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Trading Strategy for the – AUD/JPY

Trading Strategy for the – AUD/JPY
April 26
03:26 2012

Here is a 15 minute chart snapshot of the forex pair of the Aussie Dollar and the Japanese Yen (Symbol: AUD/JPY) spanning from Tuesday, March 27th, 2012 to Friday, March 30th, 2012. This chart includes several technical indicators:

  • 8 period simple moving average (blue line)
  • 20 period simple moving average (red line)
  • 200 period simple moving average (green line)
  • Bollinger Bands (purple lines)
  • Relative Strength Index (RSI) (dotted line)
  • Volume (dark blue bars)

The Walkthrough

This 15 minute chart of AUD/JPY offers the chance to look at a chart that has made a new high. If the trader missed the move-up to making the new high, there is still the option to short the currency pair on the reversal that follows.

This is particularly profitable if the trader can be careful and get in at a good entry price at or near the new high. This is important because the trader can keep a very small stop loss considering that the market will not break above this level easily.

After entering a short position, the trader must now watch to make sure that the candles continue to break areas of support or in this case the moving averages. The 200 period simple moving average is the strongest area of support. The market will need to break below this area in order to continue the downtrend.

After breaking the 200 period simple moving average, the market will normally pullback to test the moving average. In this example the market does not pullback to test the moving average but continues the downtrend. While no pullback represents a strong downtrend the trader must make sure to always move the stop loss according to the pattern, not according to their profit and loss.

Once the price has moved below the area of support, the stop loss should be moved to underneath the 200 period simple moving average. Protecting profits should be the main priority, but the trader cannot set the stop loss too close to the developing pattern because the stop will be triggered and the trader will be prematurely taken out of the trade.

Instead, the trader should give the market enough room for the pattern to develop but not so much room that the pattern can be broken. At any point, the trader can decide to exit but it is best to follow the trade down using a trailing stop and wait for the market to find support at a new low. At this new low the market will generally pullback.

The Lesson

This strategy, going short at new highs or going long at new lows, will work well on any instrument but has a higher average of working in the Forex markets. To be profitable, this simple strategy requires patience and a good understanding of support and resistance and using moving averages.

A good understanding of these simple concepts can produce massive amounts of profit to the professional trader. As with any method of trading, the trader must understand the market in which they trade. This strategy tends to fail on days of economic news or in markets that produce high levels of follow through.

Remember, in order for this trade to work, early entry is important, a stop loss above the high or low, and patience to allow the pattern to develop. If these criteria are met then the trader should be profitable when applying this strategy.

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