Terminal patterns are a great foundation for any technical trading strategy for a variety of reasons. But one characteristic I’m always most attracted to is the idea that they must eventually produce an opportunity. Unlike other patterns that may or may not offer an actionable setup, wedges always provide an opportunity regardless of the level that breaks.
Take EURNZD as an example. Just last week I commented on the wedge pattern that had been developing since April of last year. At the time of that post, it looked as though the pair would break to the upside given the recent bullish momentum.
Fast forward to today and we have a break of support instead. There’s an argument to be made that the pair broke resistance by a few pips late last week, but it wasn’t convincing enough to put money on it.
Instead, we remained patient and preserved our capital for a favorable (and convincing) opportunity, such as the one presented by yesterday’s close. With the pair now 100 pips below former wedge support, there isn’t much standing in the way until the two December 2015 lows at 1.5840.
Keep in mind that there is potential for a much larger decline based on the descending channel in the chart above. Of course, it would take a close below the 1.5840 handle to open up the door for a move of that size, but given the high level of volatility we’ve seen so far in 2016, anything is possible.