My picks: Long GBPAUD
Expertise: Combining Money Management with Fundamental and Technical Analysis
Average Time Frame of Trades: 3 days - 1 week
When setting up a trade before the weekend, extra caution needs to be taken to account for the potential market shifts during the low liquidity period. One of a few things can be down to reduce risk. We can trade short-term so that our setup can play out befroe the close of the Friday session. Alternatively, a setup can be laid out for the longer term with wide stops and objectives. The approach I took last week for AUDCHF was to set up my position; but wait for Monday's open to see how the market was trading. With a bias for a bearish break below 0.8400/25 (after a multi-month rising trend was capsized), I was looking for a confirmed push below this floor and confirmation through a decline in broader market sentiment (a decline in stocks, commodities, bond yields). These qualifers saved me from a deep spike low in a false break. With risk appetite rallying and without a higher time frame candle close below support; entry was never triggered.
This is a good lesson to carry forward. However, this time around, I am looking for a hybrid setup in GBPAUD. After an aggressive five-day decline that has spanned nearly 650 points from peak to trough, the market has grown overextended (already capping out its average true range for the week) just when a significant collection of support comes into view. Since the May reversal, this pair has developed a trend channel (four points of confirmation for both floor and ceiling); and the current level of support in this pattern is coincides with a 50-day SMA, 50 percent Fib (of the advance from May 8th to July 10th) and a horizontal trend that has held up a range of lows going back to mid-June. This position offers entry now, but I don't want to jump the gun. Fundamental risk is significant as we could still see earnings interest catalyze broader risk appetite once again come Monday morning; and there is also the advanced 2Q UK GDP number due next Friday. Nonetheless, this positon is in play now; so I will reduce my position size and approach this setup in two parts. I will set a limit entry that can execute today at 2.0370 with an initial stop of 2.0230 and first target equal to risk at 2.0510. The more aggressive component of my positon will wait for Monday's open to see how the market is trading and if there is a chance of an unfavorable breakout. If conditions are still favorable for a bullish move, I will look for a similar entry (or something closer to the prevailing price if a reversal is already developing) and put a similar stop; but my second target will be far more aggressive at 2.0790. When the first target is tagged, I will trail the stop on the second position (not necessarily to breakeven); but I will need to move up stops before event risk next Friday regardless.
