Short Term Range Trading Opportunity on GBP/USD

Tuesday, 28 September 2010

After a very quiet start to the week, we have taken a look at all of the major currency pairs across the board, and have finally arrived at one which presents us with a viable trading opportunity. The GBP/USD – which is referred to as the Cable – has had an extremely quiet start to the week, and as such has formed a daily range which could be worth trading.

On Monday, the daily candle looked much like a spinning top. That is – there was very little actual change in the price between the open and the close, yet the range for the entire day was relatively expansive. So far, on Tuesday, the entire range for the day is inside the range of yesterday's candle – which is known as an inside bar.

This means that looking forward to Wednesday, the currency pair could either continue to range trade within the first candle's range – or it could break out in either direction.

Usually, when this type of pattern forms, a breakout is the most obvious outcome because of the constraints put in place by the original first candle. Therefore – when analysing this trade, we are looking to profit from a breakout in either direction.

How are we to do that? Here is the trade that we are looking at setting up.

Firstly, we have placed two entry orders. The first is a buy order, which is slightly above the top of the initial candle. The second is a sell order which is placed just below the bottom of the original candle. Both of these orders are conditional on the other executing. In other words – if one of them executes, the opposite order is cancelled.

We have then linked further trades to these initial orders. For example, if the buy order is activated on the upside, we want to protect the trade just in case the currency pair decides to head back south. Therefore, we have placed a stop loss order – pending the execution of the buy order, exactly where the initial sell order is placed.

Hence – we are protecting ourselves from a potential reversal in the currency pair on both angles. The exact same set up also applies to the opposite order, should the sell entry be the one that is activated on breakout.