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Day Trading Confirmation Entry On The AUD/USD 18/04/2011


At around 9:00 AM EST this morning, Standard & Poor put a “negative” outlook on the U.S AAA credit rating. As you might imagine this created a massive USD weakening effect initially that was most evident in the EUR/USD, GBP/USD, and the USD/CHF.

As you can see we had a confirmation entry on the AUD/USD right before this economic news was released. Candle #1 was the candle that touched support. Not only was this level a horizontal support level, but additionally it was a ascending trend line that began forming on the 12th of April. Candle #1 was the reversal candle in the 3 candle confirmation entry trade setup. The following candle was the confirmation candle. In a long setup the confirmation candle must close above the body of the reversal candle in order to meet the criteria of a confirmation candle.

After these 2 candles formed we now know the direction and simply waited for candle #3 (entry candle) to pull back into the body of the reversal candle (candle #1). We were watching the other pairs when the third candle pulled back into the body of the reversal candle (candle #1) and didn’t take the entry at that time. This was because the other majors were not setting up in the same way.

However once the news was released the GBP/USD, EUR/USD, and USD/CHF all took off in the direction of USD strength. After seeing this in combination with the confirmation entry long described above, we went long on the AUD/USD. This trade gave us +20 pips at one point but then came back and closed us out for -20 pips. Based on this news I expected to see a much bigger move than 30 pips on the AUD/USD. However when there is major risk aversion in the market you will begin to see the USD strengthen because of the Yen crosses selling off, and this is exactly what brought down the AUD/USD

Fortunately this was a half position and thus ended up as only a -1% loss. Overall for the month were still doing quite well sitting up around +6% total. Today was very dull as far as quality entries which is why we only took one short term trade setup. I say in the day trading trading room all the time that days where the market has already ran a great deal are tough trading days, and thus present less day trading opportunities. This is because there is a higher risk to taking a day trade in either direction.

When the forex market is already extended coming into the session that you trade there is a higher risk to a short term retracement trade because you are fighting the overall trend of the market. On the other hand, taking a continuation trade in the direction of the short term trend carries a high risk as well because of the possibility of a retracement. The safest bet on days like this is to wait for that retracement against the overall trend, and then take a day trade in the direction of the trend. For example if the market is trending down, I would simply wait for the market to retrace up into resistance. At that level of resistance I would then wait for a confirmation entry.

Sometimes things do not work out as cleanly as I described above and these are the days you simply wait and don’t trade. I say over and over in the live trading room that there are so many great setups in the forex market, that it makes no sense to take a day trade when it’s not exactly what you are looking for. Plain and simple, day trading forex successfully requires developing patience . There are times we wait an hour or two for a trade to setup, and that’s just part of the business of short term forex trading. I will update the trades we take tomorrow, and hopefully add to our overall profit for the month! Until then happy trading!


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