Currency Secrets

As discussed in our previous post we looked upon the NZDUSD as a good strengthening currency due to its favorable current account figures which are going to be released Wednesday at 1845 NY EST.

What I will now try find is a good entry point that will complement this favorable announcement for the NZD.

At present the NZDUSD has been inside a 3.5 month downward trending channel… as defined by our daily chart.

HOWEVER, one bullish feature that I have noticed has been an INVERSE HEAD & SHOULDERS!

A what????

An inverse head & shoulders pattern is where the market forms a trough, labelled the “left shoulder” (LS in the chart), then forms a LOWER trough, labelled the “Head” (H in the chart), then a HIGHER trough, labelled the “right shoulder” (RS in the chart). The peaks that formed between the LS-H troughs and the H-RS troughs should be roughly the same price. The line that joins the two peaks together is known as the neckline (labelled as N in the chart).

So how do you effectively trade an inverse head & shoulders pattern?

Well… being a Currency Secrets reader, and therefore not a normal person, you should be able to tell me?

Obviously our answer would be to place a buy entry stop above the neckline with an attaching stop loss at the RS low (being at 0.7035). If we get a good breakout candle then we could possibly move our stop to the low of the candle responsible for the breakout.

We could also just WAIT for a breakout first before entering so that our initial stop loss is reduced from its 140-150 pips to something that might end up being only 40-50 pips.

Of course, for those who have accessed the locked pages, you may have some idea of I’m likely to do today!!

One last thing that you need to know about the inverse head and shoulders pattern is that the distance of the move (once the instrument has successfully broken the neckline) can be measured by calculating the distance from the head to the neckline and adding this distance from the neckline.

In the case of the NZDUSD the neckline is around 0.7180, the head’s lowest close is 0.6977, therefore the distance is about 200 pips placing the target of a successful breakout at around 0.7380… this will see it outside the medium-term down trend that it has been in over the last 3.5 months. I’d watch 0.7300 just in case this downward trend has any impact on this move eventuating (as this is where the trend line seems to lay).

Anyway, I’m bullish the NZDUSD and with the announcement that is being released this Wednesday I am preparing my bullishness by getting in before everyone else.