GBP/USD is Still Going Nowhere

Tuesday, 14 September 2010

Despite weeks of range trading, the GBP/USD is still no better off for the quiet trading period it has just been through. At present, there is a very clear flag pattern forming on the weekly chart, and the daily chart could soon turn to form the same pattern.

All of this range trading (which is not just happening in the GBP/USD currency pair) is as a result of a nervous market. Financial markets have not only been nervous, but also eerily quiet over the last few weeks. It seems that people are simply adopting a "wait and see" approach rather than jumping right in and making a full on decision as to the future of the currency pairs they trade.

That future is now in the hands of the central banks more than ever before. This is especially the case for the Japanese. If there was ever a time when the decisions of a central bank mattered most, it would be now.

Back to the GBP/USD – the currency is sitting just under the top of a resistance range band, and it is literally directly over a 100 period SMA. We also put a slower 20 period SMA on the chart to see if any added benefits could be seen from this indicator – but again the currency sits directly on top.

Something of note is that the 20 period SMA has just crossed above the 100 period SMA – and this is often a bullish sign.

However, with trading confined to the boundaries of the range, it may be that this cross over is simply one of many which will happen in different directions in the coming days.

The reason we mentioned this chart in particular is that this type of setup on a weekly chart carries a high likelihood of success. Our trading set up is as follows:

We have a buy order positioned just above 1.5960 – which will buy 1 standard lot if the currency hits that point. If it does, it will have broken the upper trend line, and probability has it that the currency will then continue to move higher.

Alternatively, in the opposite scenario, we have positioned a sell order below the lower band of the range. This is at approximately 1.4200. If the currency pair reaches this point, we would expect it to progress lower, as this is defined as a breakout.

To sum this trading strategy up – we believe we have a fairly reliable way of making a profit in this situation. The chart is clearly set up for a breakout at some point over the coming weeks – and we believe that this should net us between 100 and 200 pips in either direction when the move does eventually occur.