A potential buy setup here could see a good sized correction of the 9% decline that’s occurred in the Pound against the Aussie since New Year’s Day.
If one must back the Poms against the Aussie to make money, this looks a better option than the unthinkable alternative of backing them to win the Ashes later in the year.
“W” reversal – Daily chart
This setup is based on a double bottom or “W” pattern. Bollinger Bands are used to identify potentially attractive examples and in many cases to enable an earlier entry than with a standard double bottom strategy
The Bollinger Band set up involves:
- The 1st low in the W being made under the lower Bollinger Band indicating strong downward momentum
- A minor rally in which no candle closes above the middle band
- The 2nd low in the W being made above the lower band indicating weaker downward momentum
As things now stand GBP:AUD will have completed the basic requirements of this setup if today’s candle stays above Tuesday’s low. This will leave that low as a minor trend trough and the 2nd part of the “W”.
The strategy outlined on the chart is one approach to this situation and involves:
- Entering a trade by placing a stop entry order just behind the middle band OR if this is not hit by buying if a daily candle closes above Tuesday’s high.
- Placing the initial stop just behind Tuesday’s low. It can make sense to have a strategy to move the stop up behind new swing lows if an uptrend gets underway
- Having an initial profit target at the 50% retracement level. This assumes that the most likely development here will be a corrective rally of the decline since early January. If an uptrend gets underway, there may be scope to modify this target based on the structure of the rally as it unfolds
This preliminary strategy approach is demonstrated in the levels used in the Tracker Order Ticket shown below