So much for hoping this would be my strong finish for 2018! I got caught up in a fake out on this EUR/AUD channel drop, and here’s what I should’ve done instead.
Short EUR/AUD Trade
I hopped in what seemed to be a textbook breakdown-and-pullback setup on the long-term rising channel of EUR/AUD. I figured out that a move below this major support zone was significant, and that more sellers might be waiting to join in on a retest.
At that time, market participants already got wind of downgraded ECB economic forecasts and the central bank’s less upbeat outlook. It also seemed that trade developments would be positive for risk.
However, the tide turned ahead of the FOMC decision as investors started pricing in a potentially dovish announcement that could be dollar bearish. And as noted frequently in my buddy Pip Diddy’s weekly coverage of euro pairs, the shared currency tends to take advantage of dollar weakness.
What actually turned out to be the kicker was the sharp dip in risk-taking that ensued when the Fed signaled scope for more tightening next year. This weighed heavily on higher-yielding assets, including commodity currencies like the Aussie.
To top it off, the approval of the EU on Italy’s budget (finally!) also allowed the euro to breathe a sigh of relief. With that, the pair made its way back inside the channel to resume its climb. Ugh!
Here’s the damage:
P/L: -300 pips / -0.50%
In retrospect, I really should’ve exited early (as I planned to but hesitated) when 1) the pair barely showed much downside momentum after the retest, 2) a short-term inverse head and shoulders formed, and 3) traders started pricing in a weaker dollar from the FOMC.
Not such a good way to end the year, huh? For now, I’ll take a quick breather to crunch the numbers for the quarter to see how I can improve on my trading. Stay tuned!
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