December 13, 2010
A Breakdown Of Today's GBP/USD Breakout Trade - 13 December 2010
I said I wouldn't be trading forex again this year, but there was a set-up earlier today that was simply too good to turn down. It was on the GBP/USD and was a perfect example of an early morning breakout trade.
I switched on my computer at about 8.00 today (UK time), which is a lot later than usual because I usually trade the Forex Morning Trade system at 6.30, but I wasn't intending to open any forex positions. Anyway I noticed that in the previous 8 hours before the London market opened, the GBP/USD had been trading in an incredibly narrow range of just 28 points.
This can sometimes happen when one of the major markets is closed for a bank holiday, but this wasn't the case today, so I thought this was an excellent opportunity to trade a possible breakout. When you consider that the average daily range for the GBP/USD pair is around 116 points at the moment (according to the Average True Range indicator), there were potentially lots of points on offer should the price break strongly out of this overnight trading range.
As you can see from the chart below (which I've had to squash up a little bit), at around 8.25 the price did break below this trading range (where the previous low had been around 1.5776) and created a perfect sell signal. Not only was there a price breakout, but we also saw the Supertrend indicator switch from green to red, the Smoothed Repulse indicator cross down through the 0 level (indicating a new bearish trend), and the ADX rising, indicating a strengthening trend.
It was basically a very strong signal to go short and this pair duly obliged, moving rapidly down to S1, the first support level, where I closed half the position for a profit of around 24 points (after deducting the spreads).
I was waiting for the range for the day to hit 80 points because I figured the price was likely to fall a bit further giving a perfectly reasonable range of 80 points out of an average of 116. This gave me an exit price of 1.5724, and purely by luck the price did go on to reach 1.5720 before bouncing back upwards again. So I was able to close the second half of my position for a profit of 45 points (after deducting the spreads).
This was a classic example of a high probability breakout trade, but sadly these really good set-ups do not come along every day. Very often the overnight trading range is already quite large before the London market opens, making trading these positions very difficult unless you trade them a lot earlier.
For example last week the trading range between the hours of 12.00 and 8.00 were 43, 73, 96, 53 and 79 points for the GBP/USD, which presented a few opportunities, but none as good as today's where the range was just 24 points.
Incidentally if you're wondering how the Forex Morning Trade system performed today trading this pair, it too managed to bank the full 40 point profit as the two indicators both gave a sell signal at 6.30 this morning. However, as I say, I didn't trade this set-up as I wasn't planning to trade this system any more this year and was still in bed.