Fundies for Direction and Chart Art for Entry Levels

Good evening! For today’s market study, we’ll take a look on why the Aussie had a one way ticket past parity and to the moon against the Greenback and a smart way to play rallies like this. Check it out!

Before you move on, for those who are not familiar with my framework, signals, setups, or acronyms, please visit my discretionary day trading blog here.

Aussie bullishess was attributed to several factors:

  1. The Reserve Bank of Australia (RBA) holds rates at 4.75% yesterday. With a strong economy before the floods, declining unemployment rates, and inflation in check, there will be no need for the RBA to move rates lower for at least the duration of 2011. The interest rate advantage continues to be on the Aussie’s side, making it an attractive buy against the Greenback going forward.
  2. Worries on Egyptian turmoil ease. With the protest violence kept in check and stability seemingly kept in tact in Egypt, traders see less risk of a negative global fallout and take off the “safe haven” plays of long US Treasuries and the Greenback, and move back into higher-yielding assets like the Aussie.
  3. Positive economic data sparks risk tolerance flows. The Forex calendar gave us a few positive surprises with the UK, EU, and US manufacturing, and better than expected European unemployment rate. This also contributed to a flow out of the Greenback and into the Australian Dollar.

How Could I have Played the Strength?

As with any strong sentiment day, you should expect momentum in favor for one currency or another and plan for a potential extended run. Using my typical framework, we could have entered or scaled into various levels to create a high reward-to-risk trade.

PCDPOD20110201.png

On the chart above, we can see that there were three areas that could have served as “no-brainer” entry/add on levels:

  1. Previous Day High (PDH)
  2. Inflection cluster of Previous Week High (PWH), top of Weekly ATR (WATR), and the Daily ATR (DATR).
  3. Minor Psychologically significant level of 1.0050

The above levels were pre-determined and could have served as potential entry points had we been watching them. Easy plays such as “buying on a strong candle break” or “waiting after the break for retest and turning into support” would have been nice high probability setups to enter long given the themes pushing the market. And using the scaling technique (as described in a previous post) with a 30 or 40 pip trailing stop, you could have yielded around a 5:1 reward-to-risk return or more. Not bad!

Today’s Lesson:

Before you start your day, figure out the major market themes and check out upcoming news events to determine whether or not you’ll want to play a potential strong sentiment day or a range bound snoozer. And on strong sentiment/momentum days, be sure to watch the usual inflection points for potential high probability setups or levels to press your trade.

Thanks for checking out my review and stay tuned for more. Sign up above for our Twitter, Facebook, or my email updates to be notified of my “Pick of the Day” right away or check out my Twitter page as I like to call out levels to watch during the Euro/US session overlap! Good luck and good trading!

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  • Darkdoji

    Very nice and very useful thoughts to keep in mind.

    PS:As a newbie what scares is the power of these rallies sometimes – I keep thinking “this thing must have topped, no ways can it sustain,” then it is still going three more hours. And part of it is where do you get into the fury of it. Well that’s what you just reminded everyone nicely. Hope more like this come around again. Thanks though.

  • Darkdoji

    Very nice and very useful thoughts to keep in mind.

    PS:As a newbie what scares is the power of these rallies sometimes – I keep thinking “this thing must have topped, no ways can it sustain,” then it is still going three more hours. And part of it is where do you get into the fury of it. Well that’s what you just reminded everyone nicely. Hope more like this come around again. Thanks though.

  • Pipcrawler

    Thanks for the comment Darkdoji. Hopefully we will get more strong intraday moves to bank mad pips!

  • Pipcrawler

    Thanks for the comment Darkdoji. Hopefully we will get more strong intraday moves to bank mad pips!