Timing GBP/USD’s Pullback
With GBP/USD pulling back against the dominant downtrend, let’s explore the various ways traders can approach selling into this retracement. A blend of technical insights and a disciplined strategy is essential to navigating such setups effectively.
GBP/USD: Assessing the Pullback
Over the past two weeks, GBP/USD has been in mean reversion mode, bouncing higher after hitting six-month lows following the US election, which bolstered the dollar. Friday’s price action formed a small bearish pin-bar candle—a signal worth noting as it suggests that the momentum driving the pullback may be losing steam. Adding to this, the pullback appears to have taken the shape of an ascending wedge, a pattern often associated with market compression and potential reversals.
GBP/USD Daily Candle Chart
Past performance is not a reliable indicator of future results
Trading the Pullback: Opportunities and Considerations
Pullbacks like this offer a chance to align trades with the dominant forces in the market while optimising risk-to-reward ratios. However, balancing these opportunities with the probabilities of success depends on several factors, including trading experience, risk tolerance, and the time available to monitor the markets.
Let’s explore three approaches to selling into GBP/USD’s pullback:
1. Aggressive Approach: Selling on a Retest of the Pin-Bar High
This approach targets immediate entry near the high of the bearish pin-bar candle formed on Friday. The primary advantage here is favourable risk/reward—stops can be placed just above the high of the pin-bar, creating a tighter stop-loss. The downside, however, is the lower probability of success, as this strategy assumes the pin-bar marks the end of the pullback without waiting for confirmation.
2. Conservative Approach: Waiting for a Daily Close Below the Wedge
For those who prefer patience over precision, waiting for GBP/USD to decisively break and close below the ascending wedge on the daily chart could be a safer option. This strategy increases the likelihood of entering after the pullback has conclusively ended. The trade-off, though, is a potentially wider stop-loss to account for increased volatility and a less optimal entry point.
3. Strategic Approach: Using a Lower Timeframe
By shifting to the hourly chart, traders can pinpoint break-of-structure levels within the ascending wedge. Selling into a decisive breakdown allows for a highly precise entry with a favourable risk/reward ratio. The downside is the increased time commitment needed to monitor charts and the potential for false breakouts on lower timeframes.
GBP/USD Hourly Candle Chart
Past performance is not a reliable indicator of future results
Key Events to Watch
Today, Bank of England Deputy Governor Dave Ramsden will speak at the Official Monetary and Financial Institutions Forum, addressing financial stability and the BoE’s toolkit. His remarks could influence sentiment around GBP. Additionally, on Wednesday, the US will publish November CPI inflation data—an event likely to impact the US dollar and shape the next phase of GBP/USD’s trajectory.
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