Trade review for Tuesday:
1H chart of the GBP/USD pair
The GBP/USD pair traded lower throughout Tuesday. Unlike the euro, sterling showed a reasonably strong correction earlier, but it still leaves hope for a proper uptrend. Recall that the pound remains inside sideways channels on the daily and weekly timeframes, and after testing the lower boundaries, a move toward the upper boundaries is the logical next step. We therefore still expect a rise to at least 1.3650. However, the pound has fallen decisively in recent days. The market prices in roughly a 90% chance of a Bank of England rate hike next week, but, as often noted, it may ignore many factors that support the euro and the pound. The Federal Reserve will announce its decision tonight, yet the dollar is rising regardless. We continue to view current moves as partly speculative, even though sterling trades more technically than the euro.
5M chart of the GBP/USD pair
On the 5-minute timeframe, two sell signals formed on Tuesday. Sterling first breached the 1.3319–1.3331 area, then bounced from below, allowing novice traders to open short positions. Traders may hold those shorts at least through Wednesday evening.
How to trade on Wednesday:
On the hourly timeframe, GBP/USD continues forming a new uptrend. The pound has shown greater resilience versus the dollar and therefore has better prospects for an upward trend than the euro. The technical picture across timeframes supports sterling's rise. The macro backdrop and the dollar's stretched condition also argue in favor of a pound recovery.
On Wednesday, novice traders can remain in short positions, targeting 1.3259–1.3267, since price has broken below the 1.3319–1.3331 area. Consider long positions with targets of 1.3380–1.3386 if price holds above the 1.3319–1.3331 area.
On the 5-minute TF consider trading the levels 1.3043, 1.3096–1.3107, 1.3175–1.3180, 1.3259–1.3267, 1.3319–1.3331, 1.3380–1.3386, 1.3456–1.3476, 1.3587–1.3598, 1.3631–1.3641. Key events include the Fed meeting and Fed Chair Kevin Warsh's post-decision remarks. The decision itself is widely expected to be a hold, but Warsh's tone can trigger fresh volatility in favor of the dollar. Expect elevated volatility in the evening.
Key Rules of the Trading System:
- The strength of a signal is determined by the time it takes to form the signal (rebound or breakout). The less time taken, the stronger the signal.
- If two or more trades were opened at a certain level based on false signals, all subsequent signals from that level should be ignored.
- In a range (flat), any pair can generate many false signals or may not produce any at all. Technical levels may be disregarded.
- On the hourly timeframe, trading signals from the MACD indicator should be acted upon only when volatility is high, and a trend line or trend channel confirms the trend.
- If two levels are too close together (within 5-20 pips), treat them as a support or resistance area.
- After moving 15 pips in the right direction, a stop-loss should be set to break even.
What to Look for on the Charts:
Price levels (areas) of support and resistance serve as targets for opening buy or sell trades or as sources of signals.
Red lines indicate channels or trend lines that show the current trend and the preferred trading direction.
The MACD indicator (14,22,3) — the histogram and signal line — is an auxiliary indicator that can also provide signals.
Important speeches and reports (listed in the news calendar) can significantly influence currency pair movements. Therefore, during their release, traders should approach trading with utmost caution, or exit the market to avoid sudden reversals against the preceding move.
Beginner forex traders should remember that not every trade can be profitable. Developing a clear strategy and practicing money management are key to long-term success in trading.
