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Strategy Video: Why the USDCAD Head and Shoulders Pattern Lacks

Strategy Video: Why the USDCAD Head and Shoulders Pattern Lacks

Talking Points:

• Head & Shoulders patterns are common formations in FX and capital market charts

•Yet, the frequency of these patterns doesn't fit the prevalence of true market reversal

• What differentiates a H&S pattern that falters out of the gate and on that calls a true market turn?

Want to develop a more in-depth knowledge on the market and strategies? Check out the DailyFX Trading Guides we have produced on a range of topics.

Head & Shoulders patterns are a common site in the Forex market. In fact, there are particularly clear ones on USDCAD, NZDUSD and GBPNZD right now. That said, these setups do not always work out to plan. In fact, they more often fall apart or stall shortly after a 'neckline' break rather than signal a true turn in the market. At their most elemental, the H&S is a reversal pattern; and true reversals don't happen frequently. A well-developed pattern is the first requirement to establishing a market opportunity - a failure of setting news highs (or lows on an inverse pattern) that turns to congestion and a clear level that would signal a change in command. Next, we measure the potential in both the lead up to this consolidation (this is a reversal pattern) and the scale of the setup both in the congestion phase and lead in. But most importantly, we need to look for confirmation that momentum will follow a break, whether through additional technical cues and/or fundamentals. I discuss these factors and show why the USDCAD H&S wasn't one I wanted to trade in today's Strategy Video.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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