Fading a GBPUSD rally

Here is a strategy that Kolan, a client for many years, wrote about in the chatroom. The setup is

  1. The most recent major swing is a down swing
  2. There is an “up day” of about a 100 pips
  3. The following day expect a retracement of 50% or more of the up day

The logic makes perfect sense. The “trend” as defined by the most recent swing is down. A relatively large up day might be a short covering rally and tend to be short lived. Or perhaps trend sellers might possibly come in to sell the retracement. Or both!

Here is an example:

  1. As of the close of business on August 21st, the GBPUSD pair’s last major swing was down
  2. On August 22nd the GBPUSD rallied strongly, closing 132 pips higher on the day
  3. On August 23rd the GBPUSD pair retraced 50% of the August 22nd up move

How to trade it
·       Kolan looks for the sell trade entry when this setup occurs. Usually start of day, London open, or during the London session
·       Another possibility is finding the buy trade after the retracement shows signs of reaching support. You would not have the benefit of trading in the direction of most recent major trend though
Which is better?
It depends on your overall assessment of the current situation after weighing the pros and cons.
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