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Forex Trade Idea: 2014-07-28

It looks like sentiment is shifting for the British Pound, and with the Greenback finding support, I thought I’d switch my focus to a different opportunity.

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

USD/CHF 4 Hour Forex Chart
USD/CHF 4 Hour Forex Chart

First, the British Pound has taken a hit as of late thanks to the most recent Bank of England meeting minutes and recent U.K. economic data.  The BOE’s focus on wage growth (or lack thereof), plus forecasts that the recovery will slow by the end of the year had forex traders lightening up on Sterling longs last week.  While the U.K. is still one of the best houses on the block, the odds are that further appreciation in Sterling may be limited for now.  That’s why I’ve closed my long orders on GBP/CHF at 1.5300 — no trade. 

I’ve decided to switch my focus to the Greenback and a pretty nice setup on USD/CHF.  The other best house on the block is the U.S. Dollar thanks to the reduction of the Fed’s easy money program and the expectations we may see a rate hike sometime next year.  We’ll hear from the FOMC once again this week, with expectations that we’ll hear more of the same: that interest rates will remain low for a “considerable time” after the end of bond-buying, and that any changes will be data dependent.  We won’t know what we’ll get until we get there, but with the FOMC meeting and U.S. Non-Farm Payrolls this week, the volatility should pick up and present new opportunities.  But I figure it would also be a good idea to be initially conservative with my USD/CHF idea, which is why I’m going with a pullback setup on the pair.

On the four hour chart above, I’ve spotted a simple break-and-retest setup on USD/CHF.  .9000 held as strong resistance throughout June, and now that it’s broken, it could be now support if retested.  That area also happens to be the bottom of the weekly ATR, which means there’s a good chance mean reversion players may be closely watching that area as well.

I’ve decided to throw in orders to go long in that area to play the recent trend higher, with a pretty wide stop to weather the potentially big volatility coming up.  My target is the next major area of interest that easily turned the market lower back in January.  Here’s what I’m doing:

Long full position at .9000, stop at .8890, profit target at .9150

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 1.37:1. I actually don’t plan on holding on to the trade if it gets below the MA’s and holds there; that stop level is my max loss in the worse case that I get blindsided by some unforeseen event or commentary from the Fed.

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 by following me on Twitter and Facebook!

This content is strictly for informational purposes only and does not constitute as investment advice. Trading any financial market involves risk. Please read our Risk Disclosure to make sure you understand the risks involved.