A look at the daily GBP/USD: How do you know when to buy into a correction?

The GBP/USD is a perfect example of a current swing buy. A “swing” is another way of saying correction or a pullback in an uptrend or bounce in a downtrend. But how much of a correction is enough to offer support in the uptrend and resistance in the downtrend? Price levels like Fibonacci Retracements and Psychological Numbers are powerful and could offer support/resistance. Another tool is the 34EMA Wave itself. It serves two purposes. First, it helps identify the trend and second, it helps identify corrections in the trend. Entering on a correction is only valid – in my opinion – within the context of a trend.

The daily chart of the GBP/USD pulled back from a high of 1.6278. This high was just shy of the 1.6299 level hit on November 4. Many traders would consider this a double top and I agree. The 11 pip variance between the two highs is a “soft” level but none-the-less is also relevant because of the 1.6300 major psychological level overhead. On the daily time frame however, this was not a short entry because the trend was up, as confirmed by the Wave. In this market trend, I believe the strategy is to watch for swing buys on pullbacks and be aware of potential Wave reversal on trend breakdowns. (Any intraday chart in a distribution market trend would be better suited to trigger a fade off the ceiling with an overbought 21/1/3 Stochastic.)

Realize that it was not my goal to “top pick” and set up a short on the daily. The double top was more of a cue for an intraday distribution fade (if available) and alerted me to the potential for a correction lower that would trigger a swing BUY. The subsequent movement lower then had to be watched closely to see where buyers would step in to support the cable and create a support level or correction. In my opinion, as long as prices remained above the 34 period EMA low, the trend was valid unless the Wave transitioned into a more sideways direction – which it did not.
There were two levels that I was expecting potential support at: the 20 period SMA on the close and the 34 period EMA on the high. These two moving averages created a swing buy “zone” where I could park a conditional order to buy the GBP/USD.

Notice that these levels were readily available before the pullback even reached this area, so in essence the entry is a “wait and see” game. There were additional and more aggressive levels that could have also been considered. These were Fibonacci Retracement levels from the January 25 low to the February 3 high. The 61.8% Retracement however overlapped nicely with the 34 period EMA high making this measured pullback all the more relevant in my opinion because of the significance of the “golden mean”.

I believe there is a certain approach to swing entries that must be proactive. That is, anticipating where the corrections to go to and where the sentiment could shift, because after all, it’s not the weakness that I was looking to capitalize on but rather the shift and then resumption of the uptrend that I wanted to enter at. Identifying which support levels could offer this shift is what swing trading is all about for me.

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  • PurplePipEater

    What do you mean by a “distribution market trend” and “intraday distribution fade”?

  • http://www.ragheehorner.com Queen Cleopiptra

    A distribution market trend is sideways, range-bound price action – often volatile and prone to exhaustion at the ceiling(s) and floor(s). (There could be multiple levels of support or resistance for the range due to the volatility) A distribution fade (intraday or end-of-day) is when an overbought Stochastic coincides with the ceiling or an oversold Stochastic coincides with a floor. I use a 21/1/3 setting.

  • PurplePipEater

    What do you mean by a “distribution market trend” and “intraday distribution fade”?

  • forexhood

    Sell

  • http://www.ragheehorner.com Queen Cleopiptra

    A distribution market trend is sideways, range-bound price action – often volatile and prone to exhaustion at the ceiling(s) and floor(s). (There could be multiple levels of support or resistance for the range due to the volatility) A distribution fade (intraday or end-of-day) is when an overbought Stochastic coincides with the ceiling or an oversold Stochastic coincides with a floor. I use a 21/1/3 setting.

  • forexhood

    Sell