19 Sep 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.