Friday, September 17, 2010

GBPUSD—Analysis of a long position

I don't usually blog on Fridays but I haven't had time to post a lot this week. Instead of the usual blah-blah, I thought it might be helpful to take a look at a long position in the GBPUSD from the point of view of how the trade originated and the ups and downs I rode before it started to pay off for me. I bought at 1.5406 and it's now up over 300 pips. I took some partial profits at +304 pips this morning.

I first started zeroing in on this pair in my August 30th blog where I wrote, "Cable is coiling inside a symmetrical triangle. It's possible it could get as high as 1.6346 before it's over (but this is based on the monthly chart and won't happen immediately if it happens at all). The bottom of the triangle is in the 1.44 area." I went on to write, " In the case of the cable, the longer term monthly trend is down since 2007. However, I may look for longs if the shorter term charts indicate interest in getting to 1.6346, the top of the triangle." So the pair had my interest as a possible long even though the overall trend was down. In fact, I was wondering if we were in a C wave. C waves, as third waves, are often strong.

On September 2 the pair continued to hold my attention. I wrote, "I think there's a chance for another leg up and bought at 1.5358. In case I'm wrong I've already moved the stop to breakeven and took part of the position off the table for +40 pips."

Note how I'm keeping that larger bear trend in mind with a quick move of the stop to breakeven. But I was optimistic even though the "dip to 1.5326 was bearish since it was below the prior week's hammer candle low of 1.5371." But that dip was only slightly below and it was "only.382 of the 1.4228 to 1.5998 move." Clearly I'm interested in being long because as I went on to write, "The fact that this held as support was positive. There's also support beneath here in the form of Fib confluence zones."

I then wrote:

I wrote on Aug. 30th about the monthly symmetrical triangle with a potential of 1.6346 if it ran back up to the top. You could also look at the monthly action as having completed A and B of an ABC correction with C underway. On the daily chart, there's a bull pennant with a potential 672 pips from the breakout point (1.6164). All that's lovely to behold if price moves up but before one starts filling out deposit slips there is significant resistance in the 1.54 to 1.55 range with 10-, 50-, and 200-day SMAs ranging from 1.5428 to 1.5467. The top of the bull pennant is at 1.5480 and 1.5492 was yesterday's high. 1.5598 is the August 26th high.

September 7th found me trying to deal with conflicting signals. I wrote:

What was left of my long stopped out at +10 pips in the move down from 1.5490. It's currently clutching the .382 retracement of the move from 1.4228 to 1.5998….The 50% line is at 1.5113… near the downward sloping channel line and the 100-day simple moving average. If one buys that scenario then shorting a rally or selling a decisive break of 1.53 are the way to go. There is positive divergence on the three-hour chart so a rally may be coming.

I then reminded readers (and myself) again of the " larger monthly picture of a symmetrical triangle whose bottom, up-sloping line is in at 1.4431 and whose upper down-sloping line is at 1.6272. That leaves lots of room for price movement."

On September 9th I wrote that:

Cable is continuing its bull flag on the daily chart and even though there are some conflicting signals I'm trading it that way for now. I made this decision within the larger context of the monthly chart's symmetrical triangle which has the potential for higher prices before it drops down again. The pair broke through some good resistance in the 1.54 to 1.55 area before touching 1.5533. It then retraced to 1.5377, almost 50% of the last leg up of 1.5297 to 1.5533. There it seemed to base, near a more significant .382 retracement.

I reported that I had bought at 1.5433.

That trade didn't pan out. I wrote on September 13th that "My long from last week stopped out at -40 pips." In the blog I went on to say that "last week's low of 1.5297 has held. It's right on its weekly uptrend line and still clinging to the .382 retracement. Bulls would like to see it overtake 1.5533." I noted that if it overcame that price it would make 1.5703 possible" with the "1.5998 August 6th high" next.

I wrote that I had taken another long position at 1.5414 because of the ability to have a tight stop knowing that the stop might be taken out because "the real support is at 1.5297."

That trade stopped at breakeven.

On September 14th I wrote that I was long again from 1.5406. I provided a three-hour chart and noted that the pair had reached the top of that at 1.5515 and that a break through the resistance zone of 1.5535 to 1.5567/84 would mean 1.5703 was possible and after that would mean the August 6th high of 1.5998 was possibly achievable.

That trade is the one I'm in now. It obviously achieved 1.5703 but since that's resistance I wanted to take some profits off the table. But notice how I got there. I had two trades that stopped at or slightly above breakeven. I had one trade that had a 40 pips loss. After those three trades I went long again because there was nothing in the charts that violated my overall perception that support was holding. It's not easy. Nobody likes getting stopped out with no profit or a small loss. It's not easy to buy when the majority of opinion is that that the best course of action is to sell. But that's the nature of trading.

From here we don't really know if the pair will reach 1.5998. I'll do another big analysis over the weekend and see where I go from here. More than likely the pair will hit my profit stop at some point but we'll see.

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