I noticed on the 15 minute GBP/USD chart a clean 88.6% Fibonacci retracement.
To recap from previous analysis, I use a bounce off the 88.6% level as an indication of a new move that is an extension in size of the initial wave, or Wave 1. (This will become clearer in the coming charts.)
This is the point at which I saw it (See Chart 1):
I could have entered a short position immediately but the nearest place for a stop was around 45 pips away; whilst the nearest profit target was over 80 pips giving an okay risk/reward, I felt I could get a better stop on a consolidation. So instead I wanted to wait for a pull back or consolidation to plan the trade from. The risk with this is missing the trade entirely as the price could just rocket down.
Getting into the trade
When I checked the chart again, I noticed a triangle consolidation that the price had just broken out from and decided this made a good entry point. I used a 25 pip stop that was essentially just above the triangle. See Chart 2.
Getting out of the trade
My target was a 100% extension of Wave 1. This means you take the size of Wave 1, i.e. from Point X to Point 1 on Chart 3, and measure 100% of that size from the end of Wave 2 or Point 2 on the chart. It gave me a target of 1.4957 – about 80 pips away from entry. That gave me a risk/reward ratio of over 1:3 which I think is very acceptable.
When it hit the target, it broke it by 1-2 pips before rebounding and going through it firmly. See Chart 4.
Would I have done anything differently?
It’s worth considering that the underlying premise of the trade was an “extension” of Wave 1. Hence I could have held my position or part of my position for either the 138.2% or 161.8% extension levels. Both of these were broken soundly within a short time adding an extra 100 pips of profit.
These charts are all 15 minute bars.
Point X: 23.45 EST bar; high: 1.51018
Point 1: 07:00 EST bar; low: 1.49718
Point 2: 12:15 EST bar; high: 1.50869
H. Hamid
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