*A review of an intraday, medium duration trend continuation trade on the GBPUSD FX currency pair*
In this blog post I am going to talk you through my pre-trade technical and fundamental analysis, trade management and current plans for the the GBPUSD short trade I entered around 1 week ago. I posted this trade set up in a previous blog post and I received messages on social media from some of my blog readers who also entered short positions on Cable.
Trend continuation trades are very common and probably the simplest trades to analyse and enter positions on. You are trading with the trend, usually buying low/selling high and riding the natural waves of the markets. I covered this type of trade in great detail in a blog post last week which you can find via the link below.
Let’s get right in to it and look at the pre-trade chart analysis of the GBPUSD FX currency pair.
There were 4 main points of analysis to my short trade entry on the GPUSD FX currency pair last week.
- Bullish trendline broken and being retested.
- Bearish intraday trend with lower highs and lower lows.
- Price rejection 4hr 50EMA and bearish trendline.
- Price forming a lower high and rejecting 1.25 previous support/resistance zone.
All of these points can be seen on the chart above and when combined, they give a strong reasoning as to why I had a short bias for this currency pair. Entering at the 1.25 price level with a stop loss conservatively above the trendlines and resistance zone meant it would be safe from any further price spikes and tests of this resistance zone.
In regards to profit targets, the trend was bearish and I was therefore looking for price to make a new lower low. By using the fibonacci retracement tool with extension levels, I could see that the -0.27 fib extension level was forecast around the 1.22500 level. This is where I decided I would first take profit if price reached that level and this would produce a return of around 4R.
Fundamentally, I was always looking to short the GBP currency and FTSE100 stock market index. Brexit discussions are once again coming back in to the news and in my opinion, this can only cause trouble because there has been very little progress in the last 3 years and it seems both the EU and UK are being very stubborn. Normally the GBP and FTSE have an inverse relationship and a weak Pound would see the FTSE100 index rise but this correlation has seemingly been eliminated in recent years thanks to the increased volatility caused by Brexit and the Covid19 pandemic.
After I entered my short position, price action actually began to become quite messy. This is okay but it does test the nerves and confidence of new traders and I imagine a few short sellers would have closed their positions for a loss when they saw price close outside of the bearish trendline. This turned out to be a fake breakout (fake out) and price then went on to drop and make the new lower low that I was predicting.
I do not trade aggressively with super tight stop loss orders and huge risk because there is no need. My stop loss on this short position was 65 pips and this meant it remained safe and did not get triggered when price began to climb and spike after I entered the trade. You have to leave room for price to breathe and gather increased short interest from other traders looking to benefit from the current bearish trend.
A major part of successful trading is confidence in your analysis and patience. Both of these were tested and eventually paid off with this trade.
The chart above shows my initial short trade position @ 1.25 on my trading platform. I am still holding a small percentage of my original position to see where price will go next. As it stands, price is now just outside of the bearish trendline that I have adjusted for the last lower high but it is rejecting the 4hr 50EMA. If this EMA and trendline is properly broken then I will close the rest of my short positions on Cable but there is a possibility this is a fake breakout like what was seen when I entered the trade.
For those of you that are aware of the Elliot wave theory, it makes sense if this pair now goes on to consolidate outside of the trendline or climb to new highs. This is because the last bearish wave (the one I shorted) was the 5th wave of the bearish trend which is the usual ending of this specific pattern.
My stop loss on this position on is at my entry price now so there is no risk of loss of capital and I took a significant amount of profits and exposure off of the trade when the lower low formed just above the 1.22500 price level.
This type of trade is one that I recommend all new traders look to find. Simple trend continuations, where you are trading with the overall momentum of the market and you are selling high (the lower highs) of an established trend. By using multiple points of analysis and building up a complete picture as to why you should enter the trade gives you the best probability of success.
In reality, you only really needed one point of analysis to enter this trade and still receive relatively good success. By looking at just the swing highs and swing lows of price you could have found this trade entry, maybe not with the same accuracy or reward:risk ratio as I achieved but still an effective short trade on this FX currency pair.
All my technical analysis is done using the TradingView platform. You can get access via the link below.
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DISCLAIMER: None of the information posted on this site is to be considered investment/financial advice. Trading is high risk and you should only trade with money you can afford to lose.