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A Nimble Trend Trade in AUD/NZD

A Nimble Trend Trade in AUD/NZD

2014-02-14 17:00:00
Kaye Lee, Head Forex Trading Instructor

Talking Points:

  • Clear Weekly Downtrend Still Intact
  • A "Key Resolution" Point for AUD/NZD
  • Narrow Resistance Zone for Initiating New Shorts

The long set-up we targeted yesterday in AUDNZD did not materialize after the pair showed surprising strength, rallying upwards before even touching the desired support zone. However, while this may invalidate that trade set-up, it in fact gives rise to a new one.

Before examining today’s set-up, it is worth noting that the market environment appears to have shifted again. Readers will undoubtedly have noticed that since late-January, markets have started to move out of sync again, with several recent trades not triggering. We've been here before, and good markets often give way to touch-and-go phases like this. Moreover, it’s anybody's guess how long it will last.

For now, it’s actually good that the changing rhythm is mostly resulting in missed trades rather than losing ones. While it is not quite time to play strict defense, traders should be more wary. Moreover, now is certainly not the time to be increasing position sizes.

Today, we’ll focus on the continuation of the trade from yesterday, which is now aligning back with the higher-order trends.

On the below weekly chart of AUDNZD, we see that the downtrend is obviously still intact, although price is admittedly some ways from resistance at this point.

Guest Commentary: Accelerating AUD/NZD Weekly Downtrend

A_Nimble_Trend_Trade_in_AUDNZD_body_GuestCommentary_KayeLee_February14A_1.png, A Nimble Trend Trade in AUD/NZD

Nonetheless, a trend trade would be permissible as long as there was a clear potential turning point on a lower time frame.

The daily chart below shows price heading up towards a resolution point where it may break out of the narrow declining channel, in which case the bias would be for AUDNZD to retrace and test the declining line of resistance. Alternatively, price may respect the channel and head lower. Newer traders instinctively dislike this kind of uncertainty, but it is actually this very conflict that creates the potential for a viable trade.

Guest Commentary: "Resolution Point" on AUD/NZD Daily Chart

A_Nimble_Trend_Trade_in_AUDNZD_body_GuestCommentary_KayeLee_February14A_2.png, A Nimble Trend Trade in AUD/NZD

Ultimately, since no one has a crystal ball, the best course of action is still to take the trades that are being presented. Yesterday, the most compelling set-up for AUDNZD was to the upside, and now, the closest resistance is to the upside, making a short set-up more preferable today.

The below four-hour chart readily provides a zone of resistance based on the declining channel. An estimate of the area where the declining resistance meets price's upside momentum has been outlined, giving resistance as 1.0806-1.0838.

Guest Commentary: Shorting AUD/NZD at Key Resistance

A_Nimble_Trend_Trade_in_AUDNZD_body_GuestCommentary_KayeLee_February14A_3.png, A Nimble Trend Trade in AUD/NZD

The highlighted area would be the ideal location for short positions taken on the hourly chart (not shown). The usual trade triggers, including bearish reversal divergence, bearish engulfing patterns, and/or pin bars would be used.

The risk zone for this set-up is a mere 32 pips deep, and given that each set-up will likely offer even smaller risk, it is more than acceptable for a trade that has more than 140 pips to move, even if it only reaches the bottom of this small channel. (Moreover, the previous daily low is approximately 300 pips from the current price). That said, two or three attempts should be made to get onto this move.

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

Follow our recent track record on the Straight Talk Trading Blog.

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