Monday, April 20, 2015

100-pip GBP USD Trade Using Bear Crown Patterns

This trade was executed as part of a methodology of identifying and aggressively trading short-term movements across the currency market. More precisely, it involves targeting high probability 100- Pip opportunities in the direction of the weekly trend for each currency pair using key Candlestick Patterns and Signals across time frames.
Each trade is held for no more than a day and a half, ending before the close of the trading session the following day at 5 00 PM EST. An average Stop Loss of 40 Pips is used when entering each trade, giving a Risk-Reward Ratio of 2,5 on average for each 100-Pip trade. It is somewhat of a middle ground between Day Trading and Swing Trading as it targets a range that is similar to the average Daily Range of the most liquid pairs (70- 120 Pips), but takes place within the context of the larger 7-day Weekly Trend (300 – 500 pips).


Ø This trade involved anticipating Bear Crown formations on both the 4 Hour and Daily Charts, within the context of the pullback taking place below Support of the Weekly Chart´s Range.
Ø The trade setup on the 4H Chart was the expected formation of the Right Tip of the Crown after the Left and Center Tips appeared. This is a common setup for trends that are coming to an end with a break of a previous trend line.
Ø This expected change of trend on the 4H Chart would represent the Centre Tip of the Daily Chart which was also starting to reverse at the Support of the Weekly Range.
Ø This small 100- Pip move therefore, would represent the start of the pullback from the Weekly Chart´s Range Support to then continue further moves bearish in favour of the US Dollar.
Ø Although the technical setups on these time frames were strong enough to justify the trade, the disappointing unemployment rate and the lower economic growth forecast for the United Kingdom lent additional support to the anticipated downturn.

As can be seen on the graph below, there has been a pullback to the Support of the Weekly Chart’s Range at 1.5270 following the breakout earlier this year. If this bearish trend is going to continue, then the Counter Trend Line (in blue) will eventually be broken, giving way to further losses for the pound.


As part of this potential U-turn, the 4 Hour and Daily Charts have slowly formed Bearish Crown setups. The 4 Hour Chart’s Right Tip would be formed if it broke the blue Counter Trend Line which in turn would lead to the Centre Tip of the Daily Chart being formed.



To trade this breakout, the 30 Minute Chart was used to enter short when this 4 Hour Counter Trend Line started to be breached. After a breaking and then testing a small Pennant above this Trend Line, a bearish entry signal appeared at 7 30 am GMT. The Stop Loss was placed just inside the Pennant with the Limit set to 100 Pips from the entry price of 1.5320. After only a few hours, the 100-Pip target of 1.5220 was hit.



The graphs below show the formation of the Right Tip on the 4 Hour Chart and the Centre Tip of the Daily Chart.



If the bearish breakout is going to continue over the next few months, then the Uptrend Line on the Daily Chart (Weekly Counter Trend Line) will need to be broken. This could be followed by a temporary pullback to test this trend line before U-turning bearish once more to form the Right Tip of the Bear Crown.

The release of the unemployment rate for the UK at 8 30 am GMT - one hour after the entry signal- provided additional impetus for the sharp decline in the pound that morning. The data showed the rate had climbed to 7.9 percent between December 2012 and February 2013 from 7.8 percent for the September 2012 to November 2012 period. Combined with the lower growth forecast for the UK economy for 2013 by the International Monetary Fund the previous day (0.7% from 1.0%), the short-term outlook for the pound was inevitably negative for this trading session.

The short-term to medium term outlook for the pound will continue to be affected by important economic data as well as the actions of the Bank of England (BOE) as it balances the trade-offs between the medium-term inflation target and supporting economic growth. If the economic outlook for the UK continues to worsen as a result of further weaknesses in export demand from the euro area, tight fiscal consolidation, little improvement in business lending or consumer demand (constrained by lower real incomes and deleveraging), then the currency pair is likely lose further ground and break farther below the Weekly Chart’s Range this year.
Even if there were to be an increase in the stock of asset purchases from the current level of £375 billion to support growth-as recently proposed by the 3 outnumbered voting members of the BOE´s Monetary Policy Committee - it could accelerate the rate of depreciation of sterling. According to the minutes released simultaneously with the unemployment data, ¨Inflation was above the 2% target, was likely to rise further later this year, and was expected to remain elevated for an extended period. Medium-term inflation expectations had drifted upwards in recent months, and a further easing might exacerbate this movement and prompt renewed weakness in sterling, with implications for wages and prices.¨
Within this context therefore, trades that involve shorting the sterling against the US Dollar are likely to be the profitable decision for 2013. However, based solely on the technical setup on the Weekly Chart, there is always a possibility that this return to Support is merely the start of a false breakout. This would be confirmed by a convincing rally in the pair above 1.5500 which would make long positions the preferred choice of traders this year.

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