AUD: CAD - Head and Shoulders Buy Update

AUD: CAD - Head and Shoulders Buy Update

I posted a head and shoulders buy set up on the Aussie: Canadian cross rate back on 5 June.

Price is approaching the target outlined in the original post. However, this set up is now an interesting example of how the structure of the trend you are following can be used to modify a profit objective as a trade unfolds.

The first chart outlines the strategy in the 5 June post. To read that post click here

Price hit the dynamic stop trigger level on Friday so this strategy now changes to a trailing stop loss.

One approach to the trailing stop is to make it manual, moving the stop behind the low of each candle that makes a new high. This is done at the open of the next candle. For example, at this morning's open the stop was set behind Friday's low.

Today's candle has made a new high so tomorrow morning the stop will be moved up behind today's low. If the low of today's candle is above the trigger level (which seems likely) the stop is just left at the trigger level. This original strategy approach gives a worst case result of a small profit but allows some scope for correction on the way up to the target.

Now though, a trader might modify this original strategy and use the structure of the rally that has unfolded to do 2 things

  • Make the trailing stop more aggressive and
  • Move the profit objective out

AUD: CAD - Daily. Source CMC Tracker

This amended strategy would be based on Fibonacci projections and the 5 swing structure that is now developing in the uptrend. I've outlined this on the 2nd chart below

AUD: CAD - Daily. Source CMC Tracker

There are 2 Fib cluster levels noted on the chart above. The first is at around the level, price has now reached. This cluster consists of projections that the swing up from 4 to 5 will be:

  • 61.8% of the swing up from the "head" to "3" and
  • 161.8% of the 3 to 4 correction

If price makes a peak at this cluster level, this would be a clear warning that the 5 swing advance was ending. On that basis the trailing stop would be moved up behind today's low and not left at the original trigger level.

The stop would be moved at tomorrow's opening. That way if the current candle makes a trend peak near the first Fib cluster without quite reaching the target, the position will be defended.

On the upside, once a candle low clears the original profit objective at 1.0370, the stop can be left at that level and a sell order placed at the 2nd Fib cluster up at around 1.0420

This way the 5 swing structure of the market is being used to defend profits at a failure level that has now developed but potentially run the current trend for a better profit if we just sail through the current Fib cluster zone.