|
It seems that more than a
few of you caught the breakout that occurred shortly after we
discussed the ascending triangle two weeks ago in the article "Aussie
Ascending ". Several days after the article appeared, the AUD/USD pair
shot 250 pips higher, rising above .9650 to a new twenty-four year
high. To all of you who caught the move, congratulations. To everyone
who missed it, there may still be another chance to get in. Breakout
trades often pull back to their breakout point, giving traders a
second opportunity. In fact, many traders prefer this pullback method
of entry, believing it to be superior to the breakout method. Right
now, Aussie is pulling back toward its breakout point of .9500. If it
gets there, some traders might use that as an opportunity to buy some
Australian Dollars and short the U.S. Dollar. Conservative traders
might seek a pullback to the diagonal trend line, which currently
resides near .9425 .
Why does the breakout point make an attractive entry point on a pullback?
The answer lies in simple, basic psychology. Consider the chart above;
the black line near .9500 represented resistance until it was broken
last Friday. In the three months that preceded that breakout, the
exchange rate made numerous attempts to break above .9500, with no
luck, and during that time traders who sold short at .9500 were
rewarded on numerous occasions. It's not a stretch to imagine that
some traders may have sold Aussie short again last week, only to have
the trade break through resistance and go against them.
Now when a trade goes against you, the right thing to do is just get out.
For shorts, a stop should be located above the breakout point because
support and resistance are not permanent. We have to accept the fact
that our analysis might be flawed, or even if this is not the case, we
just might be unlucky this time. There is no such thing as a surefire
trade, since nobody can predict the future. So everyone who sold short
at .9500 was taken out of the trade by their stops, right?
Wrong. Not everybody who trades uses sound risk management techniques,
such as placing a stop in a location that, if hit, will prove that the
initial reason for placing the trade is no longer valid. Since nobody
likes to lose, and many traders are unwilling or unable to recognize
when they should simply bail out of the trade, there are certainly
traders out there still hanging on to their short positions. They are
hoping, wishing, and praying for the AUD/USD exchange rate to drop
back to .9500, so they can just break even. This is flawed thinking,
yet it is common. While it may seem like hanging in there until things
turn around is the right thing to do, it will eventually result in a
big loss. I guess that's one of the reasons why trading is hard; what
often seems right is wrong, and vice versa. That's why it's so
important to have firm risk management rules and stick to them as if
your trading career depends on it.
So if these traders sold short at .9500, the logical buy point to
break even is also .9500, and we expect some buying pressure to come
in if the exchange rate should reach this level. This is why
resistance often becomes support, and support often becomes
resistance. Will there be enough buying pressure to cause the price to
remain above .9500? Nobody knows, but let's just say it couldn't hurt.
Other traders who are not currently short may also consider buying at
.9500, not to cover short trades but to enter long positions. Why?
Because they know that support often becomes resistance, and
resistance often becomes support. They are also aware of the tendency
for round numbers like .9500 to act as a barrier. Like many aspects of
technical analysis, there is a self-fulfilling nature to the
relationship between support and resistance.
The important thing to remember here is this - don't waste your time
kicking yourself if the entry never occurs, and don't chase after it
and enter at the wrong location. Usually when traders waste their time
worrying about what might have been, they miss other opportunities
that are equally attractive or even superior to the one they missed!
Don't fall into this trap; there are more opportunities out there than
you could possibly trade. Part of being a professional is to realize
this fact and simply move on to the next chart.
The point here is that velocity matters. There is a great deal of
difference between a currency pair or stock or commodity, for that
matter that gradually floats down to resistance, and one that races
down to it like a falling knife. Friday's small candle provides some
level of comfort, but I'd like to see more small candles form and see
the price maintain its status above the moving average before I get
too excited. As you can see by the Fibonacci retracements drawn onto
the chart, the pullback still leaves us far short of the 38.2%
retracement level, which lies near 1.1967. The run higher was so quick
and massive that there was bound to be some profit taking at
resistance, and I want to be sure that whoever is selling at 1.2400
has it out of their system.
 |
