As shown below, EURGBP is in a downward channel on the daily chart, but what many traders will likely miss are the two hidden trend lines within the larger channel, which have been noted here as well.
Guest Commentary: Hidden Trend Lines on EUR/GBP Daily Chart
Price has just headed up to pierce one of these hidden trend lines, and given past history, it is reasonable to expect a downward reaction from here.
It’s possible that price will make a new low, with 80 pips or more in the trend continuation. If it simply reacts, there should still be enough room for traders to get in on the short side. It’s important to consider, however, that EURGBP is a relatively slow mover, and thus, proper position sizing is especially important.
Obtaining a zone of resistance is relatively straightforward in this case. There is an obvious consolidation area in recent history, and the estimated resistance zone emerges as 0.8227-0.8251. Price has already entered this area on the below four-hour chart and looks ready to give a pin bar, which would be a valid entry signal.
Guest Commentary: Short Signal on EUR/GBP 4-Hour Chart
As the key resistance zone is only 24 pips deep, the risk profile is quite favorable, especially when considered in conjunction with a lower-time-frame trigger, which we will do using the below hourly chart.
Triggers on the hourly chart would include the usual suspects: bearish reversal divergence, pin bars, and/or bearish engulfing patterns. Price looks to be already completing a second consecutive divergence, although at the time of writing, it could not be confirmed just yet. Should it occur, however, a break below the current black candlestick would trigger a valid short entry.
Guest Commentary: Ideal Time Frame for Shorting EUR/GBP
Two or three tries may be required to get in on this move, but given that there has already been one divergence, the second one is likely to work. With a relatively small stop loss on the hourly chart, the favorable risk profile makes this trade all the more worthwhile.
By Kaye Lee, private fund trader and head trader consultant, StraightTalkTrading.com