Support Turned Resistance on EUR/GBP?

Forex Trade Idea: 2014-10-08

For my first trade of the quarter, I’m going with a textbook support break and retest on EUR/GBP.  Is the pop higher an opportunity for forex players to jump back into the downtrend?

EUR/GBP 4 Hour Forex Chart

EUR/GBP 4 Hour Forex Chart

After falling far from .8050 in September, EUR/GBP quickly found a bottom and bounced pretty quickly in October. The pair is now hitting the strong support level that held all summer: .7900. This area is not only a psychologically significant level of interest, but it lines up with the downward sloping moving averages and Fibonacci retracement levels; both have the potential to act as resistance levels and draw in more sellers.

Fundamentally, I’m still short biased on the euro as the ECB eased monetary policy recently, which according to my boy Forex Gump, may be too little, too late. The economic picture and monetary policy outlook for the U.K. is much more uncertain, but it’s still one of the better looking houses in an ugly global neighborhood. I wouldn’t be surprised to continue to see pressure on Sterling in the short-term, but long-term, the downward path for this pair is still the much easier one.

I’ve already shorted a small position at the current retest of the broken support area, and staying small until we get to the Bank of England monetary policy tomorrow and see what the policy committee has to say their most recent concerns, wages and inflation. My max loss is one WATR, but I won’t hesitate to cut the trade to limit losses if the story turns very bullish for Sterling. My initial target is the September low, but I may open up my max profit target if the story continues to support the down trend. Here’s what I am doing:

Short half position EUR/GBP at market (.7890), max stop at .7990, initial profit target at .7770

Remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly. Create your own ideas and don’t follow what I do. Risk Disclosure.

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 1.2:1. 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!

It’s that time of year to reflect on your performance!! Did you do your quarterly performance review? Don’t know how? Check out my third quarter forex blog review for an example on how I reflect on the markets and my trading performance.

  • Henders7

    Hi, enjoyed your analysis on this. I’m no expert on trading but have been learning a lot lately and this artical was interesting, I traded this yesterday to, noticing the resistance on the fib and previous attempts to break this had failed. As a trade would you say that was high risk? Or would that be a general trade? Like a said I’m quite new but find this support and resistant levels intersting. I entered at 7886,risking only 10points. Any advice would be fantastic

    • Cyclopip

      Thanks Henders7 (or Ian?). For my risk preferences and how I trade, the analysis and my risk management plan is my usual setup. I’m a swing to longer term trader, so my stops are wide relative to its average volatility range, and I don’t usually risk more than 1% of my account. I can take a loss and not feel a thing, so to me, it’s not risky. I can’t tell you how to manage your risk, but keep this in mind: the probability of this trade being profitable is the ratio between your stop size and profit target size. If you have a 10 pip stop but a 100 pip target, you have a 10% probability of being a winner, but your winner is huge, so you only have to win 2 trades to max profit target to be profitable. If only winning 10% – 20% of the time is comfortable to you, then go for it. For me, that’s something I cannot psychologically handle.

  • Cyclopip

    I did look at the longer term charts and saw the major support, which is why my profit target is at .7770. On the 4 hour time frame, the market drivers, directional move and R:R still made sense to me, even with major support coming up, so that’s why I took the trade. Hope that helps!

    • Henders7

      Thanks for taking your time to respond, and yes it’s henders7 bit of a mix up, when I refered to risk, it was more aimed around analysis. If I was to try and aim to keep my trades similar and enter around support and resistant levels would I be heading in the right direction, thanks for explaining your risk management around money! Really helps me. I’m not really trading at high levels yet as I’m still learning and want to be sure I’m doing things correct. That side will come when I feel confident about my trades. I do look to hold my trades longer and look at the bigger picture.

      • Cyclopip

        “would I be heading in the right direction?” I dunno, but my general belief is that understanding the fundamental drivers gives me a better than 50/50 chance on being right in direction…at least for that moment. Forex is tough because things can change very fast, but since I trade with a longer-term framework, I think I cut out a lot of noise. With that said, no one can predict direction. All we can control is our risk and how we manage a trade. Hope that helps bud!

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