6 September 2009 - Musings on the Ozzie, indecision, and reversability

AUD/USD closed up again this past week at 8506, a nice uptrend that could continue on up to 8800, 8940, 9253, and possibly 9520 and 9750. I closed out my longs a week ago at 8470 and am mulling over whether to get back in. What's not to like about the pair? It's been in a nice rectangular consolidation on the daily chart and it just closed above it. One could also make the case for a flag formation on the daily with the flagpole starting at 7703. Will have to study Ozzie's behavior after Labor Day.

But I can also make a case for shorting it with a tight stop. There's a slight diversion between daily price and RSI during the last three days. It's near the September '08 high of 8524. If it closes above this, I'll go long for sure on a pullback. But this will probably serve as resistance for at least a bit. Then too, the close above the rectangle is hardly an impressive breakout. On the weekly chart, it could be completing a ZZ or ZZ combo wave two (if you buy into Elliott and I'll have more to say about that in a later post). But here's the thing: long or short it's at a good entry point because you can set your stops rather close to your entry and the potential is good either way. That is my kind of trade.

Sometimes this type of set up can paralyze traders into indecision. It could go up; it could go down. So they end up talking themselves out of a trade. Buridan's Ass comes to mind--the creature who was set halfway between two identical bales of hay. He starved to death since he couldn't decide which one to move to. Well you won't starve to death by not taking a trade and you certainly won't have any possibility of loss (or gain) when you don't take a trade. But when you can make a case either way by reasoning through with technical analysis, why wouldn't you choose one if you can do so with tight stops? Sometimes the clues are overwhelming in one direction. But often, especially in the Forex market and especially lately, they're not.

If you're wrong and the market takes out your stop you can also reverse yourself. Let's say I short Ozzie at 8506 and I place my stop at 8531 (a little above the Sept. '08 high). The market takes it out and closes above 8506 again. I can then try a long. My stop can be tight here, too. But I've seen traders not use the information they get from their stops being taken out. They walk away from the trade in a sort of eliminativistic fashion. Believe me--if you've set the stop based on reasoning about market behavior and not based on some random number, the market is giving you a lot of information if it takes it out. This isn't to say that you might not want to do another quick analysis--after all, Gann was right when he said to never change your position in the market without a good reason. But don't let a locked mindset interfere with your trading.