In the last post we asked how far will GBP/USD rally.  As you can see from the chart below just as we suggested GBP/USD hit resistance and has reversed down breaking the trend line.

GBPUSD

So do we short the GBP/USD now?  Looking at the chart it is a long way back to the trend line meaning we would have to make our stop loss to far away compared to the reward of how far the GBPUSD might fall.  At this point we will wait for a better entry point to maximize the risk and reward ratio.

Taking a look at the GBP/CAD we see a much better opportunity.  First lets look at the long term 1% box size point and figure chart.  As you can see it has been a little choppy with the trend line but have never seen a buy signal above the 21 EMA since the sell signal given below the 21 EMA back in 2005.  This chart has been in a very steady down trend and looks to continue that pattern.

GBPCAD

Looking at the chart you can see it has recently rallied up to resistance but staying below both the trendline and the 21 EMA.  This means it is time to look at a shorter term chart to find the right entry point.

The chart below is the 0.25% box size point & figure chart of the GBPCAD.  Here you can see we have lower tops and bottoms on the chart which is exactly what we like to see for a reversal.  The chart has also given a sell signal below the trend line and the 21 EMA.

GBPCAD

We have now confirmed resistance on the 1% chart and a reversal on the 0.25% chart.  So now what do we do with all that information?

It is time to place an order.  We will wait for a pull back to the trend line with an order entry at 1.7925.  This will bring us right back to the trend line but does risk that we will not get into the trade at all.  This is a risk we are willing to take as there are always more opportunities.

We will also place a stop loss at 1.8125 which would be a clear change in the trend and a break of the resistance that has been tested twice around the 1.80 mark.

GBPCAD

How much do we risk?

We use 2% capital risk for each trade.  This means the lot size used will vary from trade to trade being determined by the distance to the stop loss and which pair is being traded.

For example on this trade if the amount of money in the account is $1,000,000.00 we are willing to risk (2% x 1,000,000) $20,000.  With the GBP/CAD pair each pip is equal to $0.805 and we are risking 200 pips.  This means if we traded 12 standard lots we would be risking around $19,300 on the trade or just below 2% of our total capital.

If you are ready to make a forex investment be sure to take a closer look at our managed forex account and also look at our forex investment strategy.