The EURCHF and EURGBP are near major support levels and present trading opportunities. Here are some ways to trade them
One of my main strategies to look for trades near major support or resistance levels. There are a few different parts to the strategy.
- The first is isolating a major or important level. The price then needs to move to near that level.
- I like to wait for the price to consolidate near the important level.
- I then watch for a breakout of the consolidation.
- Additionally, multiple time frames can be used to zero in on a trading opportunity, reducing the size of the stop loss needed and typically resulting in a more favorable reward:risk trade.
These steps will be discussed as we go two pairs that are currently consolidating near major support levels, the EURCHF and EURGBP.
EURCHF Near Major Support
A major support level in this pair is between 1.0640 and 1.06. The price bounced aggressively off this region in 2016 and 2017. And this is the first time the pair has revisited the area since.
The price is currently consolidating between 1.0609 and 1.0651.
If the price breaks the consolidation to the upside that indicates that support has potentially held again, and I’d be looking for an initial target near 1.0860. This provides a reward:risk ratio of about 4:1, with a stop loss placed just below the consolidation.
Short-term traders could consider taking profit near 1.07. This presents a reward:risk of 1:1.
In both cases, the reward to risk can be improved. The above levels are based on the daily chart consolidation. By dropping to a 4-hour or hourly chart, we can probably find a smaller consolidation within the daily consolidation to base our trade on.
My preference would be to watch for a consolidation to develop near the bottom of the daily consolidation (near 1.06) if looking to go long. Or for the price to consolidate near the top of the daily consolidation (near 1.0650) if looking to go short.
It so happens a consolidation has formed just above 1.06 within the bigger consolidation. A trade could be initiated on a breakout of this consolidation (within the larger consolidation). The lower entry point means the reward:risk improves to 9.5:1 with a target near 1.0860. The hourly chart below shows this.
A trader could also take a short position if the price dropped out of the bottom of the consolidation and below 1.06, with a stop loss above the top of the small consolidation. OR a trader could wait to see if the price rallies back to near 1.0650 and consolidates again. They could then trade either direction the price breaks out…up or down.
In either case, using the hourly or 4-hour consolidations provide better entry points within the daily pattern.
You don’t need to use this multi-timeframe approach. If you want to keep things as simple as possible, you could just use the daily chart and trade a breakout of the daily chart consolidation.
For additional insights on these concepts see Front Running Chart Patterns.
I prefer the long in the EURCHF, as this is the lowest the pair has been in years, and the Swiss National Bank (SNB) has a tendency to intervene when the rate gets too low. I would view short trades as short-term and utilize a trailing stop loss if you opt to trade them.
EURGBP Near Major Support
The EURGBP is in a similar position, at multi-year support.
Once again, there is a daily chart consolidation. A breakout of the daily chart consolidation could be traded in either direction. A downside breakout indicates support thas broken and the price could continue to slide lower. An upside breakout signals a rally, with an initial target near 0.8550. Shorter-term traders could look to exit near 0.8450.
Once again, an alternative is to drop to the hourly chart, and look for consolidations near the top or bottom of the daily consolidation.
on Feb. 18 the price made a false breakout to the downside, consolidated for a few bars, and then rallied above that consolidation. False breakouts are powerful signals.
If going long near the 0.83 level on the small consolidation breakout to the upside, this could be viewed as a short-term trade back toward the top of the consolidation or a longer-term trade if the price breaks above the top of the daily consolidation (possibly after consolidating again near 0.8340). Targets above 0.85 would have a greater than 10:1 reward:risk.
Final Word on Trades Near Important Levels
There are multiple ways to trade. A trader could simply look at the daily chart and base trades on that. They can also dive down to a smaller timeframe and trade consolidation breakouts on that smaller timeframe. This will improve the reward:risk, but this can also lure the trader into short-term trades which may not have great reward:risk potential. The big reward:risk trades come from using the smaller timeframe for the stop loss and entry, but looking to the larger timeframe for the profit target.
I like to wait for consolidations, as they give me defined levels to trade off of. But I also have strategies that don’t use consolidations, so the idea is to simply watch for the change in the direction; consolidation breakouts are just one way to do that.
By Cory Mitchell, CMT, join me on Twitter @corymitc.
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, or even more than you deposited if using leverage.