USDCAD Creates Short-Term Topping Pattern

Cory Mitchell, CMT

I use a reliable trend following strategy that alerted me to a short trade in the USDCAD late on Thursday evening. After being long and seeing this pair rally relentlessly since early March (and really since the start of the year), the short signal came as a bit of a surprise.

The chart shows an hourly head and shoulders pattern formed and broke to the downside near 1.4460. It could also be viewed as a downside triangle breakout. My trend following system tipped me off to a short at 1.44.

USDCAD downside triangle breakout after long advance March 19 2020
USDCAD HourlyTradingView

The pattern was started by the biggest reversal so far in the entire advance. The left shoulder saw a decline of more than 300 pips. Prior to that, the biggest decline was about 260 pips (March 13 to 15). After a long advance, a decline bigger than any prior declines will often (not always) signal a reversal is underway. 

The decline ended up being the start of a head and shoulders pattern, where the head just barely eclipsed the high of the left shoulder. 

A pattern height of just over 300 pips indicates a potential downside target just above 1.41. 

In volatile conditions, I may use a target some of the time, but I prefer using trailing stop losses. Some of these pairs have been running exceptionally far, so I prefer to maximize the profit when that happens. If the price doesn't run, the trailing stop loss gets me out for a small profit or small loss. I find Renko charts work well as a trailing stop loss.

A stop loss initially goes above the top of the triangle (right side). My trend following system for this pair initially provides more room, with a stop loss near 1.46, but trails down as the price declines.

By Cory Mitchell, CMT. Join me in my free Facebook swing trading group.

Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.

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