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AUD: CAD - Testing Useful Resistance

AUD: CAD - Testing Useful Resistance

The Aussie currency pairs have lost momentum in recent weeks.  In the process they are forming potential basing patterns on the charts . If the right piece of news was to come along in the near future they looked primed for a decent sized corrective pop.

Of all the major Aussie pairs, AUD: CAD to me looks the closest to a potential resistance that might be used to develop a buy entry strategy.

Set up pattern

The daily chart has formed what looks as though it might be an ending or "terminal" channel pattern. Here you can draw a trend line across a series of lows. I like to see the angle of this line being quite a bit lower than the angle of the down trend leading into the pattern. This indicates declining momentum. A break out of this type of pattern can signify the beginning of a new uptrend

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An approach to trading strategy

Entry: One approach would be buy on a break above the channel resistance line. The approach on the chart uses a buy stop entry order well clear of the trend line resistance to reduce the risk of being whipsawed by a false start

Initial Stop Loss: The stop has been placed behind support back inside the channel. With a big trade like this, traders will often move the stop higher where there is a chance to do so e.g. behind any pull back that retests the channel resistance

Potential Target: This is initially set at the 61.8% Fibonacci retracement level. Significantly, this is just below the 200 day moving average at this stage.

Head and Shoulders another possibility

If price backs off the trend line resistance from here, we also have a decent chance at a head and shoulder pattern forming. I've put some labels on the chart to show how the head and shoulder might look.

If this happens, one approach would be to look for technical signs that a low is being made around the level of the right shoulder. This might provide a buy set up for an early entry on the "basing pattern" instead of waiting for a break through the resistance.  The potential benefit of this is a larger pay off potential - buying closer to the stop loss but further from the profit target.

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