Any successful trader will tell you that using confluence to your advantage is key to finding consistent profits. It can help validate a trade idea which in turn provides a greater degree of confidence that the associated risk is worth the potential reward.
Those same traders will also tell you that confluence comes in many forms. It isn’t just about using moving averages, support and resistance levels and technical patterns; although those are a few key elements.
In the case of GBPCAD, this confluence is found when we combine the double/triple top between August of 2015 and January of 2016 and the gap from last May. I should note that this gap may not be visible with some brokers, however, it is visible across the four brokers that I checked, which indicates that it’s a focal point for many traders.
Why does this gap matter?
It matters because open gaps often act as magnets, pulling price toward them until the gap is closed. Or in the words of conventional Japanese candlestick charting, the open window needs to be closed.
Now, in order to tie in the confluence that I mentioned previously, we have to remember how to measure the objective of a double/triple top.
If we measure from the October 2015 low to the 2015 and 2016 highs, we get (roughly) 1,220 pips. And if we project that same distance lower starting from the October 2015 low, we get an objective of 1.8510, which just so happens to be 22 pips away from the May 7th close at 1.8488.
But the confluence for a move lower doesn’t stop there. We also have a break of trend line support that dates back to August of 2013. This level was previously respected as support on four separate occasions before yesterday’s break. And although it’s a close call, the pair does appear to have broken below the level on a daily basis.
Could the three factors above be mere coincidence?
Of course, anything is possible, especially in the Forex market. However, trading is all about finding and exploiting the clues a market leaves behind, and right now all of the clues GBPCAD has left point to a move lower toward the 1.8488 handle.