EUR/GBP has finally reached an area of previous strong resistance. Will the psychological area hold and create a simple forex range setup?
The answer to the question above is of course, “I don’t know” but with this area holding as strong resistance in 2015, you gotta think that other traders are checking it out as a potential sell area.
Now, the sentiment is currently against Sterling on this pair, both on recent mixed economic data (positive eurozone surprises while some weak U.K. data) and the global risk aversion sentiment sparked by sell offs in the Chinese equity market. This move may be overdone according to the stochastic indicator, but to be safe, I’m using a really wide stop (even more than its weekly ATR) in case forex risk aversion isn’t over yet.
I’ll target the bottom of the 2015 range, which makes for an attractive potential risk-to-reward, especially considering there is a tiny bit of positive carry on this setup. I may even consider holding on to the trade and go for a lower target if the overall stories and currency market drivers favor Sterling over the euro. For now, here’s what I’m going to do:
Short half position EUR/GBP at market (.7445), max stop at .7650, max profit target at .7000
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 2.17:1. 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 and let me know what you think about the trade setup in the comments section below!