Article Summary: The GBPUSD has declined as much as 1066 pips in 2013. As the trend extends, traders will identify short term momentum for scalping opportunities.
The first rule when scalping is to always find the trend and market momentum in order to trade with it. However, along the way trends can become extended and be inclined to pull back and retrace against its primary direction. So how do we determine if the pair is suitable for scalping? Let’s look at an example with the GBPUSD.
One of the strongest trending pairs continues to be the GBPUSD. Since our last review of the pair on January 23rd the GBPUSD has declined an additional 526 pips. As the decline continues to extend over 1066 pips, traders may become concerned that downward momentum may be subsiding on the pair. One way to evaluate direction for scalping is to move in and block off a 30min chart.
Learn Forex – GBPUSD 8Hour Trend
(Created using FXCM’s Marketscope 2.0 charts)
GBPUSD Building Blocks
One technique designed to identify short term momentum is to divide the previous week’s trading into two trading blocks. This analysis is critical to scalpers to ensure that short term momentum is heading in the direction of the prevailing trend. With the GBPUSD trending lower, if both blocks indicate prices are decreasing, scalpers will look for opportunities to sell the market. Conversely, if momentum is stalling it may be time to avoid the GBPUSD and look for a fresh pair to trade.
Below we have a GBPUSD 30min chart divided into our two trading blocks. Block 1 begins on Wednesday the 13th and runs through Sunday the 17th. Block 1 shows a strong decrease in price as the GBPUSD declined in price to 1.5460. Block 2 shows the continuation of a downtrend as price again broke to lower lows. As price has continued its descent over the past trading week both blocks have been colored red. As both blocks have been painted red, traders will look for the continuation of our standing bear trend despite longer term charts beginning to look extended.
Learn Forex – GBPUSD Building Blocks
(Created using FXCM’s Marketscope 2.0 charts)
It is important to notice that price at present has firmly broken through the labeled Block 2 low at 1.0514. As current price has already broken lower, the next price block will also be painted red upon closing. Scalpers can take advantage of a continued price decline on the GBPUSD by finding opportunities to sell the market. A break above resistance with higher highs would indicate at least a short term reversal in our trend and call for a halt to our downside bias.
---Written by Walker England, Trading Instructor
To contact Walker, email instructor@dailyfx.com. Follow me on Twitter at @WEnglandFX.
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