The Australian dollar has had a strong start to the year, recovering much of its loss from late 2013 and early 2014. Since April though the price has been consolidating in an ever tightening triangle pattern.
Based on the current uptrend, and with distance to move until the price reaches resistance at 0.9695 (October, 2013 high), the most likely breakout direction is higher.
Figure 1. Australian Dollar Futures (6A September Contract)
The height of the triangle is 0.94 minus 0.92, or 0.02. Add that to a breakout price of 0.94 for a target of 0.96 -- which is right below the potential resistance area.
One false breakout already occurred on July 1, when the price broke well above 0.94 only to sink back below the next day.
A drop below 0.9280 sets up a potential break lower, with a target of 0.9080. This is attained by taking the height of the pattern and subtracting it from the downside breakout price.
One possibility is to await the breakout, placing a stop just outside the opposite side of the pattern. This provides a roughly 2:1 reward to risk ratio.
A bolder alternative is to anticipate the breakout direction. Buy near the bottom of the pattern with a tight stop if expecting a breakout higher. Sell near the top of the pattern with a tight stop if expecting a breakout lower. Use the same targets; this can greatly increase the reward to risk, but at the time of the trade the breakout direction is unknown.