Aussie Dollar and Bollinger Bands

CMC Markets

Heading into release of the  Non Farm Payroll data, the 4 hour Aussie Dollar chart is setting up to complete a possible double top. The Bollinger Bands on the chart are indicating that while price has recently made a new peak at .7363, it is lower in relative terms.

This is John Bollinger’s classic “M” reversal. He discussed this when he presented at CMC's recent trading masterclass. It consists of 2 peaks where the first is above the upper band and the second below it. The upper and lower Bollinger Bands are measures of standard variation.

You can see an example of the opposite situation, the double bottom or “W” formation in the bottom left hand corner of the chart. John discussed the fact that with forex instruments (which are a trading pair) you will often see M reversals that are basically a mirror image of the W. With pairs, the behavior is similar for both W's and M's. After all a high for say the $A is a low for the $US and vice versa. However, in single asset instruments such as share CFDs,  while W patterns work well, topping patterns are often a bit messier. They will more often involve multiple peaks as the profit taking process can be more drawn out than where buyers are forming a base.

Trading strategies for this situation will vary but whatever the case, the distance between your entry and stop loss level should make sense in relation to the profit objective. A conservative approach to entry given the potential for volatility surrounding the Non Farm Payroll number would be to sell on a break below the double top support. In other circumstances, many traders will have strategies based on selling as soon as the 2nd peak is confirmed with a close stop.

AUDUSD Bollinger Band Click to Enlarge AUDUSD Bollinger Band
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