Aussie Dollar Chart - Long term outlook

Aussie Dollar Chart - Long term outlook

The trading world has plenty of standard sayings and pieces of "accepted wisdom". In my experience plenty of these are actually very useful, but many are not. It pays to be guided by evidence and your own experience.

One concept that I have found to be a useful addition, especially for trend following strategies is the idea of trading in the "direction of the longer term trend".

Even if you don't follow this rule literally, it can pay to be aware of the longer term direction when setting profit objectives. Trades that are in the direction of the longer term trend are the ones that call for strategies which "let your profits run".  Trades taken in the direction of what looks like a correction of the longer term trend often have better results using more conservative strategies with closer profit objectives and trailing stops.

Given this philosophy, I always try to have a view of what's going on in longer time frames and we often comment on this in our posts. Today, I thought readers may be interested in some observations on the longer term outlook for Aussie: US

Long term trend - headed down to triangle support

AUD:USD CFD - Weekly. Source CMC Tracker

My central view of the long term Aussie chart is that we are inside a triangle formation that began with the low marked "a" in October last year.

Based on the observation that these formations often make 5 touches of the triangle, I am working on the assumption that we are currently headed down for a final test of the triangle support. Depending on how long it takes to get there, this could see the Aussie bottom somewhere around .97-.98.

The 200 day moving average has flattened out consistent with the big picture sideways type movement you get inside a large triangle. Price has been chopping up and down through the average. Currently we are right at the average, testing its resistance

Momentum up but only a correction?

Trading only in the direction of the longer term momentum (as opposed to trend) can be a really worthwhile addition to some trend following strategies in my experience. I outlined how this works in a video on oscillators last week which you can access via the blog.

The fast stochastic on the weekly chart is currently heading higher with %K above %D (see arrow) so the long term momentum is up. However this looks suspiciously like a bit of a corrective rally in a longer term downward move as the stochastic heads back towards the oversold zone at around 20. It would only take a small downward move from here for the stochastic to roll over with %K getting under %D again.

Implications for strategy

This view of the longer term chart leads to a preference for sell set ups looking to take advantage of corrective rallies. It doesn't rule out short term buy trades but suggests moderate profit targets and active stop loss strategies for these.

Right at the moment the rising stochastic on the weekly chart might keep you out of sell trades using a "dual time frame approach" but it would probably take only one weak candle to turn this around.