GBPUSD: Two Scenarios to Short the Cable

FX:GBPUSD   British Pound / U.S. Dollar
The Pound took a beating last Friday and dropped significantly against the dollar on the back of disappointing industrial production and construction data coming out. The cable even fell to a low we had not seen since 2010, which confirms a continuation of the downtrend that started July of last year. As a matter of fact, since Wednesday the 8th (the day the FOMC minutes were released, revealing a June rate hike is still on the table, thereby strengthening the dollar) the cable went into a steep bearish channel on the 4H timeframe and it has not come out of it. The uncertainty surrounding the general elections in May are also –at least temporarily- weighing down the Pound. So the fundamental outlook for this pair is bearish , at least until the elections when we may have a new situation.

On the 4H timeframe we can see PA, contained by a steep bearish channel , broke out of an ascending triangle on Thursday, kept on falling and challenged the low of March 18th. It broke below it and closed below it (so we do not have a double bottom here), then popped back up only to close slightly below it again. With the notorious weekend gap in mind, there’s no telling what price might do next, so I have two possible trades on my watchlist to enter the bearish trend and will only enter a trade after I see the price confirms either one of them.

Scenario 1:
Price gaps down, below the low of March 18th, retraces back into it for a test of its resistance and then continues its fall until it runs into the bearish trendline that has been tested 3 times this year and should provide strong support. I would enter short after the test of resistance, when I see a convincing reversal. SL would go above resistance. TP1 = traderisk and TP2 = bearish trendline (since PA always responds strongly to it). There would be 150+ pips to be made.

Scenario 2:
Price gaps up, above the low of March 18th, retraces back into it for a test of its support and then continues its to move up for a retest of 1.4742 which should provide resistance and has a nice confluence with the 382 retracement of the swing low. From there I would enter short. SL would go above resistance. TP1 = low of March 18th and TP2 = daily support at 1.4521. There would be 200+ pips to be made.
You don´t need to be a weatherman to know which way the wind blows - B. Dylan
Hi Jasper, could you please give me your point of view on this:
I currently have 3 open positions of SELL GBP|USD that i opened at 1.46 because it was going down (morning). The trend changed and now it's going to be over 1.07 soon.
From your chart I can see that the value is likely to drop back to lower than 1.46 in the next days or week.
Would you keep the positions open and wait for that moment?
I would like to know what YOU would do, as today in a similar situation I was given the wrong advice :)
+1 Reply
JasperForex gianni.g.diraimondo
You read my chart correctly; I do anticipate the cable to drop under 1.46 and potentially hit 1.4520 in the near future. It hit a 5-year low today and is in a continuous downtrend since last summer. However, there are several routes to get there and I cannot judge if your account can stand the temporary drawdown as price goes against you while retracing. That’s why I always advice to have a plan before you enter any trade: with profit targets, stop loss, minimal reward – risk requirement and trade management rules clearly defined. Plus an anticipation if the trade will be a scalp, a daytrade or a swingtrade to avoid any surprises where you wont know what to do.

Personally, I would exit any trade I was in for which I did not have a fully defined plan even if it meant taking a loss. Then I would just wait for a new opportunity to re-enter with a valid plan. If however you decide to stay in the trade, at least put a hard stoploss at a prudent level above the current price to avoid further losses if for some reason price keeps going against you (this can always happen). But I doubt you will get a good reward risk out of it.
+1 Reply
Hey jasper, I just wanted to clarify one thing. When you say "a convincing reversal" what do you really look for? I have read so many trade ideas and traders usually say that wait for a strong reversal signal before entering. What should we look for when we are trying to identify a strong reversal signal? Thank you for sharing and good luck !!
+1 Reply
JasperForex moneymaking
True, each trader defines this differently. After testing resistance, I would be looking for clear reversal candles like marubozu, shooting star, bearish engulfing or tweezer tops. I would not enter short after a close above resistance, a spinning top or doji or any kind of bullish candle.
+1 Reply
moneymaking JasperForex
So basically, we look for different bearish candle types that confirm the resistance level. Thank you Jasper :)
+1 Reply
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