The GBPAUD is in the process of continuing its downtrend which makes it an interesting candidate for today’s post. The GBP has been dropping steadily throughout the month of August (more info here) – and we can see the same pattern against the Australian Dollar.
So what’s happening with the GA?
A gigantic bear flag pattern has been built over the past 110 (!) trading days… And it’s about to break.
This bear flag or massive channel has only been a narrow 630 pips measured from bottom to top and has a very shallow angle. Not only that angle makes it a prime candidate for a bear flag chart pattern, but another supportive argument is the fact that the daily chart has a well built downtrend prior to the channel.
THE CONFIRMATION POINTS
The confirmation points on the daily chart are the 2 trend lines which are connecting the tops and bottoms. A break of either signals an important communication message to traders:
- A break lower increases the chance of a bear flag break
- A break above increases the chance that the channel is expanding into a trend channel
- A breakout candle with a strong close near candle high/low and pushing through trend line with a majority of its candle help increase the odds
Traders never can work with absolute certainties (one of the things that make it tough). But by monitoring the break out candle together with trend lines, traders are able to create an edge.
As seen on the screenshot below, the breakout occurred to the downside and the breakout candle was not only a large candle (makes breakouts better) but the close was also near the low. All in all the breakout of the bear flag looks strong.
HOW TO GET IN
Although some of our trading room members are most likely already in short trades upon earlier break out setups, let’s discuss the options for those that are now looking to trade the breakout.
A retracement of the big breakout candle would be the ideal spot for a (re)entry. A pullback to the 50% Fibonacci which has a confluence with the psychological round number of 1.80, is a great shorting zone. Stop loss should be above the top (conservative), but a more aggressive trader could opt for a stop loss above the 78.6% Fibonacci level.
If price does not retrace that deep, then the breakout of the bottom needs to be monitored. A daily candle with a strong close near the low and below the bottom would indicate a sufficient follow through. A retracement of the next daily break out candle would be the 2nd way of shorting the pair. The stop loss then needs to be above the daily highs.
Various targets are options:
- -61.8% Fibonacci target (orange) and daily bottom at 1.77
- -27.2% Fibonacci target (grey) and -161.8% Fibonacci target (orange) at 1.7440
- -161.8% Fibonacci target (grey) in front of bigger weekly bottom at 1.7050
Let us know if you take this trade and how it is developing. Also, please share with us any difficulties or problems you might have had with trading this setup.
Wish you Happy Trading!
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