Talking Points:

• 3 Types of Set-ups to Consider
• Clear Risk Factors on Higher Time Frames
• Key Support Zone for Initiating EUR/AUD Longs

There are generally two types of trades to consider when price reaches a given level of support or resistance: a breakout past that level or a bounce off of it. This sort of thinking is focused on getting in on a move relatively early. However, there is a third type of trade to consider: the continuation trade.

A continuation trade is the type of entry that gets in on a move relatively late in the day, yet is still risk controlled and has good profit potential. As always, everything is a matter of relativity, and today’s trade in EURAUD is an excellent demonstration of that.

The weekly chart of EURAUD below could give even the most devoted trend traders cause for concern. There is a clear five-wave pattern in this uptrend that dates back to mid-2012. Anyone attempting to trade this on the higher time frames will quickly recognize that there is significant downside risk there.

Guest Commentary: Five-Wave EUR/AUD Pattern Nearing Completion

However, from a lower-time-frame perspective, even a small move comprised of a just a fraction of a weekly candle would yield a healthy return, which adds to the case for this continuation-style trade.

Similarly, the daily chart below is showing signs of potential topping activity as well, which makes this a dangerous time frame for initiating trades. However, this hesitation could well develop into a shallow pullback—as it did recently—before price ultimately continues on its way.

Guest Commentary: Dangerous Pattern on EUR/AUD Daily Chart

Given this scenario, the best way to enter would be to drill down to lower time frames to reduce risk and increase accuracy.

The four-hour chart below provides another level of support, but clearly, with price coming down only slightly at this point, this time frame still provides an insufficient level of precision and is not suitable for new entries.

Guest Commentary: Rising Support Level for EUR/AUD

Fortunately, the hourly chart (finally) provides some semblance of a deep-enough pullback that’s worthy of new entries. A support zone has been estimated based on the location of previous resistance coinciding with the rising line of support. As a result, the key support zone is determined to be 1.5115-1.5164.

Guest Commentary: Key Zone for Initiating EUR/AUD Longs

The ideal entry for this trade would be on the 15-minute chart (not shown), and would be taken using reversal divergence, pin bars, and/or bullish engulfing patterns as viable triggers.

However, due to the spirited hourly downturn, entries might be choppy. Nonetheless, they are valid provided the trader is willing to be nimble in scaling out quickly at the first sign of trouble. Needless to say, that will require a multi-position entry to facilitate that level of trade management.

The ideal scenario would actually be for a pin bar (or any of the usual trade triggers) to develop on the hourly chart since there is a lower likelihood of choppiness on that time frame, but waiting for this might simply get the trader in too late.

As a result, should this turn out to be a less-than-spectacular trade, the reward for risk might be skewed. Bottom line, the hourly time frame should only be used if the trigger occurs before the trade runs too far.

Note: Very close to the time of publication, EURAUD shot up before coming down to touch the relevant level of support, thus invalidating this particular set-up. Nonetheless, this provides a good study of a solid trade set-up that simply did not trigger.

There have been a couple of notable trades like this recently, and this indicates that the overall market is beginning to change. This is valuable feedback, and in the next article, we will examine this issue in greater detail.

By Kaye Lee, private fund trader and head trader consultant, StraightTalkTrading.com