Ending diagonal, as its name suggests, is a reversal pattern, that occurs either in the position of wave C of a correction or as wave 5 of an impulse. On the chart of AUD/USD below you can see both cases. First, in wave 4 we have an ending diagonal for wave “c” down. Second, wave 5 seems to be an ending diagonal itself. If we were to trade this pattern, we would have two approaches to enter the market:
1. Aggressive approach: Wait until prices reach new top around 0.9150 and go short from there with a protective stop at 0.9210 – point of invalidation.
2. Conservative approach: Wait until prices brake below the line connecting the bottoms of wave 2 and 4 of the wave 5 diagonal and go short from there. In this situation stops should be placed at the last top.
Considering our big picture outlook on AUD/USD, which is still valid, the first target to the downside is below 0.8650. In both cases AUD/USD is providing a great trading opportunity. With the aggressive approach we will have a better risk/reward ratio, but no indication that the market has truly reversed. Following the conservative one, if the market is already trading in a downtrend, we will have higher probabilities on our side, but higher risk as well.