More Fractal Examples and Casey’s Call On The GBP/USD

Mark Thomas — Trade on Track

First of all: Casey made a great call on the double-top reversal of the GBP/USD today. The move is not over yet, the bear is still jumping out of the window (so to speak), and we expect it to move somewhat lower yet. This move is another great example of identifying and using fractals, so that is what this article will concentrate on.

Here’s a 3hr chart (very similar to a 4hr) of the GBP/USD over the last couple of weeks:

GBP/USD

Casey already pointed out the [tweetable alt=””]double-top which can be a strong reversal signal[/tweetable] in itself. However, also notice that a very strong bullish fractal was formed as the GBP moved down. This fractal is basically a support area, which becomes resistance once price breaks through it. I’ve drawn a blue line at the level where the low of the fractal was, and you can see how the double top formed as price moved back up to that resistance area. On this chart I’ve also drawn a fibonacci retracement from a fairly major high to the last major low on this chart. Notice that price retraced right to the 50% fib level (twice). Ok, so we have the double-top that Casey pointed out. We also have the double top hitting a fairly major support/resistance line. And, this resistance line is right at a fairly major 50% retracement level – plenty of reasons to go short.

That’s exactly what Casey did (where the arrow says “Go short here”) and I got in myself a little later.

So, we have the big picture on the 3hr chart. We’ll now zoom down to a 30 minute chart and follow this trade down, showing how fractals could have been used to enter the trade and also to trail a stop to reduce risk and lock in profits as we go down.

GBP/USD

On the smaller time-frame chart, we can zoom in and fine-tune our entry. You can see that a bullish fractal was formed (where I’ve indicated on the chart) and then there was a break of that level where I drew the horizontal line. This is where you could have gone short (and Casey did, because I saw it on currensee.com – you all should join!). There were other signs for an entry here too, like the crossing over of several moving averages. Once the entry was made, using our fractal-based trailing stop loss strategy you would have positioned the stop where the upper gray line is (or even a bit lower, as there is actually another bearish fractal in there, not far from the entry point).

You remember we looked at a higher time frame (3hr or 4hr) to line up this trade, then, depending on how well price is moving, you can drop to a much smaller time frame to trail your stop. Price really dropped well in this example, so we could have dropped to a 30 minute or even 15 minute time frame to determine our fractal points and trail our stop.

This is the point that I went to bed and left things, but price continued to move lower overnight. Here’s the situation now, on a 15 minute chart:

GBP/USD

The image explains where the original entry was made (the first green line) and where the original stop loss could have been placed. Then, as we get a break of a bullish fractal each time on the way down (the green lines), we move our trailing stop to just above the last bearish fractal before it (the red lines). On the very last green line we couldn’t actually move our stop loss any further down because technically, we didn’t have another bearish fractal that was lower (on the 15 minute chart).

My target for this trade is actually a bit lower (at 1.5818) but I’m choosing to exit the trade now because it’s the end of the trading week. Price can gap over the weekend and behave a little bit erratically at the start of the week, so personally, I’m banking my profits now and seeing what next week brings.

This was a perfect example of where our automated trailing stop would have been very useful. I had to go to bed for the last half of this move down, and an automatic trailing stop would have let me sleep a bit better. 🙂 We continue with the code behind the strategy in the next article.

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