AUDNZD ? Unique Opportunity to Double Up Reward While Minimizing Risk

Talking Points:

• Head-and-shoulders formation below key daily resistance
• Confirmed break of neckline points to move down to 10600
• Potential opportunity to double position size while keeping risk minimal – Example provided.

AUDNZD is not a pair I trade with regularity, but the set-up across multiple time-frames is very compelling. Failure to stay above key overhead resistance at 1.0900 brought selling pressure in, undercutting the rising trend support from the March low. The recent rally appears only to be a retracement of the decline off resistance. As a potential right shoulder forms, a channel is being carved out. This smaller time-frame set-up allows for the possibility to take an early entry within a bigger picture formation.

AUD/NZD 4-Hour

Chart created by Paul Robinson using Marketscope 2.0.

Should the pattern be validated with a fully formed right shoulder and break of the neckline, traders can add to the early entry and lower initial stops. This creates a situation of being able to double up on position size while maintaining a risk profile in line with that of a smaller position.

Hypothetical example for executing this trade using 10k lots – AUDNZD breaks the small rising channel and a trader sells 1 lot @ 10830, placing a stop just above the swing high @ 10880. The H&S pattern is confirmed by breaking the neckline and the trader then adds 1 more lot through a new swing low @ 10760. At this point, the trader is holding 2 lots with an average price of 10795, and the stop is lowered to 10825, a safe distance above the neckline. The measured move of the head and shoulders pattern points to a decline down to 10600.

Risk/Reward profile looks like this – Net, net the trader risks 30 pips to make 195 pips, or a 1:6.5 R/R ratio. Initial risk for losses was 50 pips on 1 lot, or $45 with profit potential of 230 pips, or $207. But, because the trader added another lot they ended up risking 30 pips on 2 lots, or $54. Pip profit potential was slightly lowered to 195 pips on twice the size, or $351 in actual PnL. So, you see, our trader in this example risked another $9 of losses to make an additional $144 of profit. By identifying multiple entry points as a trade works in your favor, you can increase profit potential while mitigating risk of losses.

Alternatively, the head-and-shoulders could become a triangle just below major resistance, setting up a potentially explosive situation. But, first thing is first, focus on the H&S pattern and see if we can’t score some outsized gains….

--Article was written by Paul Robinson of FXSimplified.com

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