GBP/USD Trade

Subjects Covered:

• Intraday Trading
• Signal Candles
• Position of Support/Resistance
• Quality of Support/Resistance
• Channels
• Trade Management

Analysis at DailyForex.com identifies an opportunity for intraday traders to look for a long GBP/USD trade until 5pm London time later that day.

The recommendation is to enter long as soon as the price falls to 1.6230 with a stop loss at 1.6188, without any price action confirmation. However as we are trading this strategy only with price action confirmation, we need to see a fast long break of a confirmation bar touching that level before entering any trade.

The primary justification to enter at 1.6230 is the perceived quality of the support at that level, which we will examine next.

Taking a close look at the expected support level of 1.6230, we can see in the attached chart that it has approximately acted as significant resistance three times over recent months, holding each time. The level is marked as a blue line, and the resistance actions are marked with down arrows.

After the third time, the price compressed just under the level and then broke out explosively, as marked by the up arrow in the chart.

There are two further technical influences that reinforce the probabilty of 1.6230 as a good support level:

1. As the London session opens, it is about 100 pips away from the current price. This is usually about as far as this pair will travel in one direction during the London session, making it likely to be close to the low of the day.

2. The level of 1.6230 is also the 38.2% Fibonacci retracement level of the recent move up that began on 12 November.

Economic data released during the first half of the London session shows U.K. consumer price inflation slowing unexpectedly, playing negatively for GBP, and making the price of the pair fall towads our support level of 1.6230.

Shortly after 15:00 GMT, the price hits the support level of 1.6230 after falling quite sharply. It falls as low as 1.6216.

At 15:30 GMT, U.S. data is released showing slightly higher inflation than expected.

The pair rallies strongly, forming a pin bar at the close of the hourly candle with both open and close in its top quarter, with the wick rejecting the support level of 1.6230.

We decide to enter long if the candle breaks to the upside by 1 pip during the next hour, with our stop loss just below the day's low.

About twenty minutes after the bar closes, our long entry level of 1.6249 is triggered. Our stop loss is at 1.6215. Our initial profit target is the next significant level above us which is 1.6350.

As the opening of the London session the following morning, our trade is in profit by 31 pips, but still about 70 pips short of our initial target of 1.6350. Our risk is just slightly higher than this at 33 pips. Therefore we have a reward to risk of just under 1:1 on the table.

We decide to exit the trade early due to the large bearish pin bar, and major U.K. economic data is expected shortly, which could cause us to be stopped out. Additionally, we are near the top of a channel in a downwards trend.

Although we did secure a profit that was very nearly as large as our risk, the U.K. economic data was highly in favor of our trade, as was the action later during the New York session in anticipation of the FOMC news release.

If we had sat tight, our initial target of 1.6350 would have been hit, and the price also travelled another 130 pips in our favor later the same day.

This is why some traders prefer to hold on for large rewards even when the outlook seems weak.