GBP/USD has completed a price top this week after clearing below 1.7060. This level should now be considered resistance for a short-term bearish outlook. The bearish outlook just got stronger today as price fell below a rising trendline from June. Notice price now trading below the 200-, 100-, and 50-period SMAs in the 4H chart, and the 4H RSI dipping below 30. These are all signs of a bearish development.
Reward to Risk for the Sell-on-Pullback Idea:
In the short-term, if we get a pullback look out for sellers as price returns to the 1.7050-1.7060 area. The bullish outlook should be kept at bay unless there is a break above 1.71. So, let’s take a look at the profile of a trade plan to short around 1.7060. We know the risk. If an entry is around 1.7060 and the stop at 1.7110, then we have a 50 pip risk.
Looking at the daily chart, you see that there is potential support around 1.6920, a support/resistance pivot reinforced by a rising trendline. From 1.7060, the 1.6920 target is about 140 pips. This sets up a reward to risk just under 3:1.
GBP/USD Daily Chart 7/25
(click to enlarge)
On the other hand, if price does NOT pullback, we won’t have a decent reward to risk for entering into the current short-term bearish outlook. Instead, a buy around 1.6920 could provide a decent reward to risk, and the outlook would be in-line with the prevailing bullish trend.
Reward to Risk for a Buy around 1.6920:
If a stop is below 1.69, let’s say 1.6885, then an entry around 1.6935 would risk about 50 pips. Then if the target is conservative, to 1.71, the potential reward would be 165 pips. This is a slightly better than 3:1 reward to risk ratio. Since the prevailing trend is bullish there is a potential that GBP/USD will continue running above 1.71.
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