It’s time for new tramlines in the pound/dollar charts

published 28 October 2013

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.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

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.

Exploring other tramline possibilities

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

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.

John is is a British-born lapsed PhD physicist, who previously worked for Nasa on the Mars exploration team. He is a former commodity trading advisor with the US Commodities Futures Trading Commission, and worked in a boutique futures house in California in the 1980s.

He was a partner in one of the first futures newsletter advisory services, based in Washington DC, specialising in pork bellies and currencies. John is primarily a chart-reading trader, having cut his trading teeth in the days before PCs.

As well as his work in the financial world, he has launched, run and sold several 'real' businesses producing 'real' products.