BarroMetrics Views: AUDUSD 2010-11-30

The AUDUSD  last night gave me an opportunity to display the thought processes I use when I look to take a trade.

It goes without saying that I have a written trading strategy. But, as I have found when teaching, having a plan is but the first step. The second step is to apply it and this is what this blog is about.

Last night (Singapore time) I spotted an interesting pattern on the 15-minute. The question facing me was: what did the pattern mean, if anything, for the longer timeframes. For those that have read Nature of Trends, see if you can anticipate what I saw.

Ok that’s the chart that started the whole train of thought. Do you see it? For me, it was one of those patterns that just leaped out. OK, let’s say you can’t. Bear with me while I move up to the 60-min.

Well you have to see it now - I labeled the pattern! So we have an Expanding Terminal on the 60-min which means that because it is a Forecasting Pattern, we should see the 290-min (or 240-min) change its trend. That got me excited. An entry on a bullish-conviction bar at .9608 would trigger the pattern. But since I was not looking for a day-trade, I wanted to see some connection to the larger timeframes.

That being the case, I next looked at the 240-min.

The 4-hour (240-min) showed a possible 18-period Spring formation - this would be equivalent to the 5-day swing. In the 240-min, acceptance above .9725 would project a move above 1.018. So a trigger at .9608 would project a move to at least .9684 to .9698 - not quite the .9725 I’d need to see to suggest more upside. But I decided to pursue the analysis.

If I entered at .9608 to .9618 , where could I place my stop?

Well. the obvious place was below the Maximum Extension of the 60-min (.9560).  If the trade turned out to be no more than 60-minute trade, the first potential failure zone would be the .9660 to .9654 (top of Value). I decided to use for my Reward:Risk calculation:

• The potential reward to risk (entry .9615, stop .9547; risk = 68):(entry .9615, profit .9654; reward = 39): -68:+39

So, if this was to be a day-trade, the reward:risk was not there for me. I would need to rely on a follow-through. I had a quick look at the Daily and Weekly charts. The Daily produced little of consequence but the weekly showed the AUDUSD was in retest mode. The make or break was the bottom of the Primary Sell Zone at .9317. That price was too far away to be much assistance for this trade. Had the bottom of the Primary Sell Zone been closer, I would have looked to rely on it to place my sell stops on the basis that for my 18-day swing trade, acceptance below .9317 meant my uptrend was over.

There you have it - hope you found the process useful.

On that basis, I decided to pass on the trade.

Refer this blog post to a friend or colleague…