EURUSD: High Volatility Likely Following Sharp Drop
The medium term daily candle chart below shows the price history of the Euro currency (EUR) versus the United States Dollar (USD), known as EURUSD, and trading near 1.2888 around time of publication today.
Last time this pair was reviewed in the Ideas You Can Trade series, on August 19th, the EURUSD was described as still caught in a downtrend and how if a move to the downside of a range followed that it would be larger and more sustained (than a short term bullish recovery).
Since then the EUR/USD has gone into a very steep nose-dive, cutting through multiple already-steep trend lines, thus indicating extremely bearish momentum. This fast drop in prices in recent days, has triggered the possibility of further volatility as periods of larger drops can be followed by periods of equally large drops or even gains.
Therefore while 1.2800 could be the next support stop for the pair, a spike back to 1.31 could precede a lower-low, and therefore extra caution is needed. Such a case occurred back in July when the pair rebounded from 1.2764 to 1.3205 in a single trading day.
Below are examples of how to trade a bearish continuation or a bullish reversal:
1. BULLISH BUY ENTRY ORDER: Create a “Buy Entry Stop” @ 1.2975 with a Limit to take profit @ 1.3015 and a stop-loss @ 1.2940 Risk/Reward Summary: Limit risk = +40 pips profit / (-35) Stop-loss risk = Gain to Loss ratio = 1.14
2. BEARISH SELL ENTRY ORDER: Create a “Sell Entry Stop” @ 1.2849 with a Limit to take profit @ 1.2804 and a stop-loss @ 1.2889 Risk/Reward Summary: Limit risk = +45 pips profit / (-40) Stop-loss risk = Gain to Loss Ratio = 1.12
Medium Term Daily Candle Chart:
Longer Term Weekly Candle Chart: