The GBPAUD daily candle is communicating a strong message to the market: “watch out buyers and say hello sellers.” Tuesday’s candle left little room for speculation: it was bearish with a close near the low and a big wick on top of the candle.
This post analyzes the GBPAUD in more detail before discussing various setups and triggers at different decision spots.
The bullish momentum lost its speed when price managed to reach an important psychological round level of 2.00. At that point a shooting star candle stick pattern appeared on the daily chart, after which the GBPAUD has been moving sideways for almost 2 trading weeks.
The lengthy pause certainly indicates the completion of the first bullish move up (blue arrow) and that price is now in a consolidation mode. The main question is: what happens after the consolidation?
The pair could in fact be at an important crossroad:
- Break above the consolidation for a trend continuation;
- Break below the consolidation for a reversal.
DECISION SPOTS & TRIGGERS
The key decision spots for these two trade ideas are the trend lines, which represent the support and resistance and the edges of the consolidation.
The key triggers are candle sticks on the daily charts. I am looking for a candle with a close either above the consolidation zone for a bullish setup or below it for a bearish setup. Besides the break there is one more requirement I am looking for:
- In case of a bullish break I am looking for a candle close near the high;
- In case of a bearish break I am looking for a candle close near the low.
This extra step is to ensure that the signal has sufficient strength, which increases the probability of a successful breakout.
Before actually entering a trade I first of all want to evaluate the exit strategy. It is vital to know where the stop loss placement of the trade should be and have an idea about the target as well.
With the GBPAUD the stop loss answer is simple:
- A loose stop loss can be placed on the opposite side of the consolidation zone;
- A wide stop loss can be placed on the opposite side of the breakout candle (above the candle high for shorts and above the candle low for longs).
Regarding the targets I am looking for this:
- Bullish break: price is in an uptrend on the weekly chart. When a Fibonacci tool (orange) is placed on the first bullish swing high and swing low, then the main targets are the -27.2 and -61.8 levels. Price has not yet reached the first -27.2 level so that is the main target at 2.05.
- Bearish break: in that case price will retrace part of the bullish swing high and swing low (blue Fib). The trend could easily continue at one of these Fibonacci levels so a reasonable target to aim for is the 50% Fib which has confluence with the broken top (green lines) as well.
Are you planning to trade the GBPAUD?
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