Trade Example – AUD/USD

Filed under: Learn Forex Trading |

For the trade example today – I want to show you something slightly different. This is a possible trade on the AUD/USD chart. What is different about today’s trade example is that instead of trading with the dominant trend, we will be trading against it in what is known as a contrarian’s trade.

 

Figure 1.

If you take a look at Figure 1, which is the daily chart for the AUD/USD forex currency pair, you will see all the data that we need to for this trade setup. The candle in question is the pin bar that I have highlighted at the bottom of the chart. When this pin bar formed, the trend was very bearish, with the 8-day exponential moving average crossed well below the 21-day exponential moving average, and the chart moving down from left to right. Normally, we would only be looking to take short trades as these generally have a higher probability of success. However, there are a number of reasons for taking a contrarian’s trade at this stage.

 

Firstly, there is a good area of support/resistance at the bottom of the chart. This was a very strong level in the past and the pin bar has pierced this level and then rejected it. Our other reason is an RSI divergence. As you can see, as the chart is moving down, the RSI indicator is moving up. This is what we call a price divergence and it tips us off to the fact that the market sentiment may be changing.  This gives us three factors of confluence (support/resistance level, pin bar, and RSI divergence). We could have put an order in at a 50% retracement of the pin bar, with a stop loss just a few pips below the low of the move, and a target of two and a half times our risk. As you can see, price did indeed start to move up and our target would have been met for a very nice 2.5% rise on our bank. That’s it for today – more tomorrow.

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