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Guest Commentary: Forex Chart Patterns Currently In Play

Guest Commentary: Forex Chart Patterns Currently In Play

2011-05-25 19:22:00
Cory Mitchell, CMT, Technical Strategist
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It has been a while since I posted on chart patterns. So here are a couple chart patterns in the forex market which can be watched and may provide good trading opportunities. I have elaborated on each to make it informative and educational as well. My own notes and thoughts are included for each.

EUR/CAD

The first forex chart pattern is a triangle formation in the EUR/CAD. This triangle is visible on the 15 min, 30 min and multiple hourly time frames. The chart shows the 4 hour time frame so more of the preceding price action can be seen (can be redrawn on a short-term frame on your own charts). This is the not a perfect pattern, but it still is a triangle. Ideally I would like to see a bit more back and forth action, but it fulfills the requirements of having at least two price highs and two price lows within the formation.

EUR/CAD - 4 Hour Chart: Triangle Formation

Guest_Commentary_Forex_Chart_Patterns_Currently_In_Play_body_EURCAD4hour-May25.jpg, Guest Commentary: Forex Chart Patterns Currently In Play

The pattern high is 1.3880 (rounded down) and the low is 1.3650 (rounded up). This provides a difference of a 230 pips. This is our profit target, and will added to the price where (if) upper bound is broken, or will be subtracted from the price in the event the lower bound is broken.

At this time the upper bound is at 1.3800, therefore the target for the move if the upper bound is broken is 1.4030. As price moves closer to the apex of the triangle the profit target will be lower, since the breakout point will also be lower as the upper bound is downward sloping.

At this time the lower bound is at 1.3700, therefore the target is 1.3470 if the lower bound is broken. As price moves closer to the apex of the triangle the profit target will be higher, since the breakout point will also be higher as the lower bound is upward sloping.

Stops can be placed on the opposite side of the breakout. In an upside breakout, stop is just below 1.3700. Downside breakout, stop is placed just above 1.3800. As time progresses and the price moves towards the apex, risk will diminish as the stops will move in as the lines converge.

Current reward:risk is 2.3 : 1. Will improve as each period passes.

Notes: Trend is up in this pair since January. But recently took out a former low. Makes upside or downside breakout equally likely. 1.40 has met strong resistance in the past, and could provide strong resistance again - trail a stop closely if this area is approached, don't give up much profit in attempt to gain a few extra pips. 1.3600 is strong support on the downside.

AUD/USD

There is a completed head and shoulders (H&S) in the AUD/USD pair. Not a huge fan of the way this has set up, but I put it here show some alternate ways to trade a head and shoulders. The H&S is marked on the chart. The yellow line is the "neckline" and traditionally the pattern is considered complete when the neckline is broken, in this case to the downside. Due to the steep angle of the neckline, the low between the Head and Right Shoulder is used an alternate (horizontal white line).

Now we can see the neckline combined with another line the top of the price swings (blue) creates a trend channel. This can be our guide as the pattern unfolds.

AUD/USD 4 Hour Chart: H&S Pattern

Guest_Commentary_Forex_Chart_Patterns_Currently_In_Play_body_AUDUSD-HandS-May250.jpg, Guest Commentary: Forex Chart Patterns Currently In Play

High of the formation is 1.10 (rounded down), and the low is 1.0550 (rounded up) providing a 450 target. This is based on a steep sell off and we may not see that again in the short-term. So we can use an alternative target which is attained by taking the distance between the low after the Left Shoulder and the Head: 1.10-1.07 (both rounded), which provides a target of 300 pips and is based on more reasonable (and likely to be seen again) market movement.

Therefore the breakout point is a 1.550 (market currently trading at 1.0528). Subtract 300 pips if using the more realistic approach, or 450 pips of you believe we will see an impressive decline (less likely, but reward is greater).

Initial target is a 1.0250, which interestingly is right along the neckline (the lower bound of the trend channel). The further target (the 450 pips one) at 1.01 is also along the neckline as we move out into June.

For stops use the upper bound (blue line). This means the stop is placed at 1.0720 this corresponds with placing a stop just above the last swing high at 1.0720. Therefore risk is 1.0720-1.0528=192 pips, with an initial target of 1.0250 providing a reward:risk of approximately 1.5 : 1. Using the 450 pip profit target the reward to risk gets better for us at approximately 2.25 : 1. So these aren't be best risk to reward ratios even with using some alternate strategies (which can be very useful at times), but they are decent and tradable. It is worth keeping an eye.

Notes: Not a huge fan of this pattern and won't trade it because I don't like the choppy trading which as occurred since mid-May around the breakout area. The trend channel is useful for implementing other strategies - if we see the upper bound again (blue) this could indicate a renewed uptrend or be a good selling opportunity. 1.0250 and 1.01 are possibilities, but wait for further confirmation (possibly a break to a new low) before taking action. A move back above 1.06 may be a good short-term buying opportunity as the pair is then likely to test the upper bound at 1.0650-1.07.

To profitable endeavors,

Cory Mitchell, CMTVantagePointTrading.com

Cory Mitchell is an independent trader specializing in short- to medium-term technical strategies. He is the founder of http://vantagepointtrading.com/, a website dedicated to free trader education and discussion. After graduating with a business degree, Mitchell has spent the last six years trading multiple markets and educating traders. He has been widely published and is a member of the Canadian Society of Technical Analysts and the Market Technicians Association.

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