parisseine
Education

Impulse and retracement, the danger of the one trend approach

OANDA:GBPJPY   British Pound / Japanese Yen
OANDA:GBPJPY
3 days ago I published my Bearish target for GBP that was reached yesterday @141 level.
it is critical in a trading plan to anticipate retracement. Retracement is a necessary step to initiate a new impulse but what I would like to simply illustrate is why retracement can be so brutal and potentially very damaging by nature.
On that 120 minutes chart we can see the downtrend impulse created by the bearish signal when the pair crossed below the 143 level. It was my expected signal to enter new Short positions.
A Central Bank rate decision is a key Forex event. Given the Brexit context, many investors were anticipating yesterday a drop and that context has created a new down leg to that initial impulse to reach my defined target.
That target area is a very dangerous place to trade for the following reasons:
As many investors are willing to participate to the downtrend they place Short orders but because it's a very important event usually with conservative stop loss.
All these orders placed very far from the beginning of the last impulse from around 142.50 have created a HUGE BUY volume opportunity!
All things being equal Short orders are Long for the counterpart. Any retracement in that context can be initiated by the available volume in the first place. Then when the retracement starts many investors can change their mind and reverse their positions. It is fueling the strength of the retracement and by hitting Sellers stop loss the retracement is amplified and exaggerated by High-Frequency Trading.
Finally, the retracement of the pair was so boosted that is has reached above the day high
As a conclusion investor shall be very cautious when they join lately a market impulse and it is as well perillous to trade against the retracement trend as it can conversely just add power to it. In other words, investors are trading against their positions.
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