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How to Trade the Declining AUDUSD Trendline

How to Trade the Declining AUDUSD Trendline

2012-10-16 18:00:00
Walker England, Trading Instructor,

As discussed in previous editions of Chart Of The Day, the AUDUSD is a currency pair generally known for its long trending moves. Over the past month, the pair has declined as much as 476 pips from its September 14th high of 1.0624 to the October 8th low at 1.0148. As price moves lower traders are left looking for opportunities to enter into this directional move. One way we can take advantage of a trending market is to look for opportunities to sell in a downtrend using a trendline. Today we will focus on identifying and trading the descending trendline of the AUDUSD.

How_to_Trade_the_Declining_AUDUSD_Trendline_body_Picture_2.png, How to Trade the Declining AUDUSD Trendline

(Created using FXCM’s Marketscope 2.0 charts)

Looking closer at the AUDUSD 4HR graph below we can begin to notice the development of our trendline. It is important to remember that in order for a trendline to be valid, traders need to find at least two points of contact. The trend line below has been formed by connecting a straight line between the September 14th and September 27th 2012 highs. Once these points are connected the trend line may be extrapolated to find our next point of potential entry.

Currently the AUDUSD is testing our trendline near 1.0290. Currently this line is working as resistance, holding in price before potentially turning lower. Traders have several opportunities to place fresh sell positions once resistance is established. Traders may choose to first trade with entry orders, waiting to take positions on a test of the trend line. Also, traders may choose to trade at market or even employ an indicator such as CCI or RSI to time entries. Regardless of the method chosen, it is recommended to keep stop orders above the current line of resistance. In the event that price breaks out to a higher high, traders should no longer be considering being short the AUDUSD.

How_to_Trade_the_Declining_AUDUSD_Trendline_body_Picture_1.png, How to Trade the Declining AUDUSD Trendline

(Created using FXCM’s Marketscope 2.0 charts)

My preference is to sell the AUDUSD near trendline resistance at 1.0290. Stops should be considered above our trendline at 1.0325 or better. First targets for taking profit can be placed at 1.0150 near previous lows, giving a better than 1:2 Risk/Reward ratio.

Alternatives include the AUDUSD breaking higher above 1.0300.

---Written by Walker England, Trading Instructor

To contact Walker, email instructor@dailyfx.com. Follow me on Twitter at @WEnglandFX.

To be added to Walker’s e-mail distribution list, send an email with the subject line “Distribution List” to instructor@dailyfx.com.

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