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A "Classic" Short Set-up in EUR/GBP

A "Classic" Short Set-up in EUR/GBP

2013-11-25 16:05:00
Kaye Lee, Head Forex Trading Instructor

Talking Points:

  • Long- and Short-Term Downtrends in EUR/GBP
  • Key Resistance Zone for Initiating Short Positions
  • Important Risk Factors to Consider

EURGBP is readying itself for a classic trade situation: selling a rally in a downtrend.

Price is now heading up towards the shorter-term downward resistance, which has previously been respected on three occasions. It is reasonable to assume that a push upwards into this area—should it happen—will also result in at least a reaction from the bears.

Guest Commentary: 2 Distinct Declining Trend Lines for EUR/GBP

A_Classic_Short_Set-up_in_EURGBP_body_GuestCommentary_KayeLee_November25A_1.png, A "Classic" Short Set-up in EUR/GBP

Ideally, the pair will continue lower, but even if it does not, there should be sufficient space to justify an intraday trade.

The four-hour chart below provides a simple zone of resistance estimated from the declining shorter-term trend line. An entry close to this line will allow tighter risk control, as no one ever really knows for certain whether trend line will cause a break or a bounce.

Guest Commentary: Key EUR/GBP Resistance Zone

A_Classic_Short_Set-up_in_EURGBP_body_GuestCommentary_KayeLee_November25A_2.png, A "Classic" Short Set-up in EUR/GBP

For this very reason, it is wisest to take the entry on the hourly chart (not shown). There are traders who would happily place sell orders right in front of the trend line, anticipating the move down and hoping to get in before anyone else.

While this is a legitimate approach, it is too aggressive for most traders and is akin to estimating the length of a dog's leash, standing that length away from the dog, and poking it in the nose. It’s all fine and good just as long as the measurement was correct and the leash does not snap.

As a result, a more defensive approach is preferred. On the hourly charts, traders can wait for price to rise to the level of resistance before showing signs of turning. The usual signals like pin bars, bearish engulfing patterns, and/or reversal divergence would all serve as viable catalysts for initiating trades.

That said, because of the lack of bearish momentum on the daily time frame (in spite of the downtrend), it would be advisable to take at least two positions and exit one quickly should the trade show signs of fizzling, also moving the overall position to breakeven or better.

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.