Like the majority of USDollar pairs, the GBPUSD has been moving higher since June of the 2012. From the low at created on June 1st at 1.5267 through yesterday’s high at 1.6272 the pair has advanced as much as 1005 pips. Currently the trend is at a standstill neither creating new highs nor new lows with today’s price action. This form of consolidation is called an inside bar, and can be useful to help traders prepare for breakout entries. Let’s take a look at this developing price pattern and learn about inside bars.
(Created using FXCM’s Marketscope 2.0 charts)
Zooming in on chart depicted below, we can see the development of an inside bar on the GBPUSD daily graph. As described in a previous article, an inside bar occurs when today’s price action does not exceed the previous day’s high or low. Price action from Monday printed a daily high of 1.6272 and a low of 1.6210. Today’s action has so far yielded a daily high at 1.6266 and a low of 1.6219, both inside our previous candles levels mentioned prior.
Breakout traders can use entry orders to trade a break of either the previous high or low. Traders can choose a directional bias for their entry with the trend or use an OCO order to cover both a long and short entry. One entry will be placed above the mentioned high at 1.6272 to buy on the creation of a new high. Conversely an OCO will set an order to sell if prices drop below 1.6210. Once these entries are set risk can be managed with stops can be placed between both entry points.
(Created using FXCM’s Marketscope 2.0 charts)
My preference is to place an OCO entry order on the GBP/USD near the September 17th high/low. Stops will be placed between the OCO orders near 1.6240. Traders can use a risk/reward ratio of 1:2 or better looking for a minimum of 60 pips.
Alternative scenarios include continuing to trade “inside”, prior to a breakout.
---Written by Walker England, Trading Instructor
To contact Walker, email instructor@dailyfx.com. Follow me on Twitter at @WEnglandFX.
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