The GBPAUD peaked at 2.2388 on August 24, and since then it’s been in a downtrend. The price has retraced into the vicinity of that descending trendline, providing a trading opportunity.
On the 4-hour chart the GBPAUD trend is down, meaning short trades are favored currently. We’ve had more than two months of falling prices and the longer-term uptrend has been broken–in terms of its trendline as well as pivotal lows/support being taken out.
Looking at this pair on the daily chart there is an argument to be made that this two month decline is just a correction in a larger uptrend, and that uptrend will eventually continue. If trading off the 4-hour or hourly chart though, the price could fluctuate enough to give us a profit on a short trade even if the longer-term uptrend resumes eventually. So the longer-term uptrend is something to keep in the back of the mind, but at the moment the focus is on the more immediate 4-hour chart downtrend.
GBPAUD Trade Area
The hourly chart shows the price hesitating to move higher in the 2.17 region. It has approached (or slightly surpassed) that area three times in the last few sessions and has been unable to hold above. Just above this area are two trendlines–drawn in alternate ways. They indicate resistance is likely between 2.17 and 2.185. This aligns with the slowdown in price we are seeing in this area. The trendlines do indicate the price could rally a bit higher (into the 2.185 region) but the odds are beginning to favor the shorts again with the price in this region.
GBPAUD Trade Setup
The trade now needs a trade setup, which includes an entry, stop loss and target. There are a couple ways to approach this. I’m more aggressive–which means I prefer to get a better price (and higher rewards for the risk) and be wrong a bit more often, while others may prefer waiting for a bit more market confirmation on their trade direction. Waiting for confirmation usually means a less attractive entry price.
The aggressive trade is to short at 2.1646. Stop loss as 2.1716 and target at 2.1370. That provides about a 5.9:1 reward to risk ratio, plus collecting interest each night for having sold the lower interest rate currency (GBP) and buying the higher interest rate currency (AUD).
The alternative trade is to wait for the price to drop below the November 2 low of 2.1569. The stop loss and target are the same as above. With this method the reward to risk drops to just over 2:1, but a bit more of a topping pattern is in place.
The target for this trade is based on only about a 50% retracement of the October rally. Longer-term traders could consider moving the target into the 2.10 region, or even near or slightly below October low of 2.0789. This would obviously increase the reward:risk, and the trade would last longer so more daily interest could be collected. The drawback is that the longer a trade is held the more opportunity there is for things to change. If the price moves all the way to 2.0789 or below again, there will likely be multiple opportunities to get back in, so there isn’t much need to get greedy on one trade.
NOTE: There is an AUD rate decision on November 2 (or November 3 depending on where you are). This will most certainty impact the pair. Consider waiting till after the announcement to make a trade, as trading before could result in slippage on stop loss orders. The GBP rate announcement is on November 5–another major event in this pair.
Disclaimer: The author is short GBPAUD.