Momentum Break of Parity on AUD/CAD?

Forex Trade Idea: 2014-09-15

I’m stepping away from my usual watch list by going with a potential long-term short forex trade in AUD/CAD as the pair breaks below a major area of interest on strong momentum.

AUD/CAD Daily Forex Chart

AUD/CAD Daily Forex Chart

The Aussie tends to move in strong correlation with Chinese data because of their strong trade relationship (mainly China’s demand of Australia’s raw materials), which is why it’s no surprise that the Australian Dollar has been crushed across the board over the last week or so, most likely on the weak Chinese data recently released.

Canadian data hasn’t exactly been a beacon of positivity in recent weeks either, but because of the strong trade relationship with the gradually improving U.S. economy, fundamentally the Loonie looks a bit more attractive than the Aussie at the moment.

With the strong move back down to parity (1.0000) and breaking, I think the odds that we could see a legit breakout are better than it holding.  Plus, when looking at where the next major support level is (around .9500), the potential reward-to-risk is favorable, even when using a wide stop to adjust for the big increase in volatility recently.  So, that’s what I’m going to do:

Short AUD/CAD at 1.0000, stop at 1.0250, max profit target at .9500

Remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly. Create your own ideas and don’t follow what I do. Risk Disclosure.

I’m only risking 1.00% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of about 2:1.  I’m also considering adding to my trade (and trailing my stop) if it goes my way and breaks the minor support area marked on the chart.  This will increase my potential reward without increasing my risk.

Of course, anything can happen in the forex markets, so if the story changes I’ll be sure to reassess and adjust quickly if necessary. Stay tuned!