GBP/USD:
Range bound trading continues. It is especially obvious when MA is moving horizontal. Notice on the daily Cable chart below that the 50 SMA has been horizontal since late July while the 100 SMA turned horizontal in late September. The 100 SMA is above 50 SMA which is typical of a falling price environment. Additionally, the last time a complete candle appeared below the 50 SMA price fell an additional 4.54%.
If you have been trading support and resistance then you have been very successful recently. The yellow rectangular area indicates upper level resistance. Those who trade pure reversals would look to make short entries there.
Point “A” defined our first high in the range. We make Point “A” the first level of resistance, R1. Points “B” & “C”encroach but never breach R1. These would become Reversal Trades 1 & 2. Point “D” breaches R1 before retracing. Points “E”, “F” and “G” look similar to “A”, “B”, and “C”. Point “H” breaks resistance before retracing its gains.
For Points “B, C, E, F, and G” if you were trading straight S&R you would have fared very nicely. However, for Points “D & H” indicated by the red arches you would have mostly likely been stopped out before picking up the reversal.
With proper risk controls traders will minimize their max loss on every position. A forex trader cannot expect to win on every trade so choosing the best trades and entry points is essential. With the use of Candle patterns, Momentum indicators and Oscillators a trader can time the entry where the lull in momentum begins (blue vertical lines) which may signal a reversal. The Chart below uses the MACD with a histogram to demonstrate falling momentum. The histogram more clearly reveals the convergence of the MACD with the Average. If you wait for 3 full bars with lower highs (red arrows) to form and ensure that price is still at the point of resistance you can avoid tripping a stop loss and possibly end up in another winning forex trade.
