Yo! Kicking off 2016 with an almost pure technical forex setup on GBP/NZD! Is the pullback higher a chance to play the downtrend at a better price?
On the four hour forex chart above of GBP/NZD, it’s our classic pullback into three potential resistance arguments:
- Dynamic resistance at falling moving averages (previously held early December)
- Previous area of interest – broken support-turn-resistance around major psychological level of 2.2300
- Fibonacci retracement area
The current pullback is likely ignited by the recent risk-off sentiment sparked by China’s equity selloff and geopolitical tensions, and in situations like this, sentiment tends to revert back to the norm after the initial reaction is priced in. I don’t know if that’ll be the case again, but I think this trend lower is a great way to play the recent weak Sterling sentiment and the Kiwi seems to be holding well despite a dip in today’s weak Global Dairy Trade report. I also like this trade because of the upcoming catalysts coming from the U.K. this week on the forex calendar, all likely to bring some volatility needed for shorter-term trades.
With all that said, I’m breaking up my entries to two: a very small position at current market levels and another small short on a pullback higher to my arguments for resistance mentioned above. My stop will be above that resistance area and my target will be the broken strong resistance level from back in early 2015. Here’s what I’m doing:
Short quarter position at market (2.1916), max stop at 2.2650, max profit target at 2.0800
Short quarter position at 2.2300, max stop at 2.2650, max profit target at 2.0800
I’m only risking 0.50% of my account on this one and with this trade structure, if both positions are triggered, I have a potential reward-to-risk ratio of about 3.26:1. 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!