AUDUSD: Potential 2618 Play on the Aussie Dollar
The less dovish than expected tone from the RBA last week, stating the exchange rate was still overvalued but failing to give any mention of a time scale for further rate cuts, made me less bearish than I was on this pair. On top of that, the FOMC minutes highlighted concerns about hiking interest rates too soon, creating some buying pressure. Last week was therefore a net gainer and all in all I would say that for now, the steep downtrend has started to fatigue; with the last five months seeing it lose a staggering 1.580 pips.
This does not mean I have gone bullish on the Aussie Dollar, far from it. Price is currently sitting at a level (784-ish) where all buying interest has ebbed away for the last two weeks straight and the latest attempt to break it failed again last Friday. As a result, we may now have a basic reversal price pattern developing on the 30M timeframe: a double top. This trade idea is about the possibility of trading that pattern. I am describing the most conservative play here (known as the 2618 trade), with the most conformation possible.
The scenario is depended on a number of steps happening before entering the trade and as such its a true “if… then… scenario”. A double top is a double top if the wick of the second meets at least the candle close of the first, while the candle close of the second does not exceed the wick of the first. In other words, PA tried to make a higher high, but failed. This retest of resistance with less strength also follows from the regular bearish RSI divergence at the second top.
We need the following steps to occur before entering a trade: (1) price breaks below and closes below the neckline, (2) price retraces back up, until 618 retracement of the prior leg down and (3) price stalls, stops and reverses at this retracement level. In that case, SL goes behind swings high of the tops. TP1 = structure level where the retracement started, TP2 = 1272 extension of prior leg down. In terms of trade management, when TP1 is hit I would take profit on 1 position and roll my stop loss to breakeven, enjoying a risk free trade hunting for TP2.
There are 42 pips to be made (if this pair follows all the steps in the script) and the trade has a reward – risk ratio of 2.0!
UPDATE: There is good news and bad news on this one. The good news: most of the analysis was correct. We did have a double top, a reversal did happen and price did break the neckline and hit both profit targets. The bad news: my conservative entry technique kept me from profiting of the first leg down, since the drop happened too fast to enter and there was no retracement before the profit targets were hit. I did go short, after PA finally made a 500 retracement that aligned perfectly with the neckline (that served as resistance) and made 49 pips on the second leg down (which was a 1272 extension of the prior leg down). Since then we had a third leg down, which I did not trade. I left some money on the table, but the trade was profitable.
This does not mean I have gone bullish on the Aussie Dollar, far from it. Price is currently sitting at a level (784-ish) where all buying interest has ebbed away for the last two weeks straight and the latest attempt to break it failed again last Friday. As a result, we may now have a basic reversal price pattern developing on the 30M timeframe: a double top. This trade idea is about the possibility of trading that pattern. I am describing the most conservative play here (known as the 2618 trade), with the most conformation possible.
The scenario is depended on a number of steps happening before entering the trade and as such its a true “if… then… scenario”. A double top is a double top if the wick of the second meets at least the candle close of the first, while the candle close of the second does not exceed the wick of the first. In other words, PA tried to make a higher high, but failed. This retest of resistance with less strength also follows from the regular bearish RSI divergence at the second top.
We need the following steps to occur before entering a trade: (1) price breaks below and closes below the neckline, (2) price retraces back up, until 618 retracement of the prior leg down and (3) price stalls, stops and reverses at this retracement level. In that case, SL goes behind swings high of the tops. TP1 = structure level where the retracement started, TP2 = 1272 extension of prior leg down. In terms of trade management, when TP1 is hit I would take profit on 1 position and roll my stop loss to breakeven, enjoying a risk free trade hunting for TP2.
There are 42 pips to be made (if this pair follows all the steps in the script) and the trade has a reward – risk ratio of 2.0!
UPDATE: There is good news and bad news on this one. The good news: most of the analysis was correct. We did have a double top, a reversal did happen and price did break the neckline and hit both profit targets. The bad news: my conservative entry technique kept me from profiting of the first leg down, since the drop happened too fast to enter and there was no retracement before the profit targets were hit. I did go short, after PA finally made a 500 retracement that aligned perfectly with the neckline (that served as resistance) and made 49 pips on the second leg down (which was a 1272 extension of the prior leg down). Since then we had a third leg down, which I did not trade. I left some money on the table, but the trade was profitable.
You don´t need to be a weatherman to know which way the wind blows - B. Dylan