This week, I’m going with a very simple technical setup forming on GBP/CAD. Will this week’s bounce allow me to play the longer-term downtrend at a great price?
Fib Bounce in GBP/CAD Downtrend
Since around the beginning of May this year, GBP/CAD has been on a pretty strong downtrend, moving from around 1.7800 to a recent low around 1.6000. It’s been a move likely based on the Brexit negotiation developments unfavorable for the U.K. and an improving economic situation in Canada that could spark monetary policy tightening by the Bank of Canada soon, sentiment that may not change in the next week or two.
There have been a few hiccups in between for sellers to get in at a slightly better price, and it’s possible we’re seeing that now, which is why I’m looking for a short-term trade to short if the pair moves just a little bit higher.
On the four hour chart above, we can see a potential resistance area around the broken previous support area of 1.6300, which also lines up with the 38% Fibonacci retracement level of the latest swing move from 1.6700 to 1.6000. The stochastic indicator is already signalling overbought conditions, so I think that convergence between the Fibs and broken support is likely to draw seller attention once again.
With that in mind and the potential for volatility this week coming from a slew of U.K. and Canadian economic reports, I’m going to throw up orders for a small position at the potential resistance area with my usual stop of around one weekly ATR. I’ll be targeting the strong support we saw at the beginning of the year for a solid short-term reward-to-risk potential. Here’s what I’m doing:
Short half position GBP/CAD at 1.6290, max stop loss at 1.6655, max target at 1.5800 for a max 1.34:1 return-on-risk potential.
I’ll be risking only 0.5% of my account on this position and I may potentially try to maximize my gain depending on what the market stories are if 1.6000 is broken to the downside.
As always, 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 simply follow what I do.
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