EUR GBP; Retrace Or Reversal? Short Position Entered.

EUR GBP; Retrace Or Reversal? Short Position Entered.

Recently I’ve found it more difficult than ever to establish whether some Markets are showing major trend reversals or sellable/buyable retraces of existing longer term trends.

Volumes throughout the Summer across various Markets have been lower than usual and this can make deciphering a trend reversal or retrace even more difficult.

There is no holy grail answer, because the action you ultimately take will be based upon the probability behind your trading decision and from a technical view that probability can only be based around history with the help of various indicators and tools. Even still, these factors are often misleading.

If a long term trend is down, the probability of a rally against the main trend is that the rally will ultimately fail. There will of course be a time when it doesn’t fail, and that will confirm the trend reversal. By the time that confirmation is in place it’s often too late to participate in the move, so we wait for a retrace of that rally, and the whole cycle starts again.

Today I’ve entered a short position in EUR:GBP. Fundamentally and technically the GBP appears to be the stronger currency when cross referencing the Euro and the Pound against a number of other currencies, but my reasons for entering the trade are predominantly based on the technical side where risk can be calculated against potential reward.

There are a number of technical reasons for entering, but none are particularly strong, although when combined they do give a clearer picture.

The EUR:GBP Weekly chart shows a clearly defined Bear Market, price being contained within a down channel that’s been in place for around a Year:

The more recent iteration of the channel shown on the Daily chart implies a down trend that has been accelerating at a marginal pace. This is noted by the fact that the more recent price low broke below the channel limits, whilst the retrace that encouraged my short entry appears to have found resistance at the green 200 MA:

Moving down to the 4 hourly chart we have a trend that is both up, and contained within a well defined upwards channel. But, for the first time in Weeks, the 4 hourly 20 MA (blue) has rejected price’s attempt at continuing it’s rally:

So whilst there is no individual piece of solid evidence that this market is simply retracing an ongoing bear trend or whether a major reversal is taking place, we are at a juncture where the probability does historically favour a continuation of the main trend, whilst the upside risk is clearly defined across the various channels and moving averages seen on all of the above time frames.

Depending on the time frame being traded, we can conclude the following:

Stop loss placement on the Weekly Time Frame would be best placed on a Weekly close above resistance in the 0.8176 area.

On the Daily time frame a stop loss would be best suited to activate on a Daily close above the falling channel line, and/or a Daily close above the previous market swing high at 0.8158 noting that this would also confirm a break of the resisting 200 MA (green).

On the 4 hourly time frame stop loss could be suited either to a candle close above the rising channel, or, on a pre-defined number of 4 hourly candle closes above the 20 MA (blue) which has today acted as resistance.

For me personally I’m running the trade with a stop loss above the previous 0.8158 swing high, but will ultimately  manage this trade “by ear” by watching intraday strength and weakness to gauge as early as possible whether it is the bulls or the bears that really have the upper hand in this market.

8 Comments
  • Stevan
    Posted at 02:16h, 20 September

    What is yr entry price & limit for this trade

  • RS2OOO
    Posted at 17:11h, 20 September

    Entry was at 0.8037

    I will probably scale out of the position in stages and manage the trade on a day to day basis.

    Currently watching the Daily 20 MA which is offering support at 0.7987. A daily close below this would be ideal ahead of a move towards 0.7955 area.

  • Stevan
    Posted at 02:29h, 21 September

    Is there any way to get alerted when you open or close position

  • RS2OOO
    Posted at 20:19h, 23 September

    I’ve been asked that a lot and it is something I would like to do, but due to other commitments it’s not something I’ve had time to look at in detail and set up.

    I try to post entries and exits as live as possible on the blog, usually in the comments section beneath a post, but other commitments often prevent it being as timely as I would like.

    Virtually all my trade entries and exits are posted live on my ADVFN forum throughout the day, including day trades which I don’t discuss on the blog.

    As for an actual alert system…..I’m not sure if it’s where I want to go, it sounds a nice idea but I’m not FSA regulated so cannot be seen to be giving trading advice. This blog is effectively my trading diary, and I publish it as a way to quickly check back on previous analysis I’ve done, which is almost impossible to do on the forum because each post gets swamped by 1000’s of new posts so quickly.

    So in short, for now, there’s not alert system…. in the future, there might be one!

  • RS2OOO
    Posted at 21:45h, 23 September

    I’ve covered half the position at 0.7992 for + 45 points.
    Will monitor the 2nd half over the next couple of days, and if bears show control, I may re-instate the half position that I’ve closed.

  • stevanraj
    Posted at 03:01h, 24 September

    What is yr thread name at ADVFN forum>

    • RS2OOO
      Posted at 17:25h, 24 September

      Hi,

      Thread name is “Technical Index Trading & Analysis”, under the FX epic.

  • RS2OOO
    Posted at 22:53h, 27 September

    Closed 2nd half of EUR:GBP swing short at 0.7943 for +96 pts.

    Starting to look a little oversold, and loads of potential areas of support nearby, so on the basis I don’t have a great deal of spare time to screen watch at the moment, I’ve decided to cover the position and bank my first profit so far this Month!

    Based on the fact the first half of the trade was covered for +45 points, this leaves an aggregate total profit of 71 points and I will reflect this in the trades log.