Update: Trade has since been close via its take profit buy limit order at 1.4250 mid Monday trading for a profit of +352 pips, lasting about 7 days.
We ended 2015 well, and we're starting 2016 well too. Putting our massive 1,420 pip winner on USDCAD last December aside, we're now almost close (5 pips away) from having our take profit limit order filled on GBPUSD. If that happens, we'll walk away with some 350 pips in profit. Not a bad start to the year huh? Especially given how treacherous the trading environment has been ever since New Year's Day; markets all around have been crashing and volatility flaring across the board.
Before we continue, it is important that you understand all of the trading content we put out on these pages are real trades on a real account that we trade ourselves. We're using real capital and trading live prices. You can find out more about our trading system here. You can also view our entire trading journal here. In publishing such articles, we want to help traders from all walks of life better understand how successful traders approach the markets, and translate ideas into actions.
Now on to the meaty part that is the huge downside that cable (short for GBPUSD) has seen since topping late last year. The pair has been in an almost continuous linear decline. This signals that the bears are in control of the trend for most of the time and any medium to long term trade should logically be in the direction of this prevailing trend.
Early Tuesday this week (1/11) we initiated our short position via a sell limit order placed at 1.4602. The market filled us with precisely 4 pips to spare; that is the high for the entire week was 1.4606, giving this trade a drawdown of just 4 pips. Yup, a 4-pip drawdown. That's what we call marksmanship.
After filling our order and strongly rejecting off 1.4600, cable proceeded to move lower in a classic bear market fashion, allowing us a lot of head room to maneuver our stop loss whilst giving the market ample breathing room. The last thing we wanted to do was to trail out stop too aggressively and risk being shaken our prematurely.
Objective wise, we targeted the weekly/monthly lows of 1.4250. This area is the best most obvious technical support for the pair, once intraday and daily levels were taken out in the subsequent days. We didn't mince our words when we said we were betting on massive downside on the pound. Again, this is the translation of trade ideas into actions.
Once again, subscribers to our Premium Signals Service were kept updated in real time on all of our positions and had exclusive first hand insight to our trading activity as it unfolded. Many of them were short GBPUSD with us and made a few hundred pips at least. Congrats to those that did!
In the complex of charts above, you can get a contextual view of the big picture (stretched out daily time frame), a good summary of how our trade unfolded (H4 time frame), and the intricate view of price action (H1 time frame). The former most clearly shows how a major support zone on the daily chart was breached. The market immediately staged a corrective pullback into this broken zone which served as support turned resistance, offering bears a chance to sell the rallies.
Which we did. It is not obvious to the outsider why we chose to place our sell limit order at 1.4602 specifically. What we will publicly say is that it had something to do with analyzing price action on the lower time frames (H1 and lower) on that day of entry itself. We won't go into the details here because we want to reserve this exclusively for our Premium Members.
We acted very decidedly on this trade. What in fact happened was we had set our sell limit order, went out for dinner, came back to realize that the market had filled us within an hour. Traders who were waiting for deeper pullbacks never got one and were most likely unable to short at lower levels due to the psychological barrier of missing out on the pullback (i.e. why short now when I could have shorted higher up?).
On Friday, when the trade was floating with about 220 pips of profits, we trailed our stop to the current level of 1.4437 right above a pre-breakout formation visible on the H1. We wanted to add another short early on Friday but were too busy that we missed the opportunity. It was a real shame in hindsight.
At Friday's close, cable traded 1.4255 on the offer, a mere 5 pips above our take profit level and came 2 pips away from filling it. This is definitely a trade where everything was a close shave.
Fundamentally, we were inclined to have a net short exposure on sterling. Any observant market participant would have noticed worsening economic data coming from the UK, and that the BoE (Bank of England) was much more likely to stay their course of policy rather than to alter it (despite speculations of the contrary).
GBP has been offered against most currencies ex. carry and commodity FX, which set the plot in stone for us. The USD meanwhile has seen strength, partially thanks to the Fed's first ever interest rate hike in a decade, and the exodus of capital from risk into liquidity during the most recent (and still current) rout.
Cross asset analysis gave us a few clues as to why cable was behaving more like a risk asset than the more traditional currency pairs which it used to in the past. Most of the dots lined up, so to speak. We got the green light to short from a more fundamental standpoint. The wind was in our back. That's always a good thing.
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