Forex series III: How to Trade USD vs CAD
Rumor has it that the USD invited the CAD to a party. It did so because CAD would bring maple syrup to sweeten the exchange rate.
Yes, when we say maple syrup, we are talking about Canada and a capitalist country like the US always likes a good exchange rate.
The US dollar is something that most (probably all) forex traders have traded at some point in their careers.
The USD/CAD pair is one of the most traded currency pairs in the world. While Canada may not be a huge country, the significance of the Canadian economy is substantial and the Canadian dollar is the sixth-most held reserve currency.
An interesting fact about the Canadian dollar, it is nicknamed the “loonie” because of a loon that appears on the back of a CAD 1 coin. If you are wondering what a loon is, it is a bird native to Canada.
Anyways, we won’t talk about Canada or the loon in this article. Rather, we will discuss how to trade USD vs CAD. We will cover the current positioning of the US and Canadian economies.
Next, we will look at some trading strategies that could be employed to trade USD vs CAD. Finally, we will say a few words about managing risk when trading the USD-CAD pair.
All set? Let’s go!
How To Trade USD vs CAD Or Any Currency Pair
Trading a forex pair can be exciting, nerve-racking, and everything that one can imagine. If you think that currencies don’t move as much as stocks, then you will be surprised.
When currencies move, they can create news. When a trader takes a forex trade, it is always buying or selling one currency to receive or give another currency. So, forex trading happens in pairs.
You don’t just buy the USD or the CAD. You buy the USD by paying for it in some other currency. So, if you are buying USD with some CAD, you are essentially going long USD vs CAD.
You are buying the base currency, the USD, with the quote currency, the CAD. If the forex pair was a ratio, the base currency is the numerator (USD) and the quote currency is the denominator (CAD).
Assume that you buy some US dollars by paying in Canadian dollars. If the USD then strengthens vs the CAD, you can sell your US dollars to receive more Canadian dollars than what you paid to buy the US dollars. Profit cha-ching!
However, if the USD weakens vs the CAD, and you go out to sell those US dollars, you will get fewer Canadian dollars than what you paid initially to buy the US dollars. You incur a loss!
Price movements in forex markets are expressed in a unit called a pip. One pip is 0.0001 points or 1/100th of a percent. The USD/CAD exchange rate could move a few pips or many pips depending on the conditions.
The Current Economic Environment
Let’s talk about Canada first. The story here is similar to most other parts of the world. The fight is against inflation and the policy rate has been hiked by the central bank to 4.5%. That is the highest rate since the financial crisis of 2008.
The economy has been in good shape as the labor market is strong and rate hikes are now expected to be paused. Canada’s main sectors are real estate and commodities.
The housing market was very strong in the pandemic years and heavy borrowing was witnessed. So, interest rates will play an important role.
Canada’s commodity exports depend a lot on the global economy as well as inflation. A positive environment for these two sectors could bode well for the Canadian dollar.
The actions of the US Fed significantly influence the trajectory of the US dollar. Additionally, geopolitical developments may also impact the dollar’s status in the longer term.
The recent quantitative tightening by the Fed may have led to fears of liquidity risks in the banking system. So, interest rate hikes might see a pause in the US.
The US has not seen a recession yet and the labor market continues to remain strong. Payroll data is also positive while inflation still hasn’t dropped to the levels targeted by the Fed.
Trading Strategies For The USD vs CAD
Traders can first figure out whether the USD/CAD currency pair is in an uptrend, downtrend, or sideways movement. One easy way to do this analysis is through the rate of change indicator.
If the ROC indicator demonstrates consistently positive readings, then the pair is in an uptrend. If the ROC shows a consistently negative reading, then the trend is down.
If the trend is up, the long trades are worth exploring. If the trend is down, the short positions come into play.
Long trades can be executed by simply using a moving average and staying long till the price drops over the moving average. Crossovers can also be used to generate trading signals.
The same thing can be done on the short trades. Traders could stay in the trade till the price moves above a moving average or if there is a crossover of a short-term average above the longer-term one.
Swing traders can use RSI or Bollinger bands to go short and long whenever the price seems too stretched either on the overbought side or the oversold side.
The whole idea of following a trading system is seeing what works, and what system has an edge, and then following the rules of that system diligently without getting distracted. Discipline is what makes money in the long run.
Handling Losses And Risk Management
No trade is a 100% guarantee of profits. Every trade has its associated risk. The idea is to be able to handle such risks and limit losses so that your trading capital doesn’t get wiped out.
You can do that by not overtrading and keeping your position sizes limited to the maximum loss that you can handle if things don’t go your way.
You can also ensure that your system gets executed by putting stop losses and limit orders wherever necessary.
The idea is to use every tool available to ensure that you execute your trading system and limit your losses when the market does not go your way. Maximizing profits and minimizing losses is what will likely give you an edge in your trading.
Not having any risk management plan is, perhaps, the riskiest way one could trade.
We hope that you now have a basic understanding of how to trade USD vs CAD. We also hope that you know the importance of risk management in trading currencies.
If you are ready to test your forex strategies and start trading USD vs CAD, then opening a new account with Cerus Markets would be a starting point. We can make that first step even better for you with a 100% welcome bonus offer.