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.

Tags: AUD USD, Currency Analysis

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.

Tags: AUD USD, Forex Trading, USDCHF

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.

Tags: AUD USD

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!

Tags: AUD USD

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.

Tags: AUD USD

If you noticed in our previous chart of the AUDUSD the medium-term downward trending channel that it was inside you would have seen that the upper channel line ended at around 0.7725. Yesterday the AUDUSD went as high as 0.7704 (20 pips shy) and closed the day by forming an ENGULFING BEAR candlestick pattern.

Now in the “normal” trading world I personally prefer my engulfing patterns to have gapped beyond the previous candle’s range, meaning that for engulfing bullish patterns I prefer today’s open to be lower than yesterday’s low, and for engulfing bearish patterns I prefer today’s open to be higher than yesterday’s high.

Unfortunately the forex market is not privy to gapping and thereby renders this pattern useless… or does it?

What is the market’s underlying sentiment when it forms these engulfing patterns?

Well, if we look at the engulfing bear pattern we can see that the market initially had a nice healthy UP day where it opened near its low and closed near its high – obviously the market was very decisive on what it was doing that day. When the next day opened the market CONTINUED with this sentiment by opening higher, however, upon opening the market began to lose its previous bullish sentiment and retreated further than the previous day’s gains.

By interpreting the pattern’s underlying sentiment can we now see that the same thing happened with the AUDUSD in the forex market?

Of course we can.

Let’s have a look at the raw numbers:

On Tuesday the AUDUSD opened at 0.7650 went as low as 0.7639 (down 11 pips), travelled as high as 0.7698 and closed at 0.7686 (12 pips off of its high). The distance between the open and the close was 40 pips, making this day quite decisive… the market only travelled 1/3 undecisively (23/63). Now, on the next day the market opened at 0.7687 (the forex market doesn’t gap) then continued with the bullish flavor by moving as high as 0.7704 (surpassed yesterday’s high) but then fell sharply to as low as 0.7644 (6 pips below yesterday’s open) before closing only 1 pip higher at 0.7645.

Can you see the engulfing bear pattern in this?

I do.

Maybe it’s just me.

So how do you effectively trade the engulfing patterns?

Well, what have we got: resistance at 0.7725 and another resistance point at 0.7704 (the high of the engulfing pattern). I personally would use the high of the engulfing pattern, but for those more risk averse possibly 0.7735 would be better.

Why 0.7704?

Well, to me an engulfing pattern is like a breakout. Something happened at 0.7704 and saw it break in the opposite direction, if price happens to break back ABOVE 0.7704 then it shows that either there has been a fundamental shift in the market, or the engulfing bear pattern was weaker than expected. Hence the reason why I place my stops tighter.

What to watch out for:

With most reversal patterns there are likely to be some hiccups along the way. One of these bumps is likely to be the 50% retracement zone of the recent run up, another could also be the 38.2% Fibonacci retracement zone of the recent run up. Therefore, I’d be looking for any weakness of the bearish move around 0.7620 & 0.7590 (possibly 0.7600 as this is a nice round number).

I do like this trade as we are reversal trading WITH the medium-term trend – my favorite form of reversal trading!

Tags: AUD USD, Forex Trading

The reason I do this is that it helps to know which currency to open a position in if a negative or positive economic report is released by the USD, and to open a position that would best take advantage of the strong/weak USD economic report.

As an example, if the AUD has decreased 10% against the USD over the last 3 months, and the EUR has decreased 15% against the USD then if the USD were to release a negative report it could safely be assumed that the AUD will likely rally further than the USD as it hasn’t depreciated as much as the EUR.

Of course this is not always the case and here are some things to be mindful of:

• Does the economic report influence JUST the USD or are there other repercussions against the currency you are considering to trade?
• Does the currency you are considering to trade have any economic releases soon?
• What does the chart say?

There are many ways to gauge which currencies are the strongest/weakest against the USD. Here are some methods that I’ve used:

• Rate of change of the CLOSE over the last 20 trading days (or 60 trading days)
• Rate of change of a MOVING AVERAGE of the CLOSES over the last 20 trading days (or 60 trading days)
• Using channel lines

The method that I prefer is the rate of change of the moving averages coupled with the channel lines. I plot a 20-day moving average and then obtain the rate of change of this moving average over the last 20 days and 60 days. I then just compare the raw figures of these stats to see which currency has the highest number and which currency has the lowest number.

