Forex Trade: GBP/USD Short on a Bounce

Good morning forex friends!  Starting off the week with a very simple GBP/USD retracement setup.  Will sellers take back control on a bounce to broken support?

Before you move on, for those who are not familiar with my framework, signals, setups, or acronyms, please visit my discretionary trading framework blog.

GBP/USD 1 Hour Forex Chart

GBP/USD 1 Hour Forex Chart

After another failure by the bulls to get above 1.5000, the sellers took control last week, emboldened by a string of negative data from the U.K. (trade balance, housing, and construction output), as well as a jump to the Greenback for safety against growing global weakness (mainly in China and emerging markets). It’s possible we could see a bounce this week after such a strong move, which would create a textbook setup for the bears to get in the trend lower at a better price.

And by “textbook,” I mean a return to previous support that was broken, which may now act as resistance.  On GBP/USD, that would be the strong support area that held just under the 1.4800 handle, which now lines up with the Fibonacci retracement area and the moving averages–all great arguments for sellers to drop some orders. I’ll be among that group, scaling into a short position from the 38% Fib to the 61% Fib.  My stop will be the ATR level and my target will be the next major support below, not seen since May 2010.  Here’s what I am doing:

Short half position GBP/USD at 1.4720, max stop at 1.4970, profit target at 1.4250
Short half position GBP/USD at 1.4815, max stop at 1.4970, profit target at 1.4250

Remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly. Create your own ideas and don’t follow what I do. Risk Disclosure.

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 2.55:1 if both positions are triggered. Of course, anything can happen in the forex markets and we’ve got a few big catalyst coming up on the forex calendar, so if the story changes I’ll be sure to reassess and adjust quickly if necessary. Stay tuned by following me on Twitter and Facebook!