A Very Selective Short Opportunity in AUD/JPY

Kaye Lee
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Talking Points:

  • "Suspicious" Downtrend in AUD/JPY

  • Consolidation Following Recent Gap Down

  • How to Mitigate Risk When Shorting AUD/JPY

Markets have been left largely in disarray with weekend gaps further muddying the waters after a very fast-paced Friday session. As a result, today's trades are likely to be lower probability in nature, and there are no clear shots to be taken on any of the hourly charts. Nonetheless, AUDJPY may present a short opportunity later in the trading day on the 15-minute chart.

The four-hour chart of AUDJPY (see below) shows a somewhat suspicious downtrend in progress. It is worrisome because of a relatively sharp rise on the daily chart of late, which suggests choppy price motion ahead. Nonetheless, this trend should prove sufficiently robust to support a 15-minute trade.

Guest Commentary: Apparent Downtrend in AUD/JPY

An apparent downtrend on the 4-hour chart of AUD/JPY is somewhat suspicious due to a relatively sharp recent rise on the daily chart.
An apparent downtrend on the 4-hour chart of AUD/JPY is somewhat suspicious due to a relatively sharp recent rise on the daily chart.

On the below hourly chart, price has been consolidating sideways ever since the gap down, and AUDJPY could well try to close the gap in early-Monday trading before continuing down. Should this happen, resistance in the form of the declining trend line will be met. This, in conjunction with several horizontal levels, gives a resistance zone between 90.79 and 91.04.

Guest Commentary: Gap in Play on Hourly Chart of AUD/JPY

AUD/JPY could soon fill a recent gap on the hourly chart before heading back lower off of a narrow overhead resistance zone.
AUD/JPY could soon fill a recent gap on the hourly chart before heading back lower off of a narrow overhead resistance zone.

This zone is merely 25 pips deep, which represents extremely small pip risk. That’s appropriate for a day where choppiness is likely to reign. Conservative traders might even be well-advised to take half the usual risk in calculating a position size.

Nonetheless, the best entry for this trade is on the 15-minute chart (see below).

Traders will readily note the choppy price action on this time frame, and some may fear that AUDJPY may even fail to rise as far as the key overhead resistance zone. However, it is far preferable to be unable to trade in this environment than to set a resistance zone that is too close to price and can easily be stopped out.

Guest Commentary: The Ideal Time Frame for Selling AUD/JPY

Utilizing the 15-minute chart and a narrow zone of risk helps mitigate risk when shorting AUD/JPY in the prevailing choppy conditions.
Utilizing the 15-minute chart and a narrow zone of risk helps mitigate risk when shorting AUD/JPY in the prevailing choppy conditions.

If AUDJPY does manage to reach the designated area, two or three attempts can be made to get in on a short trade, which will have nearly 75 pips to run (or perhaps even more, depending on the trigger) just to reach the previous low. This will provide decent risk profile and sufficient justification for taking the trade.

Viable trade triggers would include the usual suspects: pin bars, bearish engulfing patterns, or bearish reversal divergence on the 15-minute chart of AUDJPY.

By Kaye Lee, private fund trader and head trader consultant, StraightTalkTrading.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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