To get back in the forex markets, I’m going with a pure technical setup on GBP/CAD. Is that a bearish divergence that I see on the daily charts?
Looking at the daily chart above, we can see a few technical arguments for a move lower:
- Broken major support area turned into potential resistance
- 61% Fibonacci retracement area
- Bearish divergence between price action and the stochastic indicator
It’s a really simple setup and if you look at the higher timeframe, you can see that the reward potential is pretty big without any major support levels to be seen until around 1.6000. I will throw out a small fundamental support argument for a move lower, and that’s the idea that we won’t see a rate hike from the Bank of England as soon as previously expected because of weakening fundamentals. That expectation was a huge part of the British pound’s strength over the past year, so there may be a little bit of give back there.
There is one risk event that may throw a wrench at my trade plan: the Bank of Canada’s monetary policy decision on Wednesday at 2:00 pm GMT. Of course, I don’t know what the BOC will do or say tomorrow, but I think it’ll provide the volatility I need for this trade to work. Because it is a major event, I’ll go with a wide stop, but because the potential reward is so big, that makes this trade still worth taking for me with very small risk. Here’s what I am doing:
Short full position at market (1.8090), stop at 1.8440, initial target at 1.7500
I’m only risking 1.00% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of about 1.68:1 at my initial target. Again, if the move does gain momentum, hitting the next major support level way down around 1.6200 would yield over a 5:1 potential return-on-risk!
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!