DO WE TRADE THIS TEMPTING 70-PIP USD CHF SIGNAL?
Earlier this week, the USD CHF gave us a Bull Candle breakout from the Resistance of its Pennant setup, with the intention of moving towards the Outer Downtrend Line 70 Pips away. While this might appear to be a comfortable trade for those who trade these smaller moves, a closer look at the Daily Chart will reveal why taking this trade may be a risky move.
As you can see from the charts, the currency pair has already broken the Inner Downtrend Line of the strong Downtrend with the aid of a pair of Double Bottoms. With setups such as these, there is always a tendency to move to the Outer Trend Line after a very long trend has ended.
DAILY CHART - BREAKOUT SIGNAL
DAILY CHART - INNER & OUTER TREND LINES
DAILY CHART- POTENTIAL 70-PIP MOVE
A key aspect of trading Breakouts is that the Candlestick Signal must be strong. This signal provided here is too weak to justify entry and could lead to an unexpected reversal or a very erratic move to that Outer Trend Line. Weak Consolidations and/or Breakout Signals are two notorious reasons that False Breakouts take place. In the chart below, we can see that the candle to the left was a much stronger one and is that type of signal that we look for when trading breakouts.
DAILY CHART- BREAKOUT CANDLES
One possibility that could unfold in these situations is that a stronger Bull Candle appears above this weaker one. In general, when this occurs with Consolidation Breakouts, the trade can be taken at that 2nd candle. However, in this particular situation, the gap with the Outer Trend Line would become smaller, reducing the profitability of the trade even further. Also, in some cases, the market may actually come close to the Outer Trend Line without actually hitting it. It can then either U-Turn to resume the previous trend or consolidate for a long time.
If a move does take place it could still be a very good trade for Day Traders, but perhaps too small for Swing Traders.
Let´s see what unfolds in the days ahead.
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