Talking Points:
-British Pound has been the best performer over the past 3 weeks
-GBP to USD pair showing an extreme SSI reading suggesting further gain for Pound
-Buy British Pound Currency Basket
The British Pound has been in a broad based rally for more than 3 weeks and has easily earned the top spot in this week’s strong and weak analysis. The Sterling has been the only currency of the 5 main currencies to gain ground in each of the past 3 weeks against a basket of currencies.
Forex Strategy: Matching Strong versus Weak
| Currency | Up Arrows | Down Arrows | Change From Last Report |
|---|---|---|---|
| GBP | 7 | Higher 1 ranking | |
| CHF | 6 | 1 | Higher 6 rankings |
| USD | 4 | 2 | Lower 2 rankings |
| EUR | 4 | 2 | Higher 2 rankings |
| CAD | 3 | 4 | Down 1 ranking |
| NZD | 2 | 5 | Down 3 rankings |
| JPY | 1 | 6 | Down 1 ranking |
| AUD | 7 | Down 1 ranking |
Chart created by DailyFX EDU Robert Warensjo
Trend following is one of the oldest strategies in trading. Since the Pound Sterling has clearly been in a strong advance, trend traders will look to buy strength as trends can sometimes continue for quite a while.
When comparing the price of the exchange rates relative to their 200 period Simple Moving Average, the Sterling trend is the cleanest and is now considered the strongest currency according to the Strong & Weak analysis.
Forex Education: GBPUSD at the top of a Trend Channel
(Created using FXCM’s Marketscope 2.0 charts)
One factor that could accelerate gains for the British Pound is FXCM’s Speculative Sentiment Index (SSI). The SSI reading for the GBPUSD shows nearly 4 times as many traders are currently sellers than who are buyers in the pair. SSI is a good contrarian indicator especially when traders are lined up against the direction of the trend. The GBPUSD exemplifies both a strong trend and extreme SSI reading providing the recipe for a breakout.
A break above resistance could mean sharp gains as these sellers become a future supply of buyers (in order to close out their short positions, they would need to buy it back).
Executing the Trade
Since we anticipate the British Pound may continue its broad based rally we will take a diversified approach and buy the single currency against a basket of currencies. There are several advantages to trading a currency rather than a pair with the largest benefit being diversification.
You can try trading the GBP Basket BUY position in a Mirror account. We recommend risking less than 5% on all open trades. As a result, risk less than 1-2% on this basket so you have additional capacity to take on other trades.
Good luck with your trading!
---Written by Jeremy Wagner, Head Trading Instructor, DailyFX Education
Follow me on Twitter at @JWagnerFXTrader.To be added to Jeremy’s e-mail distribution list, click HERE and select SUBSCRIBE then enter in your email information.
See Jeremy’s recent articles at his DailyFX Forex Educators Bio Page.
Want to keep on top of the Sterling’s move and what fundamental news is pushing it? Join DailyFX on Demand where you can receive real time analysis of your trading ideas, real time SSI, and bank research of how funds are flowing. FXCM clients receive a discount.
