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.

Scenario 2: The Short Trade Setup for a Break of 1.0150

What if Aussie never makes it back to 1.02, and instead breaks to new lows? Then we need a plan to short the currency as it falls. Simply swap the green and red lines; if the price breaks below 1.01, we'll sell short, with a stop just above 1.02. Our targets on the short side will be 1.0015, 0.9905, and 0.9745. Again, we'll close a third of the position at each target.

Source: TradeStation

If we enter long and the trade fails before reaching our first target, open the short position as the stop is hit, and vice versa if we enter the short position first. This is how we'll flip from one side of the trade to the other if the situation calls for it. If any target is hit, immediately cancel all orders pertaining to this transition.

That's one way to remove stress from your trading. The only thing left to do is relax and let the market take its course.

At the time of publication, the author had no positions in the securities mentioned.

Ed Ponsi is the managing director of Barchetta Capital Management, an NFA-registered commodity trading advisory, and is also the president of FXEducator. An experienced professional trader, Ponsi has advised a variety of hedge funds and institutional traders. Ponsi has appeared on CNBC more than 50 times and has been profiled in magazines such as "Technical Analysis of Stocks and Commodities" and "The Traders Journal." He is the author of Selling America Short: The New World Order vs. the American Middle Class, released in Novermber 2011; Forex Patterns and Probabilities, a top-selling book on currency trading that has been translated for release in China; and The Ed Ponsi Forex Playbook, which was endorsed by Steve Hanke, professor of applied economics at The Johns Hopkins University.

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