Adding a new currency trade to the portfolio this week, this time a short EUR/AUD position on a simple support break. Will this break draw more forex traders into the downtrend?
Since hitting highs around 1.5800, EUR/AUD has been on a strong downtrend all 2014 but recently pulled back in September as far as 1.4700. It looks like that may have been the most recent swing top and now we’re seeing the pair breaking a strong area of interest around 1.4300. Of course, I don’t know if this is a legit breakout or fakeout, but the momentum lower has been strong and I think fundamentally, there’s still an overall bearish view on the European region. Also, there’s a nice positive carry in favor of sellers thanks to the high interest rate offered by the Aussie dollar over the near zero rate offered by the euro.
I’ve already gone short this pair at market, with my stop being one full weekly ATR away to give this trade room to breath. My initial target is the next major support level last seen in September, at which time I’ll re-assess and decide whether or not I want to hold on. Here’s what I’m doing:
Short EUR/AUD full position at market (1.4270), stop at 1.4530, initial target at 1.3800
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 1.8:1 at my initial target. If my target is hit and the momentum is still strong, and the story remains bearish on the euro or bullish on the aussie, then I’ll lock in some profit and go for a bigger reward. Of course, anything can happen in the forex markets, so if the story changes I’ll be sure to re-assess and adjust quickly if necessary. Stay tuned!