Triangle Pattern Forming on Short Term GBP/USD

Wednesday, 13 October 2010

Monday and Tuesday of this week have been relatively quiet on the currency front – and that looks set to continue in to Wednesday. Today we're looking at a short term chart of the GBP/USD, as it forms a short term triangle pattern on the hourly chart.

Firstly – a triangle pattern is essentially formed when the price action of a currency trades sideways – without breaking out of the range set at the start of the triangle. In this respect, two trend lines can then be drawn from the beginning of the price action to the end – and this forms a “triangle”.

At present, this is exactly what we are seeing on the GBP/USD.

The low of the triangle comes in at around 1.5750. The high is a fair few bars later at 1.6020 – which represents a range of around 270 pips. Since then, the highs and lows of the swinging currency have resulted in a particularly steep falling trend line, and a modestly steep rising line.

So, the key question of course is “where to from here?”. The answer is that when these triangle patterns form, the side with the steepest trend line is the most likely direction for the currency pair to break out in. This is because momentum is often on the side of the fastest trend line.

Therefore, with the GBP/USD currency pair, we believe that a breakout will occur this time to the upside.

Initially, once the currency pair has broken out, we will be looking for a target level of 1.5970 – which is the lower high which the falling trend line is based off. This is a modest target of course, and depending on how momentum develops – we could see the potential for the currency pair to return to the ultimate high at 1.6020 in the medium term.

Failing that, we believe that the downside potential is relatively mild. If the break out does occur to the downside - it shouldn't accelerate at a rate greater than about 20 pips per hour. Additionally, we would expect the currency pair to halt its decline at about 60 pips or so for a breather.

As you can see - whilst the potential for a move in either direction is relatively small (within a few hundred pips) - the breakout has to occur in some direction, so therefore if you are able to set up your trades correctly, you should be able to make a reasonable profit from the extension - either upwards or downwards.