Catching a Rebound in the Pound

From the Desk of Ian Culley @IanCulley

Anyone can enter a trade. It’s easy. 

But before you step up to the line to place your bet, you must have a plan – a set of rules rooted in risk management to guide you through your trade.

There’s no way to enter and manage a trade if you don’t know where you’re right, where you’re wrong, and where you’re taking profits. Without a plan, your strategy and philosophical approach to the markets don’t matter. 

That brings us to the British pound.

Here’s a chart of the GBP/USD cross:

A few weeks ago, we outlined a short setup in the GBP/USD pair. The pound was breaking down to levels associated with the Brexit sell-off, and we wanted to ride that trend lower.

Around the same time, the EUR/USD reached parity, as the US Dollar Index $DXY hit its highest level since November 2002. "Long dollar, short everything else" was the trade.  

But now that the GBP/USD is back above our risk level around 1.2025, we can’t be short. That trade is no longer valid based on our plan. The market told us we were wrong about the direction or the timing – or both.

The recent breakdown could end up being a failed move. The bullish momentum divergence points to that possibility. This is a great opportunity to pivot by flipping the book long.

I know this type of trade might not fit into everyone's wheelhouse. A few years ago, a mean-reversion move like this wouldn’t have interested me. Either the breakdown would work, or I would be on to the next trade.

But I’m more flexible today than I was then. And it’s made all the difference.

As long as it’s above 1.2025, I like buying the pound with an initial target back toward 1.2350. The beauty of this trade is that if it works, the pound could go much higher. And if we’re wrong, we’ll know soon. 

That’s all I can ask for – I have a plan to follow. Now, I await the outcome.

Stay tuned.

Thanks for reading.

As always, let us know what you think.

And be sure to download this week’s Currency Report!