Price Action in 2018
The AUD/USD hit a peak of 0.8136 back in January this year, but since then it has been in a fairly steady and consistent downward trend throughout 2018.
Indeed at the time of writing, the price of this particular currency pair is trading at 0.7273, which shows just how strong the American dollar has been this year.
By drawing trendlines connecting the highs and the lows, you can see that the price has been consistently sold off at the top of the channel, and bought up each time it has traded near the bottom of the channel.
However the price did actually close strongly below this lower trendline earlier this month, suggesting that there was enough momentum to take it a low lower, but this didn’t actually turn out to be case.
False Breakout
This false breakout raises two interesting points about price action trading. First of all, not all price breakouts turn out to be profitable. Even if you have a clearly defined channel or trading range, it doesn’t necessarily follow that the price will move strongly upwards or downwards once it closes outside this range.
Secondly, it reconfirms the point that you need to be careful trading continuation patterns when the trend has already been in place for a long time already (approximately 8 months in this case). Yes there is a chance that there will be another wave downwards, but there is also a strong chance that there won’t be enough momentum to take it much lower.
With long downward trends such as this one, there is arguably more profit to be made from trading an upward price breakout because this would signify that the downward trend is over, and a new upward trend is emerging, in which case there is a lot of upside potential because it could easily move 2 or 3 times the range of the current channel.
Trading Opportunities Going Forward
At this moment in time, I wouldn’t feel comfortable going long at the bottom of the channel and going short at the top of the channel because I feel that we are due a breakout very soon.
Furthermore, I wouldn’t really want to be opening any short positions on the AUD/USD pair even if the price closed below the lower trendline once again because I’m not really confident that this pair has the potential to fall much lower.
Therefore I personally would only consider opening a long position right now, and only when the price closes strongly above the upper trendline.
If it did so, I would probably look to close half the position at the EMA (200), which is approximately 1 x the range of the channel, before moving my stop loss up to break-even and targeting 2 x the range of the channel with the second half of the position, which would give a target price of approximately 0.7700, just short of the 61.8% fibonacci retracement level.
However these are just my own personal views and in now way represents trading advice.