Forex Trade Idea: 2014-12-04
Took a really small short position on EUR/GBP as the pair shot up higher after the ECB meeting to retest a broken support level. Is it now resistance?
Both the European Central Bank and Bank of England made their respective monetary policy decisions today, both making no changes to their interest rates nor changing policy on quantitative easing programs. But with the ECB pushing the potential of new QE measures to 2014 and the BOE pushing back expectations of a rate hike to late 2015, forex traders were buying EUR/GBP quickly after the event.
This pushed the market up to an area with several arguments for potential resistance:
- Broken support around the major psychological level
- Fibonacci retracement area
- 100 and 200 simple moving averages may serve as dynamic resistance
So, I decided to take a simple technical short play because of the longer-term downtrend and that volatility may stay up in the short-term. Because of the strong catalysts, I’m limiting my risk by going with a very small position and a wide one ATR max stop. I don’t have a set profit target because this is inline with the longer-term trend, but I will re-assess at the November lows and decide whether to hold or take profit. This is what I am doing:
Short half position EUR/GBP at .7900, max stop at .8000, initial target .7800
I’m only risking 0.50% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of about 1:1 at my initial target. But like I said, I may take this trade beyond .7800 if the story supports further moves lower. Also, I most likely won’t hold this to my max loss; if the market holds above the 61% Fib, I’ll close the trade down early as the technical resistance area didn’t hold. Of course, anything can happen in the forex markets, so if the story changes I’ll be sure to reassess and adjust quickly if necessary. Stay tuned!