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Thursday March 25, 2010 - 17:35:22 GMT
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FXTimes: Daily Technical Update GBP/USD Assessing Reward to Risk

GBP/USD Assessing Reward to Risk
dtu_032510_gbpusd
  • Daily and 4H: The greenback has been strong across the board and we saw that in the EUR/USD, and USD/JPY yesterday, but did not discuss GBP/USD.  the 1.44 area, coincident with 78.6% retracement and 200% extension of the first downswing, which started November 2009.
  • The 4H time-frame shows a short-term projection before getting to 1.44. We saw breaks of rising trendlines and a continuation after a triangle pattern just above 1.50. Then over the European session, the market attempted a rally, which was rejected from going above 1.50. The following candlestick near the open of the US session reversed back down, and is poised for a swing projection towards the 1.4620 area.
  • Let’s take a look at the 1H time-frame for the reward to risk analysis.

dtu_032510_gbpusd1h

  • 1H: The ATR in  the 1H time-frame is 35 pips. 2 ATRs (70 pips) above 1.50 pivot is 1.5070. This could be a placement of stop-loss.
  • The target as mentioned is 1.4620. In the 1H time-frame, we saw that a trigger would have been at the 1.4920 level. This came after a strong rejection, then an engulfing pattern, and finally a confirmation after that, which closed near 1.4920.
  • The market looks to test our near-term support at 1.4850, so maybe there will be a very short rally. Although it may not return to 1.4920, it maybe close to 1.49, which would still yield a similar reward to risk.
  • The reward to risk for 1.4920 entry with 1.5070 stop-loss and 1.4620 target would be 300 pips to 150 (2:1). Using the current level on this screenshot, the ratio would be unfavorable: 250:200 (1.25).
  • So wait for a little bounce (in other words a quick pullback). An with a bounce, use the high resulting from it for reference instead of 1.50. Then the reward/risk ratio would be much more favorable.
  • For example, if a very short-term rally occurs after the 1.4850 low is broke, look for a slight correction. If the correction tops off at 1.4850, then you can use this powerline level as reference, and add your 70+ pips (2ATR) above it for stop-loss. (3 ATR is recommended for choppy markets, but the GBP/USD has been very trendy). The target would still be the same in the short-term, and a pullback would have further added to the probability of reaching the 1.4620 target in the short-term.

Fan Yang
Currency Analyst
Commodity Trading Advisor

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. CMS will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analyses.

Foreign currency trading is not conducted on an exchange. CMS is acting as a counterparty to its clients’ transactions and as a result, CMS’ interests may be in conflict with its clients. Since CMS acts as the buyer or seller in the transaction one should carefully evaluate any trade recommendation provided by CMS or any of its solicitors. Foreign currency trading involves a substantial risk of loss and may not be suitable for all investors.

All screenshots are made from VT Trader 2.0 and are of actual market data at the time of the screenshot.

 

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