Many traders implement a forex trading strategy that includes a confluence of support and resistance. The EURAUD is approaching a resistance zone that is bounded by 3 different levels of resistance near 1.2400.
This resistance zone offers us an opportunity to short the pair with a good risk to reward ratio.
The 3 different resistance layers on the EURAUD include:
- 200 Day Simple Moving Average – 1.2412
- Round Number Resistance – 1.2400
- Trend Line Resistance – 1.2389 [How to Trade Trend lines]
(Created using FXCM’s Marketscope 2.0 charts)
As you can see from the above chart, all 3 areas above meet to form a tight resistance zone between 1.2389 – 1.2412. We will use this zone to initiate a short sell position. If you are a conservative trader, wait for the slow stochastic indicator to cross down from overbought levels creating our short sell opportunity.
When managing the risk on the trade (“Why Traders Lose Money”), place the stop loss just above the swing high near 1.2470. A forex tip the DailyFX Education team suggests is maintaining at least a 1-to-2 risk-to-reward ratio which means we want our profit target distance to be at least twice the distance of our stop loss.
In this case, the stop loss would be about 75 pips so we would look for at least 150 pips of profit potential. Additionally, make sure you are risking less than 5% of your total account balance on all open trades.
Bottom line, the EURAUD is offering us a good opportunity at a good risk to reward ratio to sell the pair.
---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education
Follow me on Twitter at @JWagnerFXTrader.To be added to Jeremy’s e-mail distribution list, click HERE and enter in your email information.
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