*Looking at a successful short trade on GBPUSD, current market choppiness and risk management*
In this blog post I am going to talk to you about a few different topics. Firstly I will show you a recent intraday Pound short trade I entered which started out really well but unfortunately succumbed to the consistent market chop that is currently being seen across FX markets and Stocks. This will lead me in to discussing the current levels of market choppiness (volatility) and why it is so important to stay on top of your risk management and exposure when trading the current market conditions.
Let’s start by looking at the GBPUSD short pre-trade analysis.
This is a trend reversal trade. I am shorting a currency pair that has recently seen a bullish trend form and is now looking like it will reverse its direction. One of the main confluences and points of analysis is that price has found resistance at the current price zone which in this case is 1.26500. If you look at the 1hr chart (shown above) price retests this area 3 times and doesn’t break above it. The higher timeframe chart shows the same and this tells me that the bullish momentum is slowing.
Another part of the short trade analysis is that the bullish trendline has been broken and a lower low made. This short trade consists of a few other technical indicators and criteria and it is part of my personal technical trading strategy that I have developed and used for some time.
I shorted Cable at around 1.26200 and had 2 price target levels in mind. The first was 1.25 which was a previous intraday resistance (now support) zone. If that level broke then 1.22500 was next in my opinion.
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The chart above shows the current GBPUSD FX currency price as well as what happened after I entered the short trade on Monday. As you can see, price almost immediately sold off after my entry and went on to make new 1hr lower lows at the 1.25 price level. However, price formed a large bullish wick rejection candle and showed signs of strong intraday support. I therefore decided to make this trade risk free and remove exposure by moving my stop loss order to my entry price level. I also locked in 1R (profit = risk) of profit to maintain some capital growth. That way if price did reverse and climb back up to my entry level I would atleast make some return from this trade.
As you can see, this afternoon this happened and today price broke back above my trade entry level and took me out of this trade for no loss. It is unfortunate really because I am not comfortable holding the position through that market choppiness but I do believe that the Pound currency has further to fall in future. I will talk about this more later in this blog post.
Choppy market conditions.
Most markets are currently flattening out, Indices are very choppy and stuck in a sideways channel. Later in this post I have shared the FTSE100 index chart and there is a clear sideways channel forming.
FX Currencies are seeing some extreme intraday price swings and this is making trading difficult and volatile. For the past few months I have been constantly talking about not being greedy and taking small profits from the markets when possible because the chances of a big breakout happening are still slim. Traders and investors are still trading on unknowns, markets are still battling on daily economic data that is conflicting and we are all at the mercy of the lingering Coronavirus.
The chart above shows that traders are betting on an increase in volatility in the FX markets and Volatility is still trading at levels that are 100% higher than they were at the beginning of the year. This shows that the price swings and market choppiness seen through he past few months are real.
A link to the Bloomberg article on FX volatility can be found by clicking on the following link. https://www.bloomberg.com/news/articles/2020-06-11/fx-faces-risk-of-a-virus-shake-up-even-as-fed-anchor-remains
If you have managed to survive the last few months and are even making small profits then give yourself a pat on the back because you deserve it! I think traders that manage risk properly and are on top of their exposure and pick trades at the right times are able to maintain a steady profit in these markets and this leads me on to my next point of discussion.
Risk management is one of the most important parts of long term successful trading and this is has shown itself to be true during the past few months. Being patient, selling high and buying low and making sure you keep your risk to a minimum gives you the best chance of taking some profit or even reducing losses in bad market conditions.
As you can see from the GBPUSD trade I entered on Monday this week. My initial analysis was correct, price dropped over 120 pips in less than 24 hours but I made sure I took some profit from this and removed exposure. There is always a chance that price action will reverse and come back above my entry level even though in normal conditions I would likely expect it to continue its downward path with very little support to stop it.
By not being greedy, taking something off the table and removing risk I was able to avoid a loss and even grow my trading capital a little. This should be considered a big win in the high volatility FX markets of today.
Thoughts on the Pound and FTSE Index.
At the risk of sounding like a broken record, I am still bearish on both the Pound and the U.K. economy. Why? Because I have seen no fundamental reasoning as to why it deserves to be bullish.
This week had the Year on Year U.K. GDP data release and it shows the output of economy has contracted by over 20% since the start of the year. The U.K. GDP grew by only 1.8% in May which clearly shows that the hopes of a V shaped recovery are very slim.
We are also still being held back by pointless Brexit negotiations and talks that lead to no progress, no deals and less time before we have to leave at the end of the year. This should continue to put pressure on the Pound currency.
Here is a link for a recent Bloomberg article outlining the current GDP data. https://www.bloomberg.com/news/articles/2020-07-14/u-k-economy-grows-at-slower-than-forecast-pace-as-curbs-eased
Looking at the two major GBP currency pairs I can still see good arguments as to why traders should be selling and not buying the currency. GBPJPY and GBPUSD charts are shown below.
Similar to GBPUSD, the FTSE100 index has once again started to retest the 6300 resistance zone today. This has held strong as a ceiling for price for some time now and I can see signs of it doing so once more. This might produce another sell-off and the sideways channel price action to continue.
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