GBP: USD – Bollinger Band Setup

Here’s a possible buy set up on the 4 hour chart

Daily Chart

Using this as a longer term reference chart, there appear to be a couple of features supporting the potential for a buy trade:

  • The decline from 1.6383 has a 5 swing structure. On this basis, there’s potential for a correction of the whole move once the 5th swing is completed. If tools can be found to identify an entry point close to the end of the 5th swing and with a close stop there is the prospect of a decent reward: risk setup
  • The stochastic is oversold giving plenty of scope for a corrective rally
GBPUSD CFD - Daily. Source: CMC Tracker

GBPUSD CFD – Daily. Source: CMC Tracker

Bollinger Bands on the 4 Hour Chart

It’s early days yet but the Bollinger Bands are beginning to indicate a possible loss of momentum in the current downtrend. This situation often precedes a change in trend.

The clues here are

  1.  The latest trend trough (first arrow) pushed below the lower Bollinger Band indicating strong momentum.
  2. A rally followed but no candle closed above the middle Bollinger Band (20 period moving average). This indicates weak, corrective behaviour.
  3. It’s now possible that we will make a trend trough above the lower Bollinger Band. This would indicate weaker downward momentum and growing indecision.
GBP: USD CFD - 4 Hour. Source: CMC Tracker

GBP: USD CFD – 4 Hour. Source: CMC Tracker

One approach to this set up is to buy as soon as price makes a trend trough above the lower Bollinger Band.

One possibility here is that we will rally now and close above the high of the candle at the 2nd arrow.

Another is that we will drift a bit lower and still make a trough above the lower band.

Of course the 3rd possibility is that the trend gains momentum with candles again moving below the lower band in which case there is no set up.

A typical entry rule may be to wait for a close above the trend trough candle and to place an initial stop behind its low.

About Ric Spooner

Over 30 years market experience - professional trader, broker, director
This entry was posted in Forex, Trading and tagged , , , , , , , , . Bookmark the permalink.

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