Projecting Pennant Breakouts (USD/CAD)

03/09/2009 10:30 am EST

Focus: STRATEGIES

John Jagerson

Co-Founder and Contributor, LearningMarkets.com

The USD/CAD broke out of its pennant consolidation pattern a few days ago. This breakout accompanied an announcement from the Bank of Canada that they will be joining several other major economies with a near-zero interest rate policy. The bank cut its benchmark interest rate to 0.5%, and the statement indicated that they may cut again in the near term.

The rate cut is going to be supportive for the pennant breakout, and many forex traders are likely to take advantage of the move with a long position on the USD/CAD currency pair. From here, there are several ways make an initial estimate for the length of the next trend.

Although there is more than one way to project a price target, it is not uncommon for those projections to provide similar results. In fact, logically, if each of these methods has statistical validity, we should expect them to line up quite often. As you will see below, that is the case with the breakout targets on the USD/CAD today.

1. An initial estimate can be made by measuring the length of the trend leading up to the pattern. In this case, that puts the initial profit target near 1.5400.

2. Thomas Bulkowski conducted several excellent studies on chart patterns in his book, Encyclopedia of Chart Patterns, which states that the mode and mean for a price increase following a pennant breakout is near 20%, which, when applied to the USD/CAD, provides a price target just under 1.5400.

3. Finally, drawing a Fibonacci retracement from the highest high in the pattern to the lowest low provides two Fibonacci projection lines that we can use to create an estimate. In this case, the second projection line (261.8%) lines up with 1.5500.

The similarities between the three methods are striking. It is a good idea to experiment with each of the methods to find one that you prefer to use. If you have not had a lot of experience projecting price targets, use each method in your paper trading as a way to estimate your max profit compared to your stop loss levels.

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By John Jagerson, of PFXGlobal.com and LearningMarkets.com

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