Once I have the two currencies that are the strongest and the weakest against the USD I then plot their charts to determine where resistance and support lay, as these technical zones override any arbitrary rate of change figure.

Here is a table showing these stats (note that the USD is the BASE currency for each currency cross – makes it easier to identify):

CURRENCY >> ROC(SMA(20),20) % >> ROC(SMA(60), 60) %
AUDUSD (2.07) (0.67)
CADUSD (0.99) (0.84)
CHFUSD (3.19) (2.54)
EURUSD (3.36) (2.65)
GBPUSD (3.64) (1.13)
JPYUSD (1.35) (2.53)

As you can see from the above table ALL currencies have weakened against the USD over the last 20 and 60 days (according to their moving averages). The strongest currency over the last 20 days against the USD has been the CAD, over the last 60 days it has been the AUD. The weakest currency over the last 20 days against the USD has been the GBP, whereas over the last 60 days it has been the EUR.

Tags: AUD USD, EUR USD, Forex Trading, GBP USD, USD CAD, USDCHF, USDJPY

• Have the underlying fundamentals changed?
• Have I missed something on my charts?

As you can see both questions look at the opposing ends of the analytical spectrum:

• The Fundamentals
• The Technicals

So, what has happened to the AUDUSD?

Has there been a shift in its fundamentals?

When I answer this question I always look at the big economic figures, such as the economy’s interest rates, trade balance figures, and unemployment rates. After searching around I have seen no *real* large underlying shift in the economy of the USD or the AUD to make the AUDUSD rally as much as it has done lately.

So, what about the AUDUSD’s technicals? Did I miss something?

Well, one EXTREMELY obvious thing I overlooked was the current medium-term trend the AUDUSD was exhibiting.

As I failed to quantify what trend the AUDUSD was in (by drawing channel lines) I completely missed the lower end of the channel from which it bounced.

You can see this by checking out our AUDUSD chart.

Hence this post should reinforce the importance of not only identifying what the underlying trends are, BUT ALSO QUANTIFYING THEM (and I do this by drawing channel lines, some may decide to use indicators such as moving averages, MACDs etc).

So what of the AUDUSD now?

Well, our bearish flag is now redundant so we would have to assume that the AUDUSD will continue within its current downward trending channel until it breaks out of it, therefore I would be looking for a bearish reversal around 0.7725.

Tags: AUD USD

Therefore, we should expect further weakness of the AUDUSD and this will be confirmed once it breaks the low of the flag pole (which was formed 16th May – 0.7538).

Initial stop loss can either be placed at the upper most section of the flag formation (being at about 0.7660) – this is the safest option, or 15-20 pips above the flag zone that was broken (being 0.7580 + 20 pips = 0.7600). I personally prefer the tighter stop.

Anyway, let’s see how the AUDUSD pans out over the next coming weeks.

Tags: AUD USD, Forex Trading

As you can see from our analysis of the DAILY AUDUSD chart the recent weakening of the AUD against the USD two weeks ago has been the basis for our bearish flag pole.

I have roughly measured the distance of the pole to be about 200 pips (start = 0.7740 end = 0.7540). Therefore the AUDUSD could land anywhere between 0.7640 – 200 pips = 0.7440 to as low as 0.7560 – 200 pips = 0.7360 – it just depends on whether you measure the size of the breakout (IF IT DOES HAPPEN) from the furtherest point of the flag (i.e. in this case the upper most trend line comprising of the flag) or the closest point of the flag (in this case the lower most trend line comprising of the flag).

For those who prefer to minimize their risk always go for the closest TARGET (being 0.7440), for those who are more active in their trading try and achieve the furtherest TARGET (being 0.7360). Being a little more active I’ll try and see if I can achieve the furtherest target… HOWEVER…

If you look at the chart you will notice that previous bounces of this currency have occurred around 0.7450 (back in Dec-04) and 0.7500 (in Jan-05), while both of these points only have had ONE successful bounce each they should be watched JUST in case anything funny is likely to happen. I personally don’t think they would cause too much of a hassle (as they’ve only successfully bounced off ONCE from these support zones, but that doesn’t necessarily mean I’m going to discount them altogether… I’ll be watching… just not actively).

Anyway, watch for a potential break out of the bearish flag at 0.7540 today (if you want to go safe wait for the AUDUSD to break 0.7520).

Tags: AUD USD, Forex Trading