Forex Trade Idea: 2014-10-08
For my first trade of the quarter, I’m going with a textbook support break and retest on EUR/GBP. Is the pop higher an opportunity for forex players to jump back into the downtrend?
After falling far from .8050 in September, EUR/GBP quickly found a bottom and bounced pretty quickly in October. The pair is now hitting the strong support level that held all summer: .7900. This area is not only a psychologically significant level of interest, but it lines up with the downward sloping moving averages and Fibonacci retracement levels; both have the potential to act as resistance levels and draw in more sellers.
Fundamentally, I’m still short biased on the euro as the ECB eased monetary policy recently, which according to my boy Forex Gump, may be too little, too late. The economic picture and monetary policy outlook for the U.K. is much more uncertain, but it’s still one of the better looking houses in an ugly global neighborhood. I wouldn’t be surprised to continue to see pressure on Sterling in the short-term, but long-term, the downward path for this pair is still the much easier one.
I’ve already shorted a small position at the current retest of the broken support area, and staying small until we get to the Bank of England monetary policy tomorrow and see what the policy committee has to say their most recent concerns, wages and inflation. My max loss is one WATR, but I won’t hesitate to cut the trade to limit losses if the story turns very bullish for Sterling. My initial target is the September low, but I may open up my max profit target if the story continues to support the down trend. Here’s what I am doing:
Short half position EUR/GBP at market (.7890), max stop at .7990, initial profit target at .7770
I’m only risking 0.50% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of about 1.2:1. Of course, anything can happen in the forex markets, so if the story changes I’ll be sure to reassess and adjust quickly if necessary. Stay tuned!
It’s that time of year to reflect on your performance!! Did you do your quarterly performance review? Don’t know how? Check out my third quarter forex blog review for an example on how I reflect on the markets and my trading performance.
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