Trade of the week: short AUD/USD

(AI video summary)

Current trade overview: short position

In the current market environment, a trading opportunity has been identified with the AUD/USD currency pair. The strategy involves taking a short position based on technical analysis showing negative divergence between price action and momentum indicators, despite the prevailing uptrend.

Trade setup

• Entry point: short AUD/USD at current levels around 0.6590
• Stop loss: set above 0.6596, positioned above the high seen on Thursday of last week. This stop loss placement is crucial to limit potential losses if the market moves against the position
• Target: aim for a downside target around the 0.6500 area, capitalising on the expected technical correction

Risk-reward ratio

This trade offers a favourable risk-reward ratio with a tight stop loss just above recent highs. However, it is important to note that this is a high-risk trade as it involves trading against the prevailing trend, and sometimes the best decision is to refrain from trading.

Market context

The Australian dollar has made a new multi-month high against the US dollar, but only marginally so. This suggests the currency pair is struggling to extend gains at current levels. More significantly, while the price chart shows a higher high, the daily relative strength index (RSI) has formed a lower high, creating negative divergence.

This negative divergence on the oscillator can serve as an early warning sign for at least a short-term correction. The current price action shows a series of higher highs and higher lows, indicating the uptrend remains intact, which makes this a counter-trend trade requiring careful risk management.