How to short the pound

You will have seen the British pound collapse amid fears that the UK economy was mired in negative growth chaos while borrowing costs and inflation soared. These fears have been reinforced by the UK’s questionable responses over the past week on both fiscal and monetary policy fronts. In response, the GBP/USD fell to a record low earlier this week before recovering somewhat. As fears mount over the UK’s economic outlook, there is a risk that the pound could even fall to par.

So how do you shorten the pound?

Before discussing shorting the pound, it is important to note that GBP/USD volatility has gone through the roof and the outlook is highly uncertain. Most of the selling may already be complete, although that doesn’t mean it’s bottomed out yet. Therefore, when trading long or short the pound, traders must be very nimble and mindful of their position sizes and other aspects of risk management.

Ideally, when shorting the pound or any other market, you should enter the trade as close to resistance as possible. The key is selling into short-term strength but within a major bearish trend. This means you will occasionally miss big moves, but the market tends to reward patience and penalize those who chase sharp moves.

That being said, you don’t always have to sell straight into a rally. Sometimes it may be better to wait for the market to find resistance, give you the “sell” signal, and then seize the opportunity. This type of trading gives you some structure to work with so you know exactly how many pips you are risking trading as you have a clear void level.

The beauty of the above input methods is that they can be applied to all time frames and you are not limited to just the daily chart, for example. This means that even if it looks like you’ve missed a trade on the daily time frame, for example, it’s still possible to scrutinize the price action on the smaller time frames to get on board and take advantage of the momentum.

We will discuss many such hourly time frame examples shortly.

But first, to give you some ideas on how to look for short setups in GBPUSD, here is a chart of the cable we provided in THIS article in mid-September:

This was the daily chart of GBP/USD showing the price bounced off the psychological 1.1500 level. We then found the GBP/USD testing resistance around 1.1590, which was Monday’s low earlier in the week.

“This level was previously support, but after Tuesday’s collapse it could turn into resistance. If the sellers intervene here then a push back to the 1.15 level would be likely. The March 2020 low just above the 1.14 level was tested last week. This level would be our extended target in the event of a sell off.”

As is often the case in a downtrend, old support levels turn into resistance levels and this has been shown once again in the example above.

Trading short the GBPUSD would have been easy in this case. A limit or market order to open a short position at or around 1.1590 with a stop loss above Tuesday’s high and the trendline would have offered a significantly more favorable risk/reward trade. Check out what happened next:

While we focus most on the daily chart, trading outside of the daily timeframe is not always the most efficient way to enter a trade, especially for short-term speculators.

Zooming to an intraday time frame, in this case hourly, below we have highlighted several instances where one could have traded short the pound as it started to fall:

Let’s discuss in turn the 5 sell or short setups we’ve highlighted in the chart above:

1. GBP/USD finds support around 1.1482 where it bounces 2 or 3 times higher before falling below. Once the price returns to test this level from below, it will start going lower. So entry in this example could have been a limit sell order placed to sell at or just below 1.1482 as the price approached that level below. The stop loss could have been placed a few pips above the recent highs made before the collapse.

2. In Example 2, the 1.1350 level proved a tough nut to crack as prices bounced up there a couple of times. But when the price finally dropped below that you can see how determined the sellers were to defend their ground as the price barely rallied back above the same level before dropping around 140 pips. Again, the entry could have been very similar to example 1 above.

3. The third entry signal came as rates briefly broke old resistance at 1.1350 before quickly falling back below as bulls lacked conviction. Sensing this weakness, the bears stepped in to sink rates below the old support at 1.1211 before that major sell-off that eventually led to the Cable making a new all-time low. In this case, entry could have been made with a market order after observing a brief fake-out.

4. Entry number 4 could easily have been overlooked as prices rallied higher to retest the broken support at 1.1211 before diving. This is why limit orders are useful in such situations. Another way to profit from such large dips below a support level is to place a sell entry order a few pips below the support (1.1211 in this case). However, this strategy is a bit risky as the market will sometimes let you in but then quickly go the other way. The stop loss would need to be a bit wide to account for such risks.

5. The last example on the chart is a trade that may or may not have worked. The idea here was to sell the retest of the starting point of the breakdown at 1.0780. While the GBP/USD pair reacted there, falling more than 100 pips, it then quickly recovered and scaled above this level (before falling again). If the goal was to make a quick trade, this may have created enough room for profit. However, those watching for another big drop would likely have been shaken higher by that second wave. Because of this, it’s important to get in the habit of taking at least some profit after a decent move.

The above examples are based only on retesting broken support levels, which is my bread and butter strategy when looking for a short trade. However, there are numerous other ways to enter trades