Nowbuth

USD/CNY Fundamental Forecast – April 12, 2016

When trading any asset, it is imperative to take a holistic approach and consider both fundamentals and technicals. However, in this article, I will demonstrate the time horizon of technical analysis can alter one’s trading stance. Taking a longer timeframe (i.e. a year) can illustrate historical highs or lows and show the floating value of a currency pairing during economic shocks (i.e. Covid-19) or prolonged periods of turbulence (i.e. the US-China Trade War). Thus, it is much easier to build expectations within a long-term trade position and base any long or short position on long-run average floating levels (the idea behind which a trading strategy called Elliot Waves is derived). This is not the case with shorter timeframes which tend to range from 1 day to about 2 weeks. Therefore, this type of trading outlook is slightly riskier and is based much more closely on chart patterns and re-test levels which signify short term momentum swings based on if a currency is over or under bought/sold. It also means that traders tend to set their take profits (TPs) and stop losses (SLs) much more conservatively due to shorter horizon trades being associated with large lot sizes. Beyond the typical amateur traders, institutional investors will utilise short-term technical analysis to try and spot market arbitrage based on the spreads offered in FX markets.

In this article, we will take a more simplistic view of what a short vs. long term technical analysis looks like and how it may alter one’s belief in going long, short or patiently hold for a better trading opportunity.

Long term approach

Looking at USD/CNY from a long-term technical perspective, by plotting the trendlines for a time horizon of roughly a year, an upwards trend from February 2020 – June 2020 is evident. This can be explained by the ramifications of Covid-19 being more pertinent in China than in the US at this stage and therefore causing a relative appreciation of the dollar to about 7.13. However, from June 2020 until the end of 2020, the worsening impacts of the US-China trade war, the increasing American Covid death toll and the uncertainty surrounding the US General Election caused the dollar to depreciate against the Yuan to a level as low as 6.43, a depreciation of about 9.96% in six months. However, the depreciation of USD/CNY has been fairly progressive and has followed a steady downwards corridor profile. Since the beginning of 2021, USD/CNY been in a ranging pattern between 6.43 and 6.50. but in early March, it has since broken this upper resistance level. Nonetheless, after reaching 6.55, it recently re-tested the 6.50 resistance line. Only in the coming weeks will it be possible to understand whether USD/CNY will have a reversal in momentum towards the upside or whether we will see lower lows. From a long-term perspective, I believe USD/CNY will rise in the future due to increased economic activity in the US courtesy of Biden’s $1.9 trillion stimulus package and also an amelioration in the Covid-19 outlook in terms of infections rates lowering and lockdown restrictions easing. Seeing how much USD/CNY has fallen in the past six months gives me hope that a rebound is imminent hence, a long position be sensible as we envisage the currency pairing to return to a higher long-run average.

Short-term perspective

From a much shorter time horizon, spanning approximately 2 weeks, it is already easier to see many more swings in momentum and for much shorter periods. The more erratic nature of the market already makes this time horizon more tentative. The extended horizontal lines on the chart represent potential levels of future resistance or areas that might be significant for a re-test as they represent an all-time or periodical high. The lowest resistance line showed evidence of a re-test on February 27th and March 3rd at a level of approximately 6.4550. Shortly after failing to break this floor, USD/CNY rose to ~6.5420 which is the highest-level USD/CNY has reached in the past two weeks. It has also been possible to draw another level of resistance at the 6.5150 which is worth bearing in mind for the future as a potential marker for a re-test. On the chart, we also see these periods of almost zero activity (the yellow boxes) and this makes predicting a future trend rather difficult because it is unclear as to whether market sentiment will swing momentum up and down. This unpredictability can very easily make a trader hit a stop loss, therefore pricing you out of a trade. In these types of situations, placing a STOP or LIMIT order is the most appropriate step to mitigate this uncertainty. The blue rectangle on the chart above is an area that I believe has the potential to be a re-test line, however, I feel the lower tails of the candles touching the base of this rectangle (1) is not a strong enough indicator since they are not all of the same lengths. Nonetheless, the fact that it was a support level on 12th March (2) means that it can’t be discounted. In terms of taking up a short-term trading position, I would hold off until there is more clarity as to the floating value between 6.50 and 6.5150 because there isn’t a noticeable pattern that has developed and also if there is confirmation as to whether the blue box becomes a level of support. Therefore, from a short-term technical standpoint, I would wait for a clearer entry position to appear, perhaps waiting for a clear reversal to capitalise.

To summarise, it is clear the time horizon in which technical analysis is conducted matters significantly. I would recommend using both since it provides more insight into the overall strength of a currency pairing. It can be deemed that a chart with a longer time horizon shows the ‘bigger picture’ trend whereas those with a shorter time horizon can identity a larger variety of patterns and level lines. But of course, never just trust instinct with solely technical analysis. Fundamentals are equally important and especially if there is an unexpected news release, the ramifications of this may not be priced into the charted levels of the currency pairing. And having a subjective feeling about a position is always a desirable skill to have. It is never 100% certain that a trade position will be successful so developing trader instincts by considering both macro and technicals is vital.

Jargon Buster:

Buy and Sell Limits: For buy limit orders, the order will be executed only at the limit price or a lower one, while for sell limit orders, the order will be executed only at the limit price or a higher one. This stipulation allows traders to better control the prices they trade.

Elliot Wave Theory: A trading strategy of being able to profit from wave patterns in a market. This hypothesis states that stock price movements can be predicted because they move in persistent and recurrent long-term up-and-down patterns called waves that are created by investor psychology and sentiment.

Stop Loss: A stop loss (SL) is a price limit entered by a trader. When the price limit is reached the open position will close to prevent further losses. 

Take Profit: A take profit (TP) works in a similar way – it automatically closes a position once aprofit target is reached to lock in profits.

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