Original Trade Idea: Shorting GBP/NZD into Downtrend
As I mentioned in my forex update last week, “it was a “perfect” textbook technical short setup, but the surprise Bank of Canada rate cut changed the game on this trade by pushing all of the comdolls lower against the majors.” Well, the pair did manage to go all the way to my stop level at 2.0160, taking me out of the trade ahead of the weekend.
Total: -499 pips/ -1.0% loss
In hindsight, I really didn’t expect the BOC to do a rate cut, but I guess I should have thought of it as a possibility with other central banks easing and inflation falling. If I had, I probably would have waited until after the event before entering at market. And even if I had waited, I still would have shorted as I feel the pair is still in a technical downtrend and yet to be invalidated even today. We even have a bearish divergence setup forming on the chart above.
But with the Reserve Bank of New Zealand issuing their own monetary policy decision at the end of the Wednesday U.S. trading session, I’ll hold off on jumping back in short on GBP/NZD for now. Who knows what the RBNZ has cooked up, which could be as surprising and market moving as both the ECB and BOC.
Overall, I wouldn’t hesitate taking this textbook technical trade setup again in the future–it was just a bit of bad luck with the Bank of Canada surprise rate cut. And that’s why I always trade with stops, for when the story unexpectedly changes.
I didn’t get a chance to catch the downtrend with my last attempt to short GBP/USD, but with Cable bouncing off of the 1.5000 major psychological area, I may get a chance to play my long USD bias once again at a better than market price.
My fundamental argument remains the same as my last GBP/USD trade idea, but there is an “X factor” this week with the upcoming FOMC monetary policy meeting. With the Greenback going on a monster rally since mid-2014 and now that we’re past the end of QE, I think any dovish speak from the Fed could bring in more USD sellers on profit taking. Dovish rhetoric may not be out of the question with the global inflation still falling and the global economy’s growth concerns still an issue, and the strong U.S. dollar may be a hinderance to the U.S. export economy down the road. Let’s not forget what Greece will do next now that an anti-austerity party is in power. So many uncertainties.
With so many uncertainties and the pair testing a major psychological area around 1.5000, I’m going with a conservative short entry near the top of the recent consolidation area highlighted in the chart above, and doing it with a small position with the intent to add if the trade does go my way. My stop will be my usual weekly ATR calculation and my max target will be the next major support level, last seen in May 2010. Here’s what I am doing:
Short half position GBP/USD at 1.5200, stop 1.5400, max target at 1.4300
I’m only risking 0.50% of my account on this one, and with this trade structure, I have a potential max reward-to-risk ratio of about 4.5:1. Of course, anything can happen in the forex markets, so if the story changes I’ll be sure to reassess, adjust, or close the trade quickly if necessary. Stay tuned by following me on Twitter and Facebook!