AUDUSD--retraced nicely

I had good reasons for shorting yesterday at .8743--the pair was stumbling at a .618 retracement on the three-hour chart and showed an ABC correction. Hah! After starting down, it marched back up again, taking out my stop at breakeven. Overnight, it retraced almost all of the move down from .8916, reaching a high of .8905 this morning. Another good shorting point, right? Only if you believe in the overall weakness of the pair and only because you can have a really tight stop if it continues to climb. This is what I did at .8870.

This pair can have surprising strength. However, if you look at the daily chart, you see lower highs and lower lows until the last three days. Lower highs and lower lows are the definition of a downtrend. Pairs don't go straight down without some rallies as I've written before. This is why I believe this is still a correction. A downtrend of 16 trading days is not erased in four up days. However you can see where risk comes into play and why you must keep stops tight. If the pair continued to climb and eventually overcame the November high of .9406, that trend change would have started with a rally of four days when traders like me would have been saying was a corrective rally. You cannot predict! There are those that say you can with the stars or vibration or Elliott Wave or whatever. You cannot. What you can do is look for weight of evidence and weigh the probability that any given trade will be successful. You can also look at how much you can lose on each trade. In this case, once it goes above .8916 in some clear manner, I'm out. I would go back in with a short if it touched the old uptrend line from August (currently .8967) but I'm not willing to endure losses to that point. We'll just have to wait and see.

Support:

.8798 (Tuesday's high and .618 retracement of the last down move)
.8735 (Dec. low)
.8614 (last swing low--three hour chart)
.8578 (Feb low)
.8569 (Oct. low)

Resistance

.8916/30
.8967 (uptrend line from August)
.9000/48
.9093
.9330
.9406

No chart for this because I'm having trouble with my new version of Snag-it.

© Dianne Fecteau, 2010. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.

My purpose in writing this blog is to show you how one trader, me, makes trading decisions and survives while trading Forex. One of the biggest problems I had when I first started trading was trying to apply the “rules” to actual trades. Another was the psychology—limiting losses and letting profits run. If you study my blog, you’ll see how I deal with both those issues. So my writings are not trade recommendations but rather educational in purpose. You have to decide on your own approach to trading. Remember that trading is risky.