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Trading on the ragged trend

Mathematics is a pure and perfect world. Markets are not. While there are rules for defining technical factors and indicators, sometimes the art of technical analysis requires traders understand what the rules  mean  if they want to avoid crowded trades. This brings us to EUR/AUD.

The downward move in EUR/AUD that began mid 2015 doesn’t meet the rules for a downtrend. Not all the lows are lower. Most of the highs are lower, but there are a number of spike highs that defy the definition. Even drawing the best fit down trend line is problematic.

I don’t care.

Not only is there clear pressure on the pair, the fundamentals in my view favour further falls. Anaemic European growth and inflation suggest the ECB will be the last major central bank to curtail its’ accommodation, weighing on the EUR. Rising commodity prices, especially iron ore, are supporting the AUD. And the support and resistance levels offer a clearly defined trade.

Selling on stop entry at 1.4170, the target is 1.3830. The stop loss is trickier. Some more cautious traders will set it above support/resistance at 1.4480, but this doesn’t satisfy my reward to risk ratio requirements. Instead, I’ll set it at my minimum R:R of 3:1. With a profit a target of 330 points, I add 110 to the entry level to set the stop loss at 1.4280.

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