Trade Closed: 2011-02-16 16:35
The 15m chart of GBP/USD above says it all. Instead of retracing before rallying, Cable moved higher at the beginning of the Asia trading session. For all of you European session traders, this lead to a few nice bearish signals at a major weekly price level: Divergence and Evening Star candle pattern.
Those signals marked the top for the day on Cable and max move of about 185 pips. I hope some of you Euro session traders caught that!
Anywhoo, thanks to BOE Governer Mervyn King, Cable dropped after his statement that the BOE does not plans to increase interest rates in today’s BOE inflation report. I guess the thought of raising rates further and stunting growth outweighs inflation being well above their comfort zone of 2%.
The drop did bring Cable to my long entry orders at 1.6070, and for a couple of hours it looked like that area would hold. Unfortunately, US Core PPI numbers came out much higher than expected, pushing the Greenback higher just a bit higher to stop me out.
Total: -65 pips/ -1.0% loss
So, the market didn’t go my way this time, but what could I have done better? Not sleeping during the European session would have definitely got me into that drop from PWH and a potential 10:1 return-on-risk, but other than that, it was a good plan. I think my biggest issue was an underestimation of the volatility today’s reports would create. There was a retracement and there was a bounce higher, I think I just wasn’t conservative enough with my entry/exit points. Something to keep in mind for the next setup…
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Trade Idea: 2011-02-15 18:35
Before you move on, for those who are not familiar with my framework, signals, setups, or acronyms, please visit my discretionary day trading blog here.
As mentioned earlier, we got UK CPI data on the Forex Calendar today, coming inline with the y/y expectations of 4.0%. The m/m number came inline as well with an uptick of 0.1% in January. Coming inline, this caused the initial drop in GBP/USD, but it was short-lived as the pair found support around the day open price (1.6040) and rallied from there. What gives?
Well, 4.0% y/y is double the comfort level of 2.0% for the Bank of England, and inflation in the UK has been over 3% since last March. So, after a tick higher than the last read of 3.7%, speculation grows that we may get a 25 bp to 50 bp hike by the end of the year.
This is a short-term sentiment changer in my opinion, and I think we may see Cable continue to move higher.
Technically, we can see in the chart above that the pair broke out to the upside of a descending channel. This is a good, high-probability signal to go long, but I think I’ll wait for a pull back of the market to the potential resistance-turn-support areas of the descending trendline and Monday’s high. And for extra confirmation, I also used a Fibonacci tool to find potential retracement levels, and I calculated the bottom DATR for Wednesday to be 1.6060.
A lot of reasons for potential support between 1.6050 – 1.6070, so I will go long there. My stop will be around half of the daily average true range of 125 pips, and my ultimate target will be the potential resistance area of PWH/top DATR (1.6185) and major psychological level 1.6200. Here’s what I am going to do:
Long GBP/USD at 1.6070, stop at 1.6005, pt at 1.6200
If my trade is triggered, I will add another position at 1.6135, stop at 1.6070, pt at 1.6200.
Remember to never risk more than 1% on any single trade. Adjust position sizes accordingly. This trade setup has a potential 3:1 return-on-risk ratio.
We do have other risk events coming up this week, including US CPI and UK retail sales, to spark volatility in the markets. Be aware and always remember manage yo risk!