Guest Post by Nick Kanger, Head Currency Analyst at ProAct Traders
Forecasting currency movements longer term can be a dangerous (and potentially embarrassing) undertaking. Get the numbers right and you’re a hero and looked upon as a currency trading guru; wrong and you’re punished with “What were you thinking” comments, snipes, derisive statements or worse. So, what to do? Keep what info you’ve amassed to yourself and trade just managed accounts that no one but you and your clients will ever see? Or, put it out there to the rest of the trading world? Hummmm…….
Well, let’s see if we can take some sensibly planned, strategic action instead, that limits potential losses should the pair choose to climb higher (yes, we’re talking shorting the pair), and attempt to maximize gains should they start to accrue if the pair begins to move south.
Here’s what I see..
At the time of this writing, price seems to be topping out for the day near 1.6250. This is a natural “squaring up” process that started last Friday and appears to be terminating currently with some price overshoot room taken into account up to 1.6255. Strong closes above here, and the bulls may get more emboldened to take price a bit higher. If the bears can hold 1.6250 (a big psychological number) and lower, a Daily close below 1.6150 (a mere 100 pips away) would lend strength to the downside. If, and once that level is broken, it now becomes a matter of finally breaking 1.6100 where a single line trend line would be struck, as well as a .618 fib from the 4 hour chart.
The max upside resistance on a price overshoot is right @ 1.6272 where the bears could enter with some real volume. In my humble opinion, this would be an ideal spot to short the pair with a paltry 30 pip stop @ 1.6305. Why paltry (small)? The upside to this is 1:4 initially down to 1.6152. Then, it’s a matter of waiting for the market make the decision to head much much lower on a break of support @ 1.5833. Should the latter occur where there has been very strong support on the Weekly chart, then we look for the next strong support to be near 1.5350.
Now again….If a trade was taken @ 1.6272, the risk is a minimal 30 pips. Another strategy, should you make the personal choice to engage a little earlier than that entry price so as not to “miss” a potential larger move to the downside, would be to cost average enter into the trade, taking smaller positions so as not to over leverage @ 13 pips increments up to 1.6272 with all positions average at risk of no more than 1%.
The above-mentioned strategy discussed here is based on simple technical analysis. Talking about the fundamental reasons why the Pound could drop so precipitously is a whole other discussion. So today, we’ll leave it at the technical.
Meanwhile, we’re in @ 1.6235 on both a short term and longer term hold and will take small positions higher up to 1.6272.
Great trading to you.
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