AUD:USD - Potential short term reversal with Bollinger Bands

AUD:USD - Potential short term reversal with Bollinger Bands

When I first looked at this chart this morning it had the look of a potential double bottom.

In the last hour or so, price has respected the 20 period moving average. However, it is stilll possible that we can get a double bottom style buy set up from here as long as we stay above the most recent low.

The AUDUSD 30 minute chart has potential for a “W” reversal or Double Bottom type set up this morning.

Bollinger Bands can often assist to refine your entry and exit strategy in this situation

As I write this, the first trough in the potential double bottom was made under the lower Bollinger Band. This is an indication of statistically strong variation from the moving average (put another way an indication of strong downward momentum). However, the 2nd trough in the double bottom was made above the lower band indicating weaker momentum. This loss of momentum and indecision often precedes a trend reversal.

I’ve outlined one approach to strategy if there is a set up on the chart above.

Here the trader would be using the middle Bollinger Band or 20 period moving average to determine entry and the initial stop.

The entry trigger is based on the logic that a break above the moving average would improve the possibility of a new uptrend following the lack of momentum displayed by the double bottom. This entry trigger assumes a filter of about 6 pips i.e. buying if price clears the moving average by about 6 pips. As I write this that would be a stop entry at about 1.0460.

The initial stop assumes that if entry triggered but price moves back below the moving average, this would be a failure indication.  Here the stop is set about 10 pips below the moving average which at the moment would be about 1.0444.

The profit target is based on the logic that an uptrend here is likely to be a corrective rally against the last major swing down. The profit objective is set at the 78.6% retracement level which is about the maximum retracement you would normally anticipate.

However, one price hits the 50% retracement level the stop is change to a trailing stop. 50% is a common retracement level and there is also potential resistance from around this level across to the left of the chart.

A 20 pip trailing stop from this level should achieve a break even type result on the trade at worst but allows the trend to be “run” up to the profit objective for a decent 4:1 profit/ initial risk multiple if a major retracement develops