Article Summary: The AUDUSD has declined as much as 415 pips in 2013. As the trend continues, traders will use momentum analysis to identify scalping opportunities.
The strength of the USD has caused multiple major FOREX pairs to decline through the first two months of the 2013 trading year. However, before blindly buying or selling a currency pair, scalpers are best advised to confirm the primary direction of the trend along with market momentum to find the most suitable pairs for day trading. So how do we determine if the pair is suitable for scalping? Let’s take a look at an example using the AUDUSD.
One of the strongest trending Dollar pairs continues to be the AUDUSD. Taking a look at the 4Hour graph below, we can see the pair has declined as much as 415 pips from its 2013 high at 1.0597. However, even though the pair is moving in a downtrend, short term momentum should be assessed prior to initiating a day trading plan. One way to evaluate direction for scalping is to move in and block off a 30min chart.
Learn Forex – AUDUSD 4Hour Trend
(Created using FXCM’s Marketscope 2.0 charts)
AUDUSD Building Blocks
To find out if this week’s trading momentum is heading in the same direction of our trend we will now turn to a 30 min chart and apply our building blocks to the graph. Essentially, we are dividing our trading week between Sundays and Wednesdays on our chart. In order for us to consider trading the pair momentum in both blocks should point towards lower lows. Conversely, if momentum is stalling it may be time to move away from the AUDUSD and look for a fresh pair to trade.
Below we have an AUDUSD 30min chart divided using our building block analysis. Block 1 begins on Wednesday the 20th and runs through Sunday the 24th. Block 1 shows the AUDUSD declining in value as it moved to a low at 1.020. Block 2 confirms the strength of our downtrend as price continued to print lower lows. As price has continued its descent over the past trading week both blocks have been colored red. As new lows have been created in both pricing blocks, they have been painted red. Forex traders looking to scalp the strongest trends should confirm both blocks of a currency pair are heading in the same direction prior to entering into new positions.
Learn Forex – AUDUSD Building Blocks
(Created using FXCM’s Marketscope 2.0 charts)
To take our analysis one step further, astute traders will notice that price at present has firmly broken through the labeled Block 2 low at 1.0199. As current price has already moved to a lower low, the next price block will also be painted red upon closing. Scalpers can take advantage of this continued price decline on the AUDUSD by finding opportunities to sell the market.
Traders should also keep an eye on the previous high when scalping in a downtrend. A price break to higher highs would at least temporarily halt our bearish bias on the AUDUSD.
---Written by Walker England, Trading Instructor
To contact Walker, email instructor@dailyfx.com. Follow me on Twitter at @WEnglandFX.
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