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I can’t help it but once again, GBP/AUD is putting up a textbook technical forex setup that I just can’t stay away from. Is the broken resistance area now support if retested?

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GBP/AUD 4-Hour Forex Chart
GBP/AUD 4-Hour Forex Chart

Crazy week, huh? On one of the most volatile move I’ve seen in years, GBP/AUD spiked higher on global risk aversion moves to hit just about 2.2400 before the buyers pulled back.  The fear seems to stem from China’s economic weakness and the massive selling off in its equity markets, prompting forex traders to get out of high-yielders like the Australian dollar.

But China’s central bank was quick to act to support its markets by cutting interest rates this week, which likely explains the pullback from the 2.2400 high to trade just under 2.2000 as I type. The question now is, “where to next?” and “will volatility remain elevated?” Of course, I have no idea, but with the driving themes still fresh and in full effect, the medium term play may be to continue to sell risk assets.

So, that’s what I look to do, but in the short-term, the pullback on PBOC actions (and probably profit taking) is likely to continue.  If that’s the case, I’m looking at the simple “resistance break and retest” play at 2.1500 as my entry area. My stop is going to be a wide one (almost one weekly ATR) since volatility has risen dramatically, and while I think volatility may calm down a bit, I think there is a possibility to see recent highs once again.  Here’s what I’m doing:

Long half position GBP/AUD at 2.1500, max stop at 2.1100, max profit target at 2.2200

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, I have a potential reward-to-risk ratio of about 1.26:1. 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.