How to Short the Aussie Dollar

Any war strategist will tell you, “You’ve got strategy… and you’ve got tactics.”

The strategy is the big picture. It gives the 30,000-foot view of an army’s game plan.

Tactics involve the specific, fine-tuned details that show how the strategy will be executed.

The same goes for investing. To catch big trends, before they unfold, you must have a strategy. That’s where Harry and Rodney come in. By keeping the pulse of global economic developments, they provide the big picture. And for Australia, their outlook is dim.

As for the tactics, that’s my job. I’m here to show you how to play the trends we see ahead… how to minimize risk… and how to maximize gains. And that all starts with mapping out the battlefield.

This chart shows the Aussie dollar going all the way back to 1999.

Click here to view larger image.

As you can see, the Aussie dollar has been in a strong uptrend since 2001, when you could trade one Aussie dollar for just 50-cents in American coin. Ten years later, in early 2011, an Aussie dollar would fetch a hefty $1.10.

So let’s assess the battle lines of our tactical plan.

The dotted white lines show a descending triangle patternrn – with declining highs and a horizontal support line. That support line is at $0.95… less than one penny below current prices.

At a minimum, we should wait for the Aussie dollar to break below this important level before making any investment moves. But I suggest waiting even longer than that before betting against this currency.

You’ll see a blue line drawn at $0.94. That’s where I’d recommend getting short the Aussie.

Now, if you know anything about me, a favorable risk-to-reward ratio is a must-have part of any tactical trade plan. Here, we have the opportunity to win about $3 for every $1 in potential losses. Here’s how…

My downside target on the Aussie dollar is at $0.80 (green line). By getting short at $0.94, this gives us about 14-cents in profit potential.

Now for the risk side of the equation…

I’d recommend cutting losses on this short trade if the Aussie dollar trades back above $0.99 (red line), putting the potential risk of this trade at 5-cents.

So with the chance to earnrn 14-cents, while risking only 5-cents, we have a favorable risk-to-reward ratio of just under 3:1. That’s a good deal in my books.