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Learn Forex: EUR/AUD and Positive Risk-to-Reward

Learn Forex: EUR/AUD and Positive Risk-to-Reward

Jeremy Wagner, CEWA-M, Head of Education


Article Summary: The EURAUD pair has been churning higher over the past week. The recent surge has placed the forex cross pair in a tight resistance zone offering a selling opportunity with a good risk-to-reward ratio.

This latest surge of the Euro has many of its pairs zooming to the upside. That Euro strength coupled with recent Australian Dollar weakness (AUD) has created a nice move to the upside on the EURAUD cross pair. However, the pair is currently bounded by confluence of resistance which offers short traders a good opportunity of a good risk-to-reward ratio.

Learn Forex: Confluence of Resistance

(Created using FXCM’s Marketscope 2.0 charts)

Using forex technical analysis, we find 3 different points of resistance forming a barrier against further increases on the EURAUD.

  1. Trend line resistance connecting the May 2012 and Oct 2012 highs rests at 1.2710 (black line)
  2. 78.6% retracement level of the October 2012 high and the November 2012 low rests at 1.2680 (orange horizontal line)
  3. Equal Wave pattern where wave C = wave A at 1.2670 (blue horizontal line)

Therefore, a resistance zone exists on the EURAUD between 1.2670 and 1.2710. Just because this technical resistance zone exists doesn’t mean prices are unable to move higher. However, when you have 3 different points of resistance joining together to form a tight zone, this generally offers traders some type of reaction that would allow shorts to eventually move their stop loss to breakeven.

Therefore, the trading plan is to short with an entry inside this zone placing the stop loss just above the October 2012 high near 1.2820. If prices reach this level, then it would have to break above the black resistance line and the October 2012 swing high…at that point I would want out of the trade.

If this pattern holds, then the November low of 1.2160 may be put to test so that will be our first target.

If prices are successful in pushing to 1.2615, then the stop loss will be moved to break even or better.

Platform is FXCM’s Trading Station IIEnroll for Demo Account

One of the advantages of this trade is a short trade is in the direction of rollover. With this time of the calendar year full of bank holidays, the rollover calendar can show large debits and credits of interest. If you are unsure of how to read or use the rollover calendar, watch this webinar from Wednesday where I explained its use on JPY pairs.

Forex Strategy: High Probability Breakout Trading December 19

Happy Trading!

---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.

Looking for a strategy to trade? Take our free Relative Strength Index trading course and learn how to use this widely followed indicator in a trading strategy. Answer the quiz questions and receive a strategy of buy/sell rules that use the RSI.

Register HERE to participate.

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