Earlier in one of my posts, I outlined a possible chart pattern trade setting up in the USDCAD. You can read the initial post here.
Today, I’ll follow up the trading lesson with the USDCAD Head and Shoulders Chart Pattern.
Following Up With The USDCAD Chart Pattern Trend Trade
You can see in the chart attached that the USDCAD tested the neckline and bounced upwards. A trade placed using a Sell Stop Entry a couple of pips below the neckline would have been triggered, and the trader would be short the USDCAD.
The question now is the placing of the initial stop loss. Remember, before the trade is even placed, all the exit strategies should already be written down and ready for execution.
For a head and shoulder pattern trade, the initial stop loss could be placed above the right shoulder. Why?
That’s because it’s the most likely point of resistance. If prices trade above the right shoulder, then this trade would have been “invalid” in terms of the chart pattern fulfilling itself.
Check out the attached chart below.
Potential Price Targets
The next question would then be the potential price targets. The traditional method of using the head and shoulders chart pattern would be using the distance between the head and the neckline as the price target.
I’ve attached the chart below showing where the price target would be using the traditional method. The magenta colored line would be the possible price target for the head and shoulders pattern.
In the attached chart, you would also see other possible price targets using the Fibonacci Expansion tool available in the MT4 platform. Prices have already hit the 61.8 target, with the next potential price target at the FE 100.0 level.
Summary
Will the trade fulfill itself? The best answer I can give you is that perhaps it will, perhaps it won’t. There is a good probability that it will, but that’s never a guarantee.
Even if price targets fulfill themselves, the next question to ask is how you would have managed the trade in terms of trailing stops, exiting partial positions, how much risk you would have taken on this trade, etc.
The reason I’m sharing this is to show you that no matter how good your entry system is, that’s only the first step of the trading process. So once you’ve practiced whatever trading system that you’ve chosen, you still have to answer the other questions required to become a successful trader.