Every now and then a moving average setup catches my eye because it is high probability trading at its best. It doesn’t happen often, which is why it’s such a pleasure to take – and there have been two which have really caught my eye recently.
The first is on Cable (GBPUSD):
GBPUSD has given us several opportunities this year. You’ll notice that there’s a strong level of resistance at about 1.6260 which was last tested in May. At that time it was over extended from the 50 exponential moving average by 328 pips and going back through the chart for a year or so, I noticed that the mean extension before snapping back to the 50 moving average was about 330 pips. In other words, once it’s extended by 330 pips or more, it’s a good time to look for entries back to the moving average.
In June there was an opportunity to go long when price hit an old support level coupled with an over extension of 411 pips. The two factors (strong horizontal support and over extension) gave us a another high probability trade back up to the moving average.
Then at the beginning of October, Cable did it again. Over extended by 383 pips and another retest of our old resistance level at 1.6260, my signal to get in was a break below the pin bar that faked out to the topside. The previous test of this level had led to a 1,000 pip slide, powering through the moving average without a second thought. This time, however, there was hesitation as the EMA coincided with the 1.6000 level, so when it touched I banked my profit.
It doesn’t mean this trade is over though. If there’s a break below the moving average tomorrow then there’s every chance that Cable could wend its way down to test the support line at 1.5345 again, so keep your eyes peeled.