The EUR/AUD , continues to be one of the strongest currency trends in the market . Since we last took a look at the pair in our feature article, Cast A Gian t Shadow on April 28th, the pair is trading 228 pips lower. As our daily trend continues to print lower highs and trade below our 200 SMA resistance line, we can continue to look for opportunities to enter this now mature downtrend to seek a lower low.

In regards to the fundamental outlook the main focus continues to be the European debt crisis and Australian yield. Bond traders are looking at the potential for a debt restructuring out of Greece. Consensus is that this will happen sooner than later despite resistance from the ECB. All news looks to hinge on Jean-Claude Trichets (ECB President) statements on the European economy coming out next Thursday. For more details see next week's Economic Calendar here.

Price Action

Taking price in to an 8Hr chart we can see the development of a head and shoulders pattern. I personally enjoy trading these patterns due to their clear entry / stop / limit points. First a trader is required to find the neck line of the pattern. We can find this at the .382 fib line of our first shoulder near 1.3292. A break of the neck line and the formation of a new low will confirm the validity of this pattern and provide our entry trigger. Profit targets can be found by totaling the distance from our high to our neck line and subtracting this distance from our entry price.

Trading O pportunity

My preference is to set an entry to sell the EUR / AUD under the previous low of 1.3229 Using the distance from our high to our neck line as target (approximately 1000 pips), we can set limits near the 1.2300 handle. Stops should be placed above our neck line over 1.3700 risking 500 pips from entry, giving us a clear 1:2 Risk/Reward ratio.

Walker England contributes to the Instructor Trading Tips articles. To receive more timely notifications on his reports, email [email protected] to be added to the distribution list.