Reading the Risk Reward Trades in the British Pound

Looking at the potential of the British Pound to bring in gains from the short side in a bearish argument presents an opportunity to trade with low risk and high reward in the foreign exchange market. Take a look at the forex chart indicators as shown in futuresource.com's July 24th 9am CET report. You will see a trade against the general trend taking advantage of an opportunity to profit with low risks involved.

Obviously, the British Pound outlook is extremely bullish. Reading the psychology of the market, this would tell you that the currency, as it is too bullish, will tend to be overbought and would soon reverse its direction to correct its position. As you will see in the Net Traders positions, there is a record number of longs held by forex speculators with a % bullish showing an extreme.

An examination of charts using the RSI, the stochastic, and the Bollinger Bands indicators will yield the following forex trading strategy:

• The RSI indicates an overbought territory. The trade sold on a slowdown in momentum after the first high at the 80.0 level. The charts show that the market is moving up again. There is a firm resistance expected with a double too at the 80.0 level of the RSI.

• The Stochastic shows a drop after the RSI moved up and then another push towards the upside. A turndown is expected in the short term. New positions can be taken when the market moves as expected and the RSI trades with the stochastic crossing at the same time. The strategy is to wait it out since we are in the trade anyway. The strategy puts the stop at a close basis of 2.07.

• At the stop, the currency is expected to lose momentum where forex speculators who took long positions in the trade will be washed out. Prices will then move to target the mid section of the Bollinger Bands.

This forex trading strategy illustrates how focusing on a bearish market can benefit a currency that is overbought. Whether this strategy is right or wrong, it presents a good risk-reward trade off and is well founded on its short position in forex trading.