When I last covered the GBP/USD on 23 October, I had a very good tramline pair working. There were several possible swing trades up to that date. This meant that buying near the lower tramline and selling near the upper tramline would have produced some tasty profits.
And that is the definition of a good tramline pair placement: when traders can take profits by trading off them.
But on 10 October, there was a nasty head fake, where the market broke below the lower line, and then made several kisses up to the underside of the line, which acted as a line of resistance. It then finally broke when it was back inside the trading channel.
This was the chart then:
I was reluctant to abandon my trusty tramlines, because the odds favoured the market rallying off the tramline, which now should be acting as support.
That was another opportunity for a low-risk trade with a possible target at the upper tramline.
As it happened, the rally did materialise. And since then, the market has been repeatedly testing this support:
This latest series of tests is a mirror image of what happened prior to the move back inside the trading channel.
MoneyWeek Trader is our FREE spread betting & trading email offering you the very best tips, secrets and guidance from our trading expert, John Burford, who has years of first-hand experience.
Exploring other tramline possibilities
Now I have my lower tramline restored as a line of support. And unless there is a move below this line, the trend is still up.
But I have a problem.
I do not like head fakes on the charts. When I see one, I like to explore other tramline possibilities using the new low within the head fake. I may find an even better fit!
And I do find a very interesting set-up:
Here is the daily chart: if I use the head fake low as a touch point, I can draw this excellent tramline pair.
This looks a lot better to me than the previous placement. In my original pair, the upper line was not satisfactory, because I had several overshoots on my upper line, with few touch points.
To have confidence in a tramline, the other tramline in the pair must be secure, with several touch points and, if possible, a PPP (prior pivot point).
Tramlines don’t last forever
The point I am trying to make is that tramlines do not work forever. That is why you must always be on the lookout for alternative placements using the most recent highs or lows (which were obviously not available when the original tramlines were drawn).
We always have to work with what we have at the time. But at the same time, we should be prepared to modify our tramlines when new highs/lows are presented.
Incidentally, my original tramlines may still be working on a smaller scale within the new ones. Unless I see a lot of trading jumping above and then below my original lower tramline, it is best if I continue to respect it – after all, it has provided some great trades.
Using my new tramlines, the upper target remains in the 1.66 area.
If you’re a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:• The essentials of tramline trading
• Advanced tramline trading
• An introduction to Elliott wave theory
• Advanced trading with Elliott waves
• Trading with Fibonacci levels
• Trading with 'momentum'
• Putting it all together