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As EUR/USD approaches its August 2015 highs, let’s take a look at how EUR/USD’s price behaviour will shape our trading strategy.
The bigger picture…
It’s always best to gain some perspective by using a higher timeframe and we favour the weekly candle chart for this purpose.
Notice how the price chart below is very minimal; no lagging technical indicators, no distracting fib lines – just key structural levels.
Using our minimalistic weekly candle chart we can quickly see the significance of the August 2015 highs at 1.1714. EUR/USD has essentially been in a sideways consolidation range for the last two years and the August 2015 highs represent the very top of this range.
Markets have a memory and should prices retest the August high an almighty battle is likely to ensue between traders who got badly burned and traders who got richly rewarded at this level. These battels often create imbalances in supply and demand and it is these imbalances drive our trading edge.
EUR/USD Weekly Candle Chart
Digging down to the detail of the daily candle chart (below) reveals that a robust uptrend is in place.
EUR/USD has been stair-stepping higher since the turn of the year with resistance being broken and used as support on multiple occasions. In fact, EUR/USD’s ability to break resistance this year should make traders very wary of trying to pre-empt a reversal at the August 2015 highs.
EUR/USD Weekly Candle Chart
We favour waiting for clear evidence that a reversal is in place before getting short. Sufficient evidence includes:
- Stop hunting false breakout – the market breaks through the August highs only to reverse and close back below. Best defined by long-tailed pin-bar candles, bearish engulfing candles and two-bar reversal patterns.
- RSI divergence – prices break to fresh highs but the RSI fails to follow suit, indicating that price exhaustion is creeping in.
- Break below daily ascending trend channel – this more conservative approach should offer the highest probability entry whilst sacrificing the enticing risk/reward characteristics of the other two.
Until we see clear evidence of a reversal we will continue to look for lower timeframe entries into EUR/USD’s daily uptrend.
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