Does every Forex trade have to involve the USD? I say definitely not. With current dealing practices nearly guaranteeing liquidity in offered pairs, the smaller crosses produce some attractive setups. For those of you that are not familiar with the term, a “cross†is defined as a currency pair that does not include the USD as the base or the quote. I would also say that a true cross doesn’t involve the EUR either. There are a couple of disadvantages with crosses. The most painful is that the spread between the bid and ask can be wider than with the most liquid pairs like the EUR/USD or JPY/USD. However, some crosses have been favorites of mine for quite a while. For instance, I have been trading the GBP/JPY every time a good opportunity opens up for years.
In this article I wanted to illustrate my point with an interesting, if undiscovered, cross. The AUD/NZD is a very lightly traded cross but I have like it because it has been reasonably predictable and the trend has been nice and smooth. That is very desirable in an investment opportunity. Pull a one-year chart yourself and you will see what I mean. Recently, the current account in New Zealand has become a problem and has provided some fundamental support for the trend between these two sister islands. Despite the fact that New Zealand has a population of merely twice the size of my home state, Utah, I think it is a great trade.
I am a pretty simple trader. I like to use support and resistance and back it up with a little fundamental analysis. I make my best estimate, set a stop, consider a price target to take profits and jump in. I love to use fib retracements and in this case you can see one applied to the pair. Because the chart is small it is hard to show one of the most important factors that I consider before a trade like this. I generally consider myself a trend trader, which means that I am looking for retracements as entry points when they are in the direction of the primary trend. Since the AUD/NZD has been trending up for nearly a year, I am looking for long opportunities.
In the chart below I have placed a fib retracement between the higher low in mid-July and the higher high towards the end of July. The pair has completely retraced to the 61.8% level and has bounced slightly back up. I am looking for an initial price target of 1.2432 or 100%. On a breakout, I may get in heavier for a rally to the 161.8% level of 1.2739. The first price target is nearly 130 pips away from the current price shown and the second target is nearly 440 pips away. Watch out for the Kiwi’s Foreign Trade announcement on the 23rd of August if you are not out by then. The last time this release happened, the pair rose dramatically. A surprise to the other side could easily happen this time.
Source: Prophet.net
John Jagerson is a writer about and active trader in the Forex. His book, Profiting With Forex, published by McGraw Hill, will be released this July. This author also develops Forex education courses for INVESTools.com.