short-term trading strategy explained in my last article was recently applied to
the EURO AUD last week when the Euro experienced significant losses against
other major currencies. The lukewarm response to the Spanish bond auction
renewed fears about the economic outlook for Europe
and its common currency, leading to declines against the USD, Aussie, Pound and
More trades such
as this are likely in the weeks ahead as the Euro loses more strength
against the majors. Although we might actually see a brief rally this week as
the pairs retrace in favour of the Euro, this is likely to be temporary ahead
of further declines towards the end of April.
On April 5th, the 4H Chart
had formed a Descending Pennant at a major downtrend line and broke an Inner
Uptrend Line to signal a strong possibility of a pullback. The other reasons to
have expected a decline were that
- the pair was at the end of its average Weekly Range of 500 pips
- it was also just below the Support of the Weekly
Chart’s Range which normally leads to a pullback
- the Euro had already started to decline
significantly against other pairs earlier in the week.
4 HOUR CHART
TRADE SETUP AND ENTRY
The setup to
trade this expected move was seen on the 30 Minute Chart which had formed a
small Pennant just inside the Support of the 4H Pennant. The signal to enter
this trade came with the bearish break and close of a candle below Support. The corresponding Stop Loss was just below the
Resistance of the 30 Minute Chart´s Pennant.
30 MINUTE CHART – ENTRY SIGNAL
Following this entry
signal, the currency then pulled back briefly to test the Support of both
Pennants before turning to resume the breakout. For a trader who either missed
the original entry or who wanted to add lots for more profit, there were four
other strong bearish entry signals along the way before the breakout ended.
As explained in the last article, the goal is to aim for the 120-Pip price for a Risk-Reward Ratio of 3:1. However for this trade, a target of 100 Pips at 1.2669 that gave a 2.5 Risk-Reward Ratio was deemed to be more appropriate. The reason was that the breakout was heading towards a strong Past Support area at 1.2660 which was part of the previous uptrend that was broken. This is normally a good short-term profit target during a new downtrend since it would keep you away from a possibly large pullback at that price.
4 HOUR CHART
With these types
of breakouts from consolidation, the trader can either enter at the start
and leave the trade to the target or add more lots while adjusting the Stop
Loss to protect the floating profit. Alternatively, a larger percentage than is
normally risked could be used for that single entry at the start to maximize on
the breakout, as long as the trader believes it to be a high probability trade.