Here’s one of my favorite trading setups

One of my favorite trading set-ups is a failed new high. This is a
situation where the market has been rallying, surges to a new high for the move,
but cannot hold those relative new highs, and rolls over to finish the period
lower. These can be excellent short entry opportunities, especially when
the market has rallied in to an area of resistance. This is a set-up which
could be forming on the daily EUR/GBP charts.

In assessing the chart below, the first thing to observe is the lower high
put in a couple of weeks back when EUR/GBP failed to break through 0.6900.
The cross then proceeded to take out the low from the early part of January,
giving the chart a generally negative bias. The most recent sell-off also
took the market below the lower Bollinger Band, so it could be said that the
latest rally is the expected rebound back within the Bands. The cross has
now reached the area of the 20-day moving average (the middle line in the
Bollinger Band plot), which means it is at a potential turning point ahead of a
move back down to retest the recent lows. It is also in the area of
resistance from the last rally peak. That sets things up for a possible
resumption of selling near-term.

The day is early yet, but with the rally to a new relative high in EUR/GBP,
and already a pull-back from those levels to a point below yesterday’s high, we
have the makings of a possible new high failure reversal trade. The hourly
chart below gives us our entry point.

Look to the low put in just above 0.6840 overnight. That is the key
level. If EUR/GBP breaks below that point it would definitely complete the
reversal set-up and should signal a move back down toward the lower Bollinger
Band on the daily chart, if not even lower. With a sell entry at 0.6840,
or perhaps a fraction lower, and a stop placed above 0.6850 the initial trade
risk could be about 15 pips. That stop might seem a bit close, but if the
market breaks down then reverses back up that high, we would have questions
about it’s legitimacy. The immediate target for the short would be
0.6800.

These sorts of set-ups tend to lead to quick, sharp moves when they work out,
so one must be nimble on entry and exit.

John Forman is a near 20-year veteran of trading and investing across a wide array of markets and instruments. He is author of the forthcoming book,
The Essentials of Trading (Wiley, April 2006)
and is currently working on a new book –
Trading With Fire. His analysis and market comments have been found in the financial news media across the world and he has published dozens of
magazine articles on trading methodology and analytic technique. To learn more about John’s research and trading activities, visit the
Anduril Analytics website.