Swing Lower in Guppy? – Trade Closed

Trade Closed: 2010-08-05 6:25 am ET

PoD Chart

Good morning! With the Bank of England interest rate decision quickly approaching, I have decided to lock in profits to avoid event risk.

I have closed my position by buying at 136.75.

Total: +75 pips/ +0.41% gain

With bullish sentiment and positive data working in the Pound’s favor as of late, I feel this is a good decision as we may get positive comments from the Monetary Policy Committee.

Not a bad trade, and if we get a good amount of volatility a new opportunity will present itself soon. Until then, stay tuned and thanks for checking out my blog!

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Trade Adjustment: 2010-08-03 6:25 pm ET

Good evening! After I posted my trade idea, GBPJPY did move a bit higher to trigger my short orders at 137.50 to open up my position. Since then, Guppy was only able to reach around 137.78 before dropping during today’s European and US trading session. Time for some adjustments!

The pair actually hit lows around 136.30 before finding support and rallying to current levels around 136.78–putting me up around 70+ pips in the trade. To create a risk free trade, I will adjust my stop to break even at 137.50.

Now, I can just sit back relax and let it ride, but I may do another adjustment as we head in the Bank of England interest rate meeting this week. If I’m still in profit by their announcement this Thursday at 7 am ET, I may take some of my position off the table or adjust my stop to lock in that profit. Should be exciting so stay tuned!

Trade Idea: 2010-08-02 4:19 pm ET

PoD Chart

I have a four hour chart up, and we can see that GBPJPY broke resistance last week and topped out around 137.50 before dropping back below previous resistance. The pair rallied strong to test 137.50, so the question of the day or week is, “will we see a swing back to the downside?”

There are a few technical signals indicating that there may not be enough buyers for the pair to push past 137.50 First, we do have stochastics indicating the pair is overbought. Secondly, the same stochastics is making slightly lower “highs” while price action is making slighty higher “highs”–a sign of bearish divergence. Last but not least, we do see a doji candle at the end of a strong rally, and this tends to show buyers and sellers are deadlocked, and buyers are possibly losing control.

Fundamentally, the British Pound rallied as UK manufacturing expanded and that the sentiment on the UK is that it will recover faster than economists have forecasted. This is bullish for the Pound, but it seems as if this–along with the rest of this week’s Industrial Production and Manufacturing data from the UK–was all priced in today with this strong rally. On the Forex calendar, we have the UK housing prices, Construction PMI, and the Bank of England interest rate statement that could change that sentiment very quickly if data comes in weaker than expected.

There are no major economic releases from Japan, so price action will be dictated by UK economic data and global risk sentiment.

So, this is purely a technical setup, but I think this week’s events will bring enough volatility to either close me out at nice win, or close me out at a small loss. My loss will be half of the average daily movement of the pair (around 185 pips). My profit target will be just above prior major support at 134.50. This equates to about a 3:1 reward-to-risk ratio. My entry will be a bit higher than the current market price since sentiment is still bullish for the Pound.Here’s what I am going to do:

Short GBPJPY at 137.50, stop at 138.40, pt at 134.50

Remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly.

I will actually only risk 0.50% of my account on this trade because of the potential wild volatility from this month’s low liquidity conditions as the summer winds down.
I will monitor my position closely and make adjustments like trail my stop or close early ahead of the BOE interest rate statement. Stay tuned and thanks for checking out my blog!

  • wcforex

    I’m in :) have a nice pips

  • wcforex

    I’m in :) have a nice pips

  • j4mp3r

    Hi, I’m a noob into forex. Can you please explain a bit what you’ve mentioned in the post: “wild volatility from this month’s low liquidity conditions” Does it mean prices move a lot because of low amount of money in the market? and if yes why does that happen?
    Thank you a lot

  • j4mp3r

    Hi, I’m a noob into forex. Can you please explain a bit what you’ve mentioned in the post: “wild volatility from this month’s low liquidity conditions” Does it mean prices move a lot because of low amount of money in the market? and if yes why does that happen?
    Thank you a lot

  • PipDevil

    j4mp3rd I think that’s what Pip Crawler means… It is low liquidity because it is summer and most traders are out on vacation… Chillin’ hehe

  • PipDevil

    j4mp3rd I think that’s what Pip Crawler means… It is low liquidity because it is summer and most traders are out on vacation… Chillin’ hehe

  • Pipcrawler

    Thanks for the comments everyone! j4mp3r…in environments of low liquidity, prices tend to move faster when a rush of market orders come in… For example…

    Let’s say you want to buy 1M units of EURUSD at market, meaning right now at the best price possible.

    Now let’s say it’s a high liquidity environment, and there’s 10M units of EURUSD available to be sold at the best offer price available of 1.3200. If you bought at market (or the offer price), then your transaction would not move the Offer price up because there’s 9M more units available to be sold at 1.3200.

    Now let’s say it’s a low liquidity environment, and there’s only 300k units offered at 1.3200, 200k at 1.3201, 250k at 1.3202, and 400k at 1.3203. You market order to buy 1M units of EURUSD would move the offer price up 3 pips instantly as you take up the supply of sell orders between 1.3200 and 1.3203…you just caused a burst of volatility with your one order…

    Does this make sense?

    With more traders taking vacation, typically this is one of the lowest liquidity environments of the year (the other being end of December). Prices tend to move sideways, but when there’s a catalyst and the traders that are still around want to jump in, prices tend to move fast…

    I hope this helps!

  • Pipcrawler

    Thanks for the comments everyone! j4mp3r…in environments of low liquidity, prices tend to move faster when a rush of market orders come in… For example…

    Let’s say you want to buy 1M units of EURUSD at market, meaning right now at the best price possible.

    Now let’s say it’s a high liquidity environment, and there’s 10M units of EURUSD available to be sold at the best offer price available of 1.3200. If you bought at market (or the offer price), then your transaction would not move the Offer price up because there’s 9M more units available to be sold at 1.3200.

    Now let’s say it’s a low liquidity environment, and there’s only 300k units offered at 1.3200, 200k at 1.3201, 250k at 1.3202, and 400k at 1.3203. You market order to buy 1M units of EURUSD would move the offer price up 3 pips instantly as you take up the supply of sell orders between 1.3200 and 1.3203…you just caused a burst of volatility with your one order…

    Does this make sense?

    With more traders taking vacation, typically this is one of the lowest liquidity environments of the year (the other being end of December). Prices tend to move sideways, but when there’s a catalyst and the traders that are still around want to jump in, prices tend to move fast…

    I hope this helps!

  • Piphacker

    WellDone PipCrawler
    That was a good trade.

  • Piphacker

    WellDone PipCrawler
    That was a good trade.

  • j4mp3r

    Very usefull and clear explanation using a prety simple example. Many thanks and keep up the good job!!

  • j4mp3r

    Very usefull and clear explanation using a prety simple example. Many thanks and keep up the good job!!