Talking Points:

  • Traditional Rules for Trading Trend Lines
  • Non-Traditional Price Action in EUR/AUD
  • A Clear Entry Signal on the Hourly Chart

Once a trend line is broken, one expects it to be retested on the other side before price properly breaks down. Following that retest, the trend will then either continue on or break down from there. It is rare that a retest does not produce a conclusion either way, but EURAUD is exhibiting such behavior right now.

The daily chart below shows that price has tested the same line of resistance not once, but twice. The line is obviously being respected, but a second test is most unusual. This usually indicates that a new uptrend may be developing, possibly parallel to the previous uptrend. This notion is supported by the (so far) uninspiring reaction off the second test.

Guest Commentary: Second Test of Resistance for EUR/AUD

A_EURAUD_Entry_Signal_Thats_Flashing_Right_Now_body_GuestCommentary_KayeLee_January20A_1.png, A EUR/AUD Entry Signal That's Flashing Right Now

Thus, given the evidence, it is safer to assume that the overall uptrend is still valid, and trades can then be taken accordingly.

The four-hour chart below is interesting in that price has just broken another level of support without a proper retest. It looks as if it is now finding a bounce area based on previous horizontal support and resistance. The zone of interest emerges as 1.5343-1.5383.

Guest Commentary: Second Test of Short-Term EUR/AUD Trend Line

A_EURAUD_Entry_Signal_Thats_Flashing_Right_Now_body_GuestCommentary_KayeLee_January20A_2.png, A EUR/AUD Entry Signal That's Flashing Right Now

In this case, there is an approximate risk of 40 pips, but there are at least 90 pips between the current price in EURAUD and the underside of the shorter-term trend line that has just been broken and will likely be retested. Additionally, if the larger trend resumes, the trade could run considerably farther.

As always, attempts to get in on the trade should be attempted on a time frame that promotes a high level of precision, and in this case, that comes from the hourly chart (see below).

As shown, a reversal divergence is already in play, and this can be considered a valid entry signal. Technically, though, since two or three attempts should be made to enter a move, several triggers may be possible, although reversal divergence, pin bars, and bullish engulfing patterns are the preferred entry signals for this particular strategy.

Guest Commentary: A EUR/AUD Entry Signal That’s Flashing Now

A_EURAUD_Entry_Signal_Thats_Flashing_Right_Now_body_GuestCommentary_KayeLee_January20A_3.png, A EUR/AUD Entry Signal That's Flashing Right Now

Although this trade has already triggered, it has not run far, and traders who are quick to act may still be able to hop on at a good price. More conservative traders may place a limit order with an entry at 1.3686 or better. The stop loss may be placed below the low of the price swing.

By Kaye Lee, private fund trader and head trader consultant,