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Article Summary: Traders should look to trade in the market’s path of least resistance. This is commonly referred to as trading with the trend. However, you also need to be on guard for when the trend breaks so that you can enter a new trend or protect your profits as much as possible. Currently, EURAUD is at a decisive point that could be a great trend entry or near a trend reversal point.

Earlier in the year, many traders thought that the EUR was going to break up and shorting the EUR was one of the best trades around next to shorting the JPY. Once the fears temporarily subsided, a new ‘worst in show’ currency came to the forefront and that is the Australian Dollar (AUD). The AU Dollar has become the worst performing currency since early May on a litany of bad news which is explained later in the article.

Learn Forex: EURAUD Has Seen Two Major Moves In 2013

Make_Or_Break_Moment_For_EURAUD_body_Picture_1.png, Make or Break Moment For EURAUDPresented by FXCM’s Marketscope Charts

Please understand that just because the current trend that has seen a rise of 2,100 pips doesn’t mean it’s over. In fact, we often see in FX markets that trends continue longer than many traders expect. This is why you’re encouraged to expect the trend to continue until a major signal like a trendline break or a pivot level is broken to suggest the trend has broken.

Rising Support or Trendline Keeps Our Sights Higher For Now

Trendlines help Forex traders develop a directional bias by connecting the bottoms in a rising market or tops in a falling market. Drawing trendlines on your chart will allow you to buy the higher low or sell the lower high in a developing trend. The other benefit of a trendline is that it allows a very clear representation of when the trend has broken.

Learn Forex: Trendline Break Example on EURAUD in 2013

Make_Or_Break_Moment_For_EURAUD_body_Picture_3.png, Make or Break Moment For EURAUDPresented by FXCM’s Marketscope Charts

You will know a trendline is broken when price breaks through the trendline and then is unable to get back to the original side. You will want to pay specific attention to the ‘retest’ when price tries to get back in line with the original trendline but fails. The failed retest will be your trigger to enter with the new trend.

Learn Forex: Recent Example of a Trendline Break on USDJPY

Make_Or_Break_Moment_For_EURAUD_body_Picture_2.png, Make or Break Moment For EURAUDPresented by FXCM’s Marketscope Charts

The benefit here is that you will be possibly entering into a new trend at the best possible time. On the other hand, if the trade doesn’t work out, you will have a tight stop placed just on the other side of the trend line so that your risk: reward ratio is highly favorable.

Riding the Front Car of a Roller Coaster

Trading any trend is similar to riding the front car of a roller coaster in that you’re experiencing firsthand how the market is moving along its track. When trading trendlines or other trend trading systems you will be the first to experience new highs or new lows as you ride the trend. If you’re currently not in a trend that you’re analyzing then your efforts should be focused on a trendline touch or trend correction for a higher probability entry.

Trading Opportunities in EURAUD

Learn Forex: Current Opportunities on EURAUD

Make_Or_Break_Moment_For_EURAUD_body_Picture_5.png, Make or Break Moment For EURAUDPresented by FXCM’s Marketscope Charts

Before entering the EURAUD trade we want to see if the current trendline will hold. Price action around the trendline will determine the direction of the trade we take. You can see that the current trendline is holding price and if price breaks below the trendline and fails to reset itself on the trendline then we will have a selling bias as the tides may be shifting.

Buy Entry: 1.4200 (Above the Trendline & the Current Path of Least Resistance for the Market)

Stop: Below The trendline at 1.4100

Limit: 1.4500

Sell Entry: Price below 1.4100 (price at this level would accompany a trendline break)

Stop: Above The trendline in the Buy Entry Zone around 1.4200

1st Limit: 1.3900 (1:2 Risk to Reward Ratio)

2nd Limit: 1.3500 (1:6 Risk to Reward Ratio)

Much has been made of the recent weakness in the AUD over the last few months and rightly so. The AUD has been smacked by the tightening credit environment in China which has a large impact on Australia’s economy at the same time demand for commodities are drying up which has delivered another blow to the AUD. However, the EUR has begun to see signs of its financial crisis revived so we will stay nimble with our trendline analysis and be ready to act in the direction of price action.

Happy Trading!

--Written by Tyler Yell, Trading Instructor

To contact Tyler, email tyell@fxcm.com.

To be added to Tyler’s e-mail distribution list, please click here.

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