GBPUSD Bearish Flag
At present the GBPUSD is forming one of my favoured formations… a bearish flag.
For those unfamiliar with bearish flags these are formations whereby the currency has had a decisive directional move followed by a nice tight consolidation period after. As a general rule whatever direction was made PRIOR to the consolidation, is what will occur after the consolidation. So in the case of the GBPUSD the direction prior to the consolidation was DOWN, therefore, it would be highly probable that the break out of this consolidation will be the downside.
A current chart of this phenomenon can be seen here.
But identifying such a pattern means nothing unless a strategy can be created involving it.
Before I begin formulating such a strategy I like to quickly take a peek at Forex Factory’s Economic Calendar to see if anything is likely to help or hinder this directional trade by way of economic announcements… and one such announcement being made today is Industrial Production, which, according to the forecast is likely to be positive for the GBPUSD and should see it move north.
Okay, with that in mind what should one do?
Well, as the economic announcement isn’t anything major I’d still like to trade this currency in the direction of the formation. Therefore, I will place a sell stop entry order at 8930, with a further sell stop entry order at 8910 with stops for these at the 50% retracement zone of 8992 (+ spread).
However, as the economic announcement is slightly bullish in flavour I will place a buy entry stop at 8973 with stops at 8910 (I would then watch 9010 as a target, and if all goes well through this level 9070 as the ultimate target).
These orders will go on at 0400 NY EST if none of the entry prices have been broken since then.
This is just me thinking out loud… and not to be construed as trading advice.
But what about the EURUSD or the USDCHF? Don’t they have similar directional movements on their hourly charts?
They do, but if you look at their flag poles you’ll see that the poles (the directional part of their move) was interrupted – i.e. it wasn’t as sharp as the GBPUSD. And while I do prefer uninterrupted flag poles (where with each candle we see lower highs – for BEARISH flags – and higher lows – for BULLISH flags) the interruptions during the GBPUSD’s flag pole formation aren’t as lengthy in time and in price than the EURUSD and USDCHF.
Tags: Currency Analysis, GBP USD
September 5th, 2006 at 10:35 pm
By the way…
Targets for the GBPUSD should it break SOUTH would be the length of the flag pole, being 160 pips, however, if we were to measure the uninterrupted part of the flag pole (which started from around 9010 down to the base at 8913) we would have an initial target of around 100 pips.
I will be watching the initial target, and if the GBPUSD begins forming bullish reversal patterns I’d be inclined to take the profits and move on.
Ryan
September 6th, 2006 at 1:47 am
Hi Ryan,
Thank you for your email notification of the GBP/USD bearish flag formation . I really have the following question to ask , In case everybody start to short GBP/USD then who will be the buyers ? and what will happen to the pair in this case ?
Many Thanks
Tony Andraos
September 6th, 2006 at 3:20 am
Hi Tony!
First, the forex market is the largest market in the world and I don’t think any person will have the strength to manipulate a liquid currency (such as the GBPUSD) in any direction for an extended period of time.
Although it would be great to have that power (I’d use it for the greater good… honest!). ;o)
However, if every living soul wanted to short the GBPUSD then obviously we’d have a problem of establishing a SHORT position because NO ONE would be willing to open a LONG position.
If this were to happen I’d envision that the GBPUSD would crash to a level where either:
1. those who have sold are willing to buy back their lots to close out their position for a profit that they are happy with, or,
2. people change their view and begin placing LONG entry orders at prices they think the GBPUSD would be at bargain/oversold prices.
I hope this helps answer your question.
Ryan
September 6th, 2006 at 7:25 am
Looks to me like you nailed this one right on the head, Ryan! Good work.
September 12th, 2006 at 6:39 pm
[...] First, we need to know where this break point exists. As a general rule most flag break points occur around the 50% mark of the flag pole, however, experienced traders can sometimes pinpoint earlier entry points and one of these earlier entry points is where the second peak/trough occurs during the consolidation/flag period. In the case of the GBPJPY and CHFJPY formations yesterday I identified the second peak in both charts. I knew that if these prices were broken it would end the flag formation for how it should normally be traded (being in the direction of the pole). [...]
May 8th, 2008 at 8:45 pm
The US dollar has been weakening against the UK pound for several years, reaching a record high for the pair. In fact if we go back to 1984, when the pair were virtually at parity ( one pound was worth just over one dollar), the US dollar has been in a steady decline since, and as recently as December 2007 reached the all time high of almost 2.12, a level not seen before. As a currency trader, the question I am always asked is where do I believe the currency is heading in the future – a critical question if you are thinking of buying and holding US dollar assets long term, or paying for these assets in US dollars. Naturally there are many factors which affect the long term relationship but my current reading of the charts would suggest that if the pound breaks below 1.93 then it is likely to weaken further to 1.75 in the medium term.