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2 GBP Trades That Validate Each Other

2 GBP Trades That Validate Each Other

2013-11-11 20:30:00
Kaye Lee, Head Forex Trading Instructor

Talking Points:

  • GBP/AUD Tests Upper Channel Resistance
  • Similar Pattern Shaping up in GBP/NZD
  • 3 Viable Ways to Trade This Scenario

One of the more common mantras many traders hear early in their education is to look for "favorable points of confluence" or "multiple reasons to enter a trade." Usually, this refers to finding multiple trade signals lining up in the same direction for the same instrument.

However, one situation that receives less emphasis, but can be of tremendous significance, is when two or more related instruments give signals in the same direction. That is happening this week for the British pound (GBP).

The daily chart for GBPAUD (see left panel below) speaks for itself, as price is hitting the top of a resistance channel. This level is holding so far, as shown by the pin bar on the four-hour chart in the right-hand panel.

Guest Commentary: Rising Channel Resistance in GBPAUD

2_GBP_Trades_That_Validate_Each_Other_body_GuestCommentary_KayeLee_November11A_1.png, 2 GBP Trades That Validate Each Other

As always, there are only three ways price can go: up, down, or sideways. The resistance level and the pin taken together suggest that price should at least go sideways, if not turn around for a pullback. Of course, there is always a possibility of price rising, but given the evidence, this seems less likely.

Nonetheless, this set-up would seem a little dubious given that there are only two reasons to take this trade.

Things get even more interesting when looking at the daily chart for GBPNZD, which is hitting a declining resistance level on the daily chart (left panel). The four-hour chart for GBPNZD (right panel) has already shown signs of reacting given the latest doji candle, shown in green.

Guest Commentary: GBPNZD Facing Resistance, too

2_GBP_Trades_That_Validate_Each_Other_body_GuestCommentary_KayeLee_November11A_2.png, 2 GBP Trades That Validate Each Other

Admittedly, the confluence of resistance of the daily trend line and the four-hour rising channel gives some leeway in the form of a resistance zone overhead. Nonetheless, bulls would have to work hard to break this level.

The zones of resistance on the two pairs have been identified using a combination of trend line and swing analysis, as shown on the charts below. The GBPNZD resistance zone is derived on the four-hour chart as 1.9441-1.9552. The GBPAUD zone is derived from hourly trend line and swing analysis and encompasses 1.7062-1.7189.

Guest Commentary: Trade Triggers for GBP/AUD, GBP/NZD

2_GBP_Trades_That_Validate_Each_Other_body_GuestCommentary_KayeLee_November11A_3.png, 2 GBP Trades That Validate Each Other

First, it’s vital to determine on which time frame(s) to take these trades, and since GBPAUD is showing more signs of reversal with the pin bar on the four-hour chart, it can be taken on that time frame. A break below the low of the pin would be a reasonable place to enter a short position.

On the other hand, although the long-legged doji on the GBPNZD four-hour chart may be enticing, it is far from decisive. Thus, a more precise entry on the hourly charts would be preferable. Some form of reversal divergence or even more decisive candlestick action (pin bars, bearish engulfing candlesticks, etc.) on the hourly time frame would be reasonable triggers.

At this point, another serious consideration is presented: Can both of these trades be taken simultaneously?

Technically, both set-ups are reasonable. However, to enter both shorts would be, in essence, double the short-side exposure to GBP, which is not especially wise.

As a result, traders have three options:

  1. Choose the one most preferable trade and take only that. The risk here is that only the other trade may trigger, essentially leaving them on the sidelines;
  2. Take both trades, but using half the normal risk for each trade. That way, if one works out and the other does not, it would be in the account anyway; or...
  3. Take the first trade to trigger so as to capitalize on the first one that occurs within the appropriate trading window

All three would be valid responses. Both of these trades are valid on their own, and together, they do reinforce one another. Nonetheless, it is also worth remembering that there are plenty of GBP pairs out there, so a confluence such as this is extremely reassuring, even though in trading, nothing is ever a sure bet.

By Kaye Lee, private fund trader and head trader consultant,

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.