May 23 – May 27, 2011 Weekly Winner: EUR/GBP gives us a 2:1 setup

Before we get the ball rollin’, I suggest y’all read my introductory post on the Weekly Winner to refresh your memory on my trading framework. Done? Cool, let’s get started!

May 23 – May 27, 2011: EUR/GBP Price Action Review

EUR/GBP Hourly Chart

On Monday, the euro basically picked up where it left off… fallin’ like there was no tomorrow! But if you think about it, we shouldn’t have really been surprised with how it weak the euro was. Like I said in my EUR/JPY analysis , I really didn’t see a reason why market sentiment on the euro should change.

Unlike the Spain-based Barcelona team that dominated the U.K-based Manchester United in the UEFA Champion’s League finals (3-1, son!) the euro really didn’t have much of a chance against the British pound, what with credit downgrades spurring on euro bears early in the week.

Actually, there was a moment when it seemed like the euro would put up a fight as risk appetite improced on Tuesday. But this turned out to be nothing but a retracement, and the pair soon came tumbling down.

The pound remained in control for the rest of the week as it received a bit of help from the U.K.’s GDP report. The pair bottomed out at the bottom WATR, before it rose slightly, ending the week less than 50 pips below its opening price.

The best way we could’ve played this bad boy was to short at .8750, which was in the middle of Fibonacci retracement territory, right when Stochastic was showing a bearish divergence. Using a 50-pip stop, we could’ve set our PT at the .8650 MiPs for a solid 2:1 trade.

Now, we could’ve also played this more aggressively and added to our position when price retested the .8700 handle/ WO. Opening another full position here would’ve improved our reward-to-risk ratio to 3:1. We could’ve even opted to hold on longer and aim for the WATR to give us more bang for our buck!

So there you have it, folks! A simple Fib play that could’ve easily given us a 2:1 winner. Were any of you able to catch it?