Wednesday, September 30, 2009


I wrote earlier this morning that I wanted to short the pound “hopefully around 1.6150.” I ended up entering at 1.6106 after seeing it briefly touch, then back away from, 1.6126. That was my clue that it might not reach 1.6150. Why that price? Based on some calculations using Fib ratios, I believed that was a vulnerable area. But the pair started stumbling on lower time frame charts—15- and 5-minute—and a doji formed on the hourly chart. So I held my nose and jumped in. Remember, I was struggling with the drop in the USD/CHF earlier as well and that pair tends to drop when GBP/USD goes up (not always but often). Also equity futures were bidding up earlier this morning so I thought perhaps the USD was going to take a beating today. These are the kinds of things that make it psychologically difficult to trade. Price on the pound chart was clearly speaking to me and yet my “beliefs” formed from other data were kicking in, making it difficult to take the trade. Regardless, I plunged in. My stop is now a profit stop and the pair is currently down 148 pips.

Let’s take a closer look at the doji on the hour chart below. It’s a honey. Not only does it form after an uptrend (as it must), but there aren’t a lot of them on the chart. The market is overbought so why is there such hesitation which is what the doji represents? It’s at an area I’ve identified as resistance. It’s also at 50% retracement. Finally, one could make an argument that it goes on to become part of a larger candlestick pattern, the evening star. Steve Nison in his book, Japanese Candlestick Charting Techniques (2001), wrote that the evening star consists of three candles. First, there’s a long white candle; then there’s a star (or doji); finally there’s a black real body that cuts deeply into the first white candle’s body. The third candle here doesn’t just cut deeply. It overwhelms the first candle so I’m not sure Nison would endorse this interpretation. Regardless, it was the right entry point. Here’s the hourly chart:

© Dianne Fecteau, 2009. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.

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