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The British Pound (BP-Spotv in ProfitSource) experienced some heavy selling last week, including a drop on Wednesday of over 350 points. The Pound has currently found support, at least for the short term, around the 2.0200 level. After a sharp move in any market, we need to assess the situation and work out our plan going forward.
Chart 1 below shows the recent market action on the British Pound.
Chart 1
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Any technical analyst will tell you that there are three things the Pound can do from here. It can move up, it can move down, or it can move sideways. The question we all want answered is, “which way will it go?”
W. D. Gann is famous for the accuracy of his market forecasts. But the reason he made so much money is that he knew his markets so well and always had a contingency plan in case his forecast went wrong. In one of Gann’s later lessons, on “Auburn Motors”, he offers two scenarios for students to consider: if the market rallies, watch these levels; if the market declines, watch these levels.
The cynics will say he was having a bet each way, but serious traders know he was simply preparing for all outcomes. Let’s apply this analysis to the Pound. Chart 2 below takes a bullish view, assuming the market has simply retraced and is ready to continue upwards.
Chart 2
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By looking at the ranges the market has shown previously, we can easily project a target range forward and watch closely to see if a rally is strong or weak compared to our forecast. A contingency plan would be: if the market breaks the support level at 2.0200 we will close our long positions and trade short positions.
Chart 3 takes a bearish view of the Pound, and shows different price targets and trading strategies.
Chart 3
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If we were bearish, we could wait to see how far the market can bounce from this support and look to short the market on the first sign of weakness. Or we could wait to see if the support is taken out and place sell orders just below the support in anticipation of the market breaking through. If the market were to make higher bottoms above the support level, we could start to look for long trades.
Finally, Chart 4 shows a potential sideways or “range trading” scenario.
Chart 4
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Range trading means buying at support levels and selling at resistance levels. In this case, we could buy at the support level of 2.0200 and take profits at the first sign of resistance. The horizontal lines indicate previous support and resistance levels. We would watch the market closely to see which levels it gives us going forward. If the market breaks out of a range, we would adjust our trading accordingly.
All three of these scenarios are valid ways of trading this setup on the British Pound. Everyone will have a different approach. My preference is to use time analysis in combination with price analysis as taught in David Bowden’s Ultimate Gann Course. Whatever your approach, your analysis should be secondary to having a concrete trading plan in place and a contingency plan in case the market goes against you.
Be Prepared!
Mathew Barnes
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