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Thomas Long, Course Instructor

Let's take a closer look at this pair by posting an hourly chart.


The first thing we should note is the previous high in the 1.5800 area. If the EUR/AUD can reverse before moving up through this previous high, that would be very bearish for this pair. If the market moves up through this resistance area, we should interpret that as a possible change in sentiment and adopt a more conservative approach.

But what we want to talk about here is how to identify that reversal and how to take advantage of it as a trader. A look at the previous move down offers a great example. A corrective move against the downtrend on the daily chart is seen as a series of higher highs and higher lows on the hourly chart. We can see that this is what is happening now on this hourly chart. It is when the market starts to move down and moves through the previous low that defines the reversal. In the previous move down, breakout traders would have sold this pair on the move down through the 1.5646 low. They might then place their protective buy stop above the high and either look for twice that risk in profit potential for a 1:2 risk:reward ratio or close the trade when the market moved up through a high. The use of highs and lows like this in your entries and exits can be more powerful than using technical indicators as you are letting the market tell you when it is time to enter instead of depending on an indicator or guessing.

So now we wait to see how this pair will react. Those same breakout traders are now poised to sell on a move down through the current 1.5559 low in this corrective move up. They would then place their protective buy stop above what is currently the 1.5740 high. So the two levels to watch on this pair are the 1.5800 level which a move up through would mean a revaluation of the strength of the downtrend and the 1.5559 low which a move down through could open the door to more selling pressure. As trend traders, we just try to identify a trending move and jump along for the ride, but we must first wait for the market to tell us what it wants to do. That means exercising patience and discipline in our approach to trading. But those two traits can be well rewarded in the field of speculation and this example shows why.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.