A GBP/CAD Short That Dispels Classic Technical Methods

DailyFX

Talking Points:

  • Rare Formation on GBP/CAD Daily Chart
  • Mixed Signals on 4-Hour Chart
  • The Ideal Time Frame for Shorting GBP/CAD

It is rare for support and resistance to not be immediately evident to traders when using traditional technical analysis techniques, but the pattern on the below daily chart of GBPCAD may well qualify as one of those instances.

The price action yields a pair of parallel channels in which all the lines have acted as significant support or resistance throughout the course of the trend. Although not as popular a technique as the classical trend line analysis, this method is valid basis for finding trade set-ups as well.

Guest Commentary: Parallel Channels on GBP/CAD Daily Chart

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In this particular situation, even a move to the previous support level could have 270 pips or more in it, and if the trend ends, there would be, of course, room for even more. This is more than sufficient for justifying an intraday trade on the lower time frames.

The below four-hour chart of GBPCAD makes this trade a little more suspicious, as the consolidation area that coincides with the line of resistance shows some weakness. As seen, the initial bounce off of this resistance zone was rounded, and upon the second test, price managed to break through it after only a little while.

Nonetheless, this trade is bolstered by the fact that there has been relatively little momentum as price heads up towards this area, and as a result, it still represents a reasonable trading opportunity.

Guest Commentary: Mixed Signals on GBP/CAD 4-Hour Chart

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The exact zone of resistance is estimated on the four-hour chart as 1.8215-1.8304. However, trades should be taken on the hourly chart (see below) using bearish reversal divergence, pin bars, and/or bearish engulfing patterns as entry triggers.

Considering the resistance zone on the four-hour chart is only 89 pips deep, and the hourly chart will likely provide entries with even smaller risk (perhaps around 40 pips), the risk profile for this trade is more than acceptable.

Guest Commentary: Ideal Time Frame for Shorting GBP/CAD

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The hourly chart of GBPCAD also shows a rising wedge pattern, which happens to terminate in the key resistance zone. This lends some added strength to the zone despite the initial questions about its validity.

As always, two or three tries may be needed before this trade works, but if it does pan out as shown, it would be more than worth the effort and capital.

By Kaye Lee, private fund trader and head trader consultant, StraightTalkTrading.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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