Forex Confluence Trading Example - AUDUSD Setup
This post will run over the AUD/USD price action from today (31/7/2012) with a particular focus on a high probability trade setup that presented itself.
We have published numerous analysis posts on the merits of confluence when trading the forex market and this was an excellent example. Many new traders look for bounce trades at support and resistance areas and wonder why they don’t work out… Nothing is ever guaranteed but the higher probability setups tend to occur when a confluence of support or resistance is evident.
AUDUSD Confluence Setup Analysis
Let’s now look at the 30-minute timeframe AUDUSD chart from this morning and focus on the technical confluence areas.
First of all we know that price is in an uptrend when referencing the trigger chart as can be seen below (candle chart). A series of higher lows has been made and price is respecting the ascending trend line as buyers are keen to purchase Aussie dollars; anyone following the blog will likewise see our recent currency correlation relative strength posts have favoured AUD longs. See the following currency strength chart.
Last night the AUDUSD hit the minor resistance trend line four times before eventually breaking higher. When price retraced lower this morning, around the London open, we were presented with an opportunity to go long as price hit an “energy point”; this is the area of confluence when technical levels coincide. This energy point had the following factors:
Technical Elements In Play
- Ascending trend line which started the previous day at 01:00 (far bottom left of chart). This up sloping trend line had seen three accurate touches with no penetration of the trend line until this morning.
- The aforementioned descending resistance trend line which formed late yesterday. This level formed as the market tested the 1.0500 round number before eventually breaking higher.
- 1.0500 psychological round number. Options barriers and other events/scenarios can often see these levels providing support and resistance. See our separate “Forex round numbers” tutorial for more information.
- 50 Period SMA. A popular moving average, not as important as the other elements in my opinion but others would beg to differ. The bottom line is this gives additional confluence.
- I haven’t even pulled a Fib as the other factors were already sufficient for my approach, but there is potentially a 50-61.8% retrace or similar here.
Putting It All Together
- If price had moved much lower than 1.0500 a run on the stops could have been seen.
- If price had moved much lower than 1.0500 it would have broken below the trend line confluence area, thus providing a bearish breakout scenario.
- Knowing this, a tight stop loss was the favoured approach, cutting any loser short (15 pips or so).
- Price was moving in the direction of the underlying trend so the position could have been trailed according to the respective traders approach if it worked out (as it did).
- A failure to hold above this level could have potentially seen a nice opportunity to scalp a downside break (more advanced and beyond the scope of this post).
This is a great example and exactly what I look for when checking the charts. In follow up to the above, price ultimately went as high as 1.0536 before reversing and moving lower after hitting a new high for the week- allowing plenty of time to tighten stops or take profit.
Anyone interested in trading with technical analysis may want to save this chart as a reference. Don’t expect these to work out all the time but you may want to look for these kind of setups and paper trade them to gain a better understanding.