The USD/CAD struggles to find direction, trades flat on the day below 1.3400 and finally reverses on the second day of the uptrend. A brief analysis of the chart reveals that the pattern of bullish and bearish reversals in the USD/CAD chart are essentially a confirmation of a bullish or bearish divergence in the price action. This confirms that the price is going up or down. On this second day of the reversal, the trend is reversed and the USD/CAD trades above 1.5200.
The reason for the reversal can be determined in two ways. First, the breakouts may have been triggered by the news of Greece’s default. If Greece does not restructure its debt, it may default on all of its debt within two months. It is unlikely that Greece will be able to get back on track. Second, the breakout in the price action may have been triggered by the anticipation that the Greek government would announce an extension of its debt restructuring program. However, a new announcement may bring news of a successful agreement. The breakouts in the price action indicate a reversal in the price movement following a successful agreement by the government of Greece to restructure the country’s debt.
There is a common misconception among many Forex traders that price patterns are predictive of future prices. Price patterns do not provide any insight into the future price movement. They only provide a means of identifying trends that may be related to the current trend and predicting the direction of that trend. Price patterns provide a starting point and an end point and help to confirm or dispel the trend.
A common mistake in interpreting charts for Forex trading is to believe that price patterns are predictive of future movements in currency pairs. While there are no “caveat emptor” rules with Forex charts, most traders rely on patterns to decide the direction of their trade. In addition to the obvious trend, a trader should also look for other patterns. Examples of patterns include the reversal of long and short positions.
One other important lesson from this example is that a Forex trader should not rely solely on charts to make trading decisions. A good Forex trader uses the timeframes (e.g., daily, weekly, monthly, etc.) as well as indicators of direction. Using charts may allow a trader to identify patterns, but it is the knowledge of the timeframes and how to interpret them that will guide him or her in making trades.
In conclusion, the USD/CAD trades flat on the first day of the reversal and reverses on the second day of the uptrend. If the pattern is bullish, the trader should expect a break of the pattern on the second day and a continuation of a bearish pattern on the second day.