AUD breakout traders – look to the yuan for inspiration
As is typically the way in FX trading the breakout traders see a set-up on the higher timeframes and either the market uses these levels to fade the move, or the breakout fails to gain traction and ultimately reverses.
Those seasoned traders who use breakouts for trade entry – often momentum and trend-followers – know the percentage of breakouts that lead to trending conditions is typically low. It is why they target ‘outlier’ moves within a distribution and subscribe to the view that the win/loss ratio is not a major concern. The strategy will typically run win rates of 30-40% but will focus more on the reward-to-risk trade-off.
Extracting as much profit from each trade is where they make their money and that is where the science of holding positions kicks in.
We may end up with many small losing positions, but when we win it is ideally a 5 to 10R. Holding, as I say, is key and that is never easy – it is why having a rules-based strategy can pay dividends. When the market breaks out and goes on a run you must know when to hold and when to fold.
Granted, FX markets have a higher propensity to revert to a mean than commodities or equity indices, but the AUD screams out as currently fitting this dynamic. Notably, EURAUD, AUDUSD, AUDCHF and GBPAUD screened on the breakout radar yesterday, but have since failed to follow through with the move.
China is at the heart of the AUD recent moves. USDCNH has always been a strong guide for me on AUD flows, and while I have been of the view that weaker external demand needs a weaker currency – the PBoC is doing the utmost to push back on the yuan weakness, with consistently stronger yuan ‘fixings’ (seen each day at 11:15 AEST).
As a driver, we’ve seen a slightly better China CPI print today at -0.3% and USDCNH has sold off, in turn, this has lifted the AUD.
The statistical correlation between AUD and CNH has broken down of late, but for those trading AUDUSD or the AUD crosses through Asia, the influence of the yuan is still incredibly significant.
Tactically, if we are to see an upside break of 7.2500 (in USDCNH) I’d have far higher conviction we’ll see a closing breakout in these AUD pairs.
Patience is always our best friend in trading, especially when using leverage, as we need to nail our entries – so having the set-ups on the radar and waiting for the market flow to push a trade is prudent.
One could say we’re at peak negative sentiment towards China, and next week’s China economic data (industrial production, retail sales, fixed asset investment) is likely to see a more pronounced positive reaction to a beat than a negative one to a miss. That is a risk to manage, but if the AUD kicks lower in these pairs it could be meaningful and certainly be welcomed by those that like to trade continuations.
Those seasoned traders who use breakouts for trade entry – often momentum and trend-followers – know the percentage of breakouts that lead to trending conditions is typically low. It is why they target ‘outlier’ moves within a distribution and subscribe to the view that the win/loss ratio is not a major concern. The strategy will typically run win rates of 30-40% but will focus more on the reward-to-risk trade-off.
Extracting as much profit from each trade is where they make their money and that is where the science of holding positions kicks in.
We may end up with many small losing positions, but when we win it is ideally a 5 to 10R. Holding, as I say, is key and that is never easy – it is why having a rules-based strategy can pay dividends. When the market breaks out and goes on a run you must know when to hold and when to fold.
Granted, FX markets have a higher propensity to revert to a mean than commodities or equity indices, but the AUD screams out as currently fitting this dynamic. Notably, EURAUD, AUDUSD, AUDCHF and GBPAUD screened on the breakout radar yesterday, but have since failed to follow through with the move.
China is at the heart of the AUD recent moves. USDCNH has always been a strong guide for me on AUD flows, and while I have been of the view that weaker external demand needs a weaker currency – the PBoC is doing the utmost to push back on the yuan weakness, with consistently stronger yuan ‘fixings’ (seen each day at 11:15 AEST).
As a driver, we’ve seen a slightly better China CPI print today at -0.3% and USDCNH has sold off, in turn, this has lifted the AUD.
The statistical correlation between AUD and CNH has broken down of late, but for those trading AUDUSD or the AUD crosses through Asia, the influence of the yuan is still incredibly significant.
Tactically, if we are to see an upside break of 7.2500 (in USDCNH) I’d have far higher conviction we’ll see a closing breakout in these AUD pairs.
Patience is always our best friend in trading, especially when using leverage, as we need to nail our entries – so having the set-ups on the radar and waiting for the market flow to push a trade is prudent.
One could say we’re at peak negative sentiment towards China, and next week’s China economic data (industrial production, retail sales, fixed asset investment) is likely to see a more pronounced positive reaction to a beat than a negative one to a miss. That is a risk to manage, but if the AUD kicks lower in these pairs it could be meaningful and certainly be welcomed by those that like to trade continuations.
Disclaimer:
Trading leveraged products carries a high level of risk and may result in you losing substantially more than your initial investment.
Trading leveraged products carries a high level of risk and may result in you losing substantially more than your initial investment.