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Learn Forex: Triangle Formation on GBPAUD Brings Nice Potential

By , Forex Trading Instructor
20 November 2012 03:00 GMT

The GBPAUD is a famous pair for strong technical plays. Both the GBP and AUD have higher interest rates historically and are seen as risk pairs. Because they have similar dynamics, the GBPAUD cross often ranges nicely.

When you take the ruler tool to the chart, you can see how this pair favors big coordinated moves.

Learn_Forex_Triangle_Formation_on_GBPAUD_Brings_Nice_Potential_body_Picture_7.png, Learn Forex: Triangle Formation on GBPAUD Brings Nice Potential

Going back to this very week in 2011, GBPAUD started the first of three 1,400 pip plus moves. These moves display the ability of this pair to take off in one direction until the underlying factors of the pair switch course. Luckily for you, the underlying factors are played out and can be interpreted on the chart in price action.

Triangle Forming

If we turn our attention to the right of the chart, which is the only part of the chart we can enter a trade on, you’ll notice a triangle forming. Specifically, this is an ascending triangle because of the rising floor. Triangles allow us to analyze congested price action so that we can place a higher probability entry.

Learn_Forex_Triangle_Formation_on_GBPAUD_Brings_Nice_Potential_body_Picture_8.png, Learn Forex: Triangle Formation on GBPAUD Brings Nice Potential

What’s nice about trading triangles is that our risk is clearly defined based on prior price action.

Looking below we can see the levels that we want to focus on should the triangle continue to play course.

Learn_Forex_Triangle_Formation_on_GBPAUD_Brings_Nice_Potential_body_Picture_9.png, Learn Forex: Triangle Formation on GBPAUD Brings Nice Potential

Most notably though is the potential trade set up with a confluence of indicators. Anytime we have a union of indicators pointing out a trade idea, it is seen as a higher probability trade. Granted, there are no guarantees so we must always have our risk management set up properly.

Identifying Important Levels

In addition to the price action ascending triangle, we see the 200 period moving average and pivot levels to help up mange the risk on the trade.

The 200 Day Moving Average is used as a line in the sand for most traders. For you, this would mean that the market would not encourage you to buy if price is below the 200 Day Moving Average.

On the chart above you can see the 200 Day Moving Average dividing price down the middle. We can look to trade back to the top of the triangle once price has crossed through and closed above the moving average. These are strong technical levels and we do not want to risk the trade until price is above the 200 Day Moving Average.

Price is currently below the 200 Day Moving Average which sits at 1.5361. You can use an entry order to trigger your trade once price hits that level.

We also have Pivot Levels that price has respected in light of the triangle. If you’re unfamiliar with monthly Pivot Levels, they are drawn from the first to the last of the current month based on last month’s price action. Because so many traders look to Pivot Levels for trading they can be predictive in nature as you can see sellers back off and buyers come in off the Monthly Pivot Levels. Many traders combine Pivot Levels with candlestick patterns to help them identify entries.

Learn_Forex_Triangle_Formation_on_GBPAUD_Brings_Nice_Potential_body_Picture_10.png, Learn Forex: Triangle Formation on GBPAUD Brings Nice Potential

The 2nd level of support also known as the S2 aligned with the rising triangle when we see a Bullish Engulfing Candlestick Pattern form. You can use this as a risk point and set your stop below the S2 because price rejected trading below this level before. You can also trail the stop to move in the direction of the profit target if the triangle formation plays out.

We now have a clearly identified entry with the 200 Day Moving Average. We have a stop exit set below the S2 level which is formed the ascending triangle. Lastly, we’ll look at potential profit targets.

Learn_Forex_Triangle_Formation_on_GBPAUD_Brings_Nice_Potential_body_Picture_11.png, Learn Forex: Triangle Formation on GBPAUD Brings Nice Potential

Potential Profit Targets

As it stands, the moving average is roughly 175 pips away from the S2 level. To set up an appropriate risk: reward: ratio, we should look for a profit of more than 200 pips. The Pivot level for the month is at 1.5630 or 266 pips from the entry target. The top of the triangle is our other profit target option and is roughly 350 pips away which would give us a better risk: reward ratio.

You could either look to scale out of the position should the profit targets be reached with ease or decide on one profit target or the other.

Regardless of the profit target, please ensure you’re trading with a proper amount of capital so as to limit your effective leverage.

Happy Trading.

---Written by Tyler Yell, Trading Instructor

To contact Tyler, email tyell@fxcm.com.

To be added to Tyler’s e-mail distribution list, please click here.

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20 November 2012 03:00 GMT