GBPCAD has been in a raging uptrend for quite awhile, as the daily chart below will show.
Today, the daily candlestick is threatening a bearish engulfing pattern, which is always a potential signal about an end to the upward move. Nonetheless, very few trends shoot up in this fashion and then turn on a dime and crash.
Guest Commentary: Parabolic Move on GBP/CAD Daily Chart
With this much previous bullishness, it is wiser to bet on a trend continuation developing, even though it is at such a high level already.
One of the great things about trading forex is that although a buy on the daily chart would be dangerous, the power of multiple time frames can be harnessed to reduce risk on the trade. Along those lines, the four-hour chart of GBPCAD (see below) provides an easy way to estimate the key zone of support.
As the rising trend line is extremely steep, it is reasonable to assume that any trend continuation pattern should react quickly to it, and thus, even though there is a relative lack of further evidence pertaining to this support zone, the estimation is sufficient. This zone comes out as 1.7316-1.7371.
Guest Commentary: Key Support Zone for GBP/CAD
Regular readers might expect the usual admonishment to look to the hourly chart for reversal divergence, pin bars, and bullish engulfing patterns, and there is certainly nothing wrong with that. However, this particular set-up may not be conducive to that entry, as the support zone is quite small compared to the size of recent candlesticks.
Guest Commentary: The Ideal Time Frame for Trading GBP/CAD
This means that an entry on the hourly chart could appear too late, especially if the momentum reverses suddenly. Thus, although it is not wrong to take the set-up on the hourly frame, the 15-minute chart (not shown) would be the preferred place to look for a trade trigger.
Reversal divergence, pin bars, and bullish engulfing patterns on the 15-minute chart are all viable triggers for taking this trade, but of course, should an entry develop on the hourly chart first, that would be tradable as well.
In this case, it is a matter of taking the next trade that comes up, and doing so on the time frame on which it develops. It should also go without saying that one trade at a time is good enough, so do not take an entry on the 15-minute chart and then increase risk by taking an hourly trigger as well!
As always, however, traders would be well-advised to be prepared to give the set-up two or three tries to develop.
Finally, there is a declining line of resistance on the hourly chart (not drawn) that could give this trade trouble. Should price have trouble breaking this level after the entry, it would also be a warning signal to start scaling out and reducing risk.
By Kaye Lee, private fund trader and head trader consultant, StraightTalkTrading.com