The Double Trend Trap (DTT) motto is to keep trading simple by trading with the trend of each currency pair. Trading with the trend has tremendous benefits such as short holding time, quicker development of a trade, unlimited reward to risk potential (when using a trail stop loss), etc.
But one of the key steps in the DTT strategy is in analyzing whether the trend could potentially continue. The presence of a trend is not sufficient – although with a bit of luck a trend can be traded at any spot. However, obviously traders can optimize their statistics by removing trades with the least odds of success.
TWO MAJOR FILTERS
In this process DTT utilizes two very important concepts to judge the probability of a winning trade:
- Support and resistance or the “wide open space” of each pair
- Momentum moving in the same direction as the trend
Point number 2 is exactly the disturbing factor when reviewing the USDCAD daily chart. The fall from 1.1280 to 1.0860 surely occurred quickly (less than 3 weeks) and can be considered a swing high swing low with considerable momentum. There are two main scenarios:
- The momentum was a correction within the uptrend
- The momentum was a first part of a bigger correction or a reversal
In my experience there is a higher chance that a correction with such a momentum belongs to option B. However, before the bigger correction downward could start, the currency market loves correcting itself. Therefore a correction / retracement to the upside prior to more downside correction / reversal is likely.
In fact if the analysis of scenario B is correct, then the upside price action should be very slow and should take 2-3 weeks according to my experience and statistics. Price will most likely confirm the corrective nature of price by building a chart pattern as well. A contracting triangle or a rising wedge are the usual chart patterns which appear in these corrections. This pattern can end at the 50%, 61.8% or even the 78.6% Fibonacci retracement level.
In the case where price moves up more impulsively than expected then scenario A is starting to be more likely. In the case where price does slow down substantially in the next 2-3 weeks then more downside can be expected. The first target is the -27.2% Fibonacci target at 1.0740, although the main target is the -61.8% Fibonacci target at 1.0593. The latter target is close to the weekly 38.2% Fibonacci retracement level at 1.0648 (and price already stopped at the 23.6% Fib). Whether price bounces for uptrend continuation at this point OR a bigger reversal (and downtrend) takes place depends on how price action behaves as it approaches and bounces off of the 38.2% Fib (and something we will analyze then).
Conclusion: for the moment I am expecting a turn around and CAD strength to emerge but it will take 2-3 weeks before such as confirmation can be expected. We will keep an eye on the USDCAD, EURCAD, and GBPCAD to warn of this potential trend change.
How do you see the CAD pairs? Let us know your view down below!
Thanks for sharing this article and wish you many pips!
Happy Trading, Chris
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