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Started 2016 by zooming out to the higher forex timeframes and I saw this rising wedge pattern on AUD/USD.  With China turning in some ugly economic data, will we see a downside break?

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

AUD/USD Daily Forex Chart
AUD/USD Daily Forex Chart

Looks like the markets are in fear mode thanks to fresh manufacturing PMI data from China showing weakness and re-igniting global slowdown fears.  This news actually comes after other weak manufacturing PMI readings during the holidays, and with the second largest economy coming in weaker-than-expected, I guess risk takers didn’t want any part of being long equities or commodities. I don’t know if this is the start of a new leg in risk aversion behavior, but I do know that economic data doesn’t shift back to positive overnight so I’m sticking with it.

Technically, we can see a consolidation pattern that looks similar to a rising wedge or a triangle because of the recent resistance at .7400.  Whatever you want to call it, if that trend of rising “lows” is broken lower, it could draw in more sell orders…that’s what I’m playing today.  I’ve already gone in at market with small risk and if the pair bounces higher to previous resistance, I’ll add another there. My stop is one weekly ATR from recent resistance and my max target is the 2008 lows since there hasn’t been major support below current market levels in a while, making for a very attractive risk-to-reward ratio.  Here’s what I’m doing:

Short a quarter position at market (.7167), max stop at .7560, max profit target at .6100

Short a quarter position at market (.7400), max stop at .7560, max profit target at .6100

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 0.50% of my account on this one and with this trade structure, if both positions are triggered, I have a potential reward-to-risk ratio of about 5.67:1.  I’ll even look to maximize my profit if it goes my way by scaling in more positions and trailing my stop.  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 by following me on Twitter and Facebook!

This content is strictly for informational purposes only and does not constitute as investment advice. Trading any financial market involves risk. Please read our Risk Disclosure to make sure you understand the risks involved.