Welcome to the first edition of the Trading Tutors Newsletter for 2012. I trust you enjoyed a relaxing and peaceful holiday and are ready for an exciting and profitable New Year.

2011 was a volatile year and a lot of traders and investors will be glad to see the back of it. While it was a year of great opportunities, it was definitely challenging and I see 2012 providing cleaner moves on many markets.

I’d like to kick the year off with a look at the Australian Dollar. If you’d like to follow along in with charting software, the code is FXADUS in ProfitSource and HUBB Investor software.

Chart 1 below indicates that despite all the volatility, the Australian Dollar finished 2011 at almost exactly the same price it ended 2010 – $US1.02.

Chart 1

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While it may seem that not much happened during 2011, the Aussie traded as high as 1.1080 and as low as 0.9386, a range of around 17 cents.

The Australian Dollar finished the year in a ‘wedge’ formation, as illustrated in Chart 2 below:

Chart 2

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A wedge formation (also known as a triangle, among other names) consists of a series of higher bottoms together with a series of lower tops. The idea is that the market is ‘compressing’ like a spring, winding up before an eventual breakout. The breakout could be to the upside in the form of higher tops or to the downside with lower bottoms. The direction is not really important to shorter-term traders – we have the luxury of waiting for the breakout and jumping on the trend once it declares itself.

To give you an idea of a possible move following a wedge, Chart 3 below shows a major wedge formation on the US stock Google (code: GOOG).

Chart 3

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I was still a Safety in the Market student when one of my instructors showed me this trade setup and in hindsight, I wish I had followed it through more closely. The trouble was that the wedge formation began with the top early in 2006 and did not break out until the final quarter of the year. Nine months is a long time to follow a market for one particular setup. These trades can take time to unfold and require a lot of patience but you can see from the move that followed they can be worth watching!

So is the Australian Dollar likely to break to the upside or the downside?

Given the volatility of 2011, I wouldn’t be surprised if the Aussie Dollar tested both the upside and the downside. We have seen a rally from the 15 December low but the upper line of the wedge is drawing near.

If the Aussie Dollar continues past the upper trend line of the wedge, then it will almost certainly have a crack at the post-float high of 1.1080. This is where things will get interesting.

If it can hold above the 1.1080 level, we may see much higher prices – potentially even a fast breakaway. However, if we see a ‘false break’ above the high and a quick retreat below that level, it is a fairly strong bet we will see a crash and a sustained bear market.

Either way, I think we will see at least three or four really strong opportunities to enter for big moves on the Australian Dollar in 2012. Your goal as a currency trader should be to get on at least one of them!

Be Prepared!

Mathew Barnes