Zaheer Anwari, of TheTradersCosmos.com, takes a technical look at a currency pair, outlines how to eliminate the misunderstood psychology of trading, and shares his outlook for what he’s looking for next out of the pair.
The EUR/GBP has broken out from a long-term period of consolidation and is showing signs of further weakness and establishing a bear trend.
The monthly chart below paints a clear picture of price structure. The bears have been in control of the market since the tram tracks formation at the start of 2013, but the bigger picture shows price in a period of consolidation between the major figure 1.0000 and the support zone around the round number 0.8000. Price has been doing lower highs during this consolidation period which dates back to 2009 but trends have been short lived. This is an example of an area that does not appeal to trend traders and hence the importance of having an extensive portfolio. While the EUR/GBP was range bound, trend traders took advantage of better looking trends on either other forex pairs or another market altogether, such as stocks. This month has seen price break through the major pivot support of 2012 and, so far, cover around 300 pips. I have had a short position triggered and will look to add compounds as price continues to breakout and create lower lows.
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The weekly time frame below shows that price has a bearish bias to it as it is dealing below the weekly 200MA. My trend filter has also been suggesting weakness since price used the weekly 200MA as resistance back in October 2013. The structure of the trend has been choppy but that can be expected in a period of consolidation. The longer the consolidation, the bigger the breakout and so I would like to see a trend develop where the bears cover ground quickly with neat pullbacks to compound. The initial breakout from last week is suggesting this. This week, so far, we are seeing indecision as is expected after a breakout before further weakness. If this turns out to be a fake breakout then I have my stop in play and a small risk allocated.
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The daily below also shows that price has a bearish bias to it as price is dealing below the daily 200MA and my trend filter is also plotting red bars from December of last year. Having a trend filter is an advantage to trend traders as it shows when the weekly and monthly are in unison and both time frames are in impulse waves. I have drawn in the support level that was broken on the 15th of January, followed by the expected breather or retest of the support-turned-resistance level, and then the next breakout, which offered the more conservative entry.
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Price action triggered me into the trade as the bears continued the momentum on Friday last week, but this week, so far, has seen price pullback. As a trend trader, pullbacks are not only expected but also welcomed as it allows for further opportunities to compound. It is here where the dreaded psychology of trading comes into play. Knowing how to hold your positions, without fear or emotion, while price is going against you—before a reversal back in your favor and further profit—comes from understanding the natural movement to price and with experience. This will then eliminate the misunderstood psychology of trading.
What now for the EUR/GBP? I would like to see price target round numbers and so I will be holding my short position to 0.7000 and ideally 0.6000, strategically adding new positions along the way.
The past is not a guarantee but a good indication of future price action. The odds are with the bears and continuing short is my preferred direction for now.
By Zaheer Anwari, Founder, TheTradersCosmos.com
