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Ponsi: A Game Plan for the Aussie Dollar

This article originally appeared on Real Money Pro at 2:30 p.m. EDT on May 7.

NEW YORK ( Real Money Pro) -- If trading stresses you out, maybe it's a sign you need to plan your trades more carefully. Easier said than done, right? People get stressed because they're not exactly sure of their next move. Is it possible to plan all of your moves in advance?

Monday, I wrote a column called " Aussie Going Down Under" where I explained why I believe the Australian dollar is likely to move lower. Less than a day later, the currency is down sharply and testing the support level I mentioned. Now that the currency has reached support, we face one question: Should we buy in anticipation of a bounce, or short in anticipation of a break in support?

My answer is neither. I won't anticipate anything. Instead, I'll allow Aussie to make the call. If the currency bounces, buy it. If support breaks, short it. That sounds easy -- until you consider the logistics of determining an exact entry, exit and stop. How does one set up such a trade?

Actually, we're going to set up two trade scenarios: one to get long, and one to sell short. Both will center on the massive support level that resides at 1.0150 ($101.50 if you're trading via the CurrencyShares Australian Dollar Trust ( FXA) exchange-traded fund). This also creates a potential scenario in which we may flip from long to short, or from short to long, at a predetermined point.

In the charts below, support and resistance are represented by black horizontal lines. A green line is a potential entry point, and a red line represents a stop. Three blue lines represent targets; if a target is achieved, we'll close a third of the position.

Scenario 1: The Long Trade Setup for a Bounce From 1.0150

Source: TradeStation

We'll go long Aussie at market if it trades above 1.02 (green line). The key is to enter only as the price is rising, not falling. Now that the exchange rate has fallen close to 1.0150, it must bounce to create the entry. Instead of anticipating strength, we are demanding that this trading vehicle show strength before entering the trade. A stop will be placed just below 1.01 (red line), meaning that a break of support will be required to take us out of the trade. Targets are 1.0285, 1.0375, and 1.0555.

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