Monday, September 19, 2016

About Trendlines and Their Importance in Technical Analysis (Part 2)

Today the GBP/USD pair was retracing after the 250 pips drop last Friday, but despite that there was an opportunity to profit. One look at the charts was enough to notice the price channel in which the pair had been moving since the market opened during the night. The pair rose with 95 pips between the parallel lines of the price channel.

Since I know that after such a 250 pips drop a correction is all but mandatory, I used the smallest possible time frame (in this case the fifteen-minute one) and I opened a long position after noticing a divergence between the chart and the RSI indicator, placing a stop loss a few pips below the support at 1.2996.

After GBP/USD formed a pair of higher lows (the red 1 and 2) I drew the first trendline (the darker blue one). After that I drew the parallel trendline through the first high (the lighter blue line). That way the price channel was visible and I could trade from a high to another high, watching the price closely and closing my position – and profiting – every time the pair reached the resistance trendline.

The Bollinger Bands indicator also helped when the pair reached high 5 (in blue) at the upper band of the indicator on the one-hour time frame, which was a signal that the move to the upside had most likely ended for the moment. I was right about that and the pair started dropping, which gave me an opportunity to open a profitable short position. Meanwhile the pair not only reached the support trendline (the dark blue one) but it also broke below it.

This correction probably isn’t over, but I have closed my position and I am waiting for further development before I make any new decisions.