Currency Secrets

Once again the Aussie Dollar is trading around the long-term historical resistance area of 0.8000.

There are several interesting patterns on the AUDUSD that I’d like to share.

Here’s a weekly chart of the AUDUSD.

Notice how we have an extremely large (and albeit ugly) head and shoulders pattern. Add to the fact that the right shoulder didn’t dip as far south as the left shoulder and we have a currency ready to move.

Not only that but we also have an ascending triangle that has formed over the last 3 years.

So what does all this mean? Well I for one am quite bullish the AUD/USD - as this is a weekly chart I’ll be keeping an eye on how the AUDUSD closes at the end of this week, and then how it reacts to any successful close beyond 0.8000 the week after. As an example, if we have a successful break this Friday, yet by the following Friday we see the AUDUSD back below 0.8000 then resistance is still strong and we may get further downside before it attacks it again - provided the AUD/USD doesn’t retrace too far.

Potential targets for this move would be the ascending triangle’s side of about 1200-1300 pips (0.8000 - 0.6800), therefore being, around 0.9200-0.9300. The head and shoulders target is phenomenally higher again giving a target some 3200-3300 pips above 0.8000 (0.8000 - 0.4700) - if this gets reached then we’d see the ol’ 1980 glory days of the AUD!

But is this a strategy that anybody could use? It definitely isn’t one for us small retail traders - our stops would need to be very large making the position size so small we wouldn’t even be able to enter in.

However, by providing a long-term view of where we perceive a currency may go in the future it can help our trading by only short-term taking trades in the long-term direction.

If there’s one thing that most of you should probably know by now and that is that I just love congestions.

Why?

Simply because you can easily define support and resistance points.

We have popular patterns such as:

• pennants
• flags
• triangles
• ranges

And all these other fancy names that revolve around the market doing something but going nowhere.

It also makes my job at making money all the more easier too.

So what has me so excited about the USDCHF & AUDUSD charts?

On the USDCHF chart we have a pennant forming on its hourly chart (click the image to enlarge):

On the AUDUSD chart we have sideways congestion, with anticipation of a breakout to the downside (click the image to enlarge):

Oop… USDCHF breaking out.

Outta here.

Well I’m glad I didn’t take too much notice of the AUDUSD change of polarity yesterday, otherwise I would have missed out on making some pips!

When I peered at the AUDUSD on an hourly chart I saw a beautiful sideways congestion that was just begging me to trade it (resistance was around 0.7700 with support around 0.7670).

At the time I noticed the sideways congestion the AUDUSD was trading around 0.7680-85, so I decided to place a buy entry stop at 0.7665 with a stop loss at 0.7705 (40 pip stops) as well as a buy entry limit order at 0.7695 with a stop loss at 0.7710 (15 pip stops).

My buy entry stop order was hit at 0200 NY EST and as it bounced I became fearful that the market was going to go to the upside (thinking that the change of polarity WAS going to take effect), so I cancelled my buy entry limit order… after seeing how high the AUDUSD went, as well as what happened after the event I kind of wish I hadn’t of cancelled that order and had stuck to my original plan.

(The AUDUSD went as high as 0.7696 according to Oanda’s chart (which is mid-priced) meaning that the highest bid price would have been 0.7695 - my entry buy limit order would have hit it right on the head… and I’d be up 60 pips!)

Oh well, at least by recording events like this I can give my mind the experience which will help reinforce myself.

Question: Does the change of polarity principle work with charts that have sloping trend lines?

This is a good question as I’ve only used the “change of polarity” principle on charts that have exhibited flat (or near flat) trend lines.

As of yesterday’s close the AUDUSD has parked itself slightly above its previous downward trending resistance line which it broke on 16th June.

So can we expect to see the AUDUSD rally based on this “change of polarity” principle?

Unfortunately due to my lack of experience with keeping an inventory check of changes in polarity with sloped trend lines I cannot sufficiently answer this question.

I guess the best thing we could do is just see what happens… and then we can all learn from the experience!

The AUDUSD has just broken out from its medium-term (last 3.5 months) downward trending channel.

However, did the bar responsible for the breakout form a breakout-like candle (i.e. did the market open near its low and close near its high)?

Not really.

But it still did break.

Yes.

But when you trade breakouts you want decisive market action, not half-hearted action as this shows that either the market doesn’t recognize the resistance trend line - and don’t forget just because I draw a “line in the sand” doesn’t mean the entire market revolves around it, ponders it and then makes a decision upon it.

NO!

The market does what it likes - the lines display meaning to ME about what *I* think the market will do - there’s no magical powers hidden in drawing lines all over the page, or for that matter any other indicator!

So at this point in time the AUDUSD shows ME that its current move doesn’t warrant a trade, we’ll see if my mind changes over the next week.