I hate trying to pick tops and bottoms. Most of the time it’s pretty unprofitable. But it’s those rare times that it is profitable that make it so tempting. That said, when I am attempting to pick a top or bottom I try to be mentally aware of what I’m doing: trading against the trend.
This is one of those times.
It takes discipline and the ability to admit that your timing may be off. Right now I’m attempting to pick a top, either short-term or long-term, in GBPJPY. But I’m doing so with caution. Let’s dig into why I think we might be in for a pullback.
What is the daily chart telling us?
Most of my reasoning for this trade is coming from the daily chart. Take a look:
There are a few things of interest here. First the 200-day SMA is just a bit above current prices. We just recently put in a high for the day at 143.70 and the 200-day SMA clocks in at 143.79. This is a hugely important level, and one that could very well be respected.
Second, coinciding with these levels is the post-Brexit high of 143.70, the same high we printed today. This was the highest point price reached after the Brexit bounce and we haven’t seen these levels since. I’ve marked this with the horizontal, dashed pink line.
Lastly, look at the RSI. Notice the bearish divergence? Price made a higher high on the daily chart, but RSI has failed to do the same.
When you put these three things together, I like taking a stab at calling a top at these levels. The best part is we can easily define our risk with a stop lose just above the 200-day SMA.
Divergence on the 4-hour chart, too
If we drill down to the 4-hour chart, we’re also seeing bearish divergence:
Again, price has moved to higher highs but RSI hasn’t been able to do the same.
I have no idea if this trade will work out. But I do like the risk/reward potential. Proper money management is the key to trading, and as long as you aren’t putting out too much risk, trading against the trend from time to time can work quite well.
Here’s to hoping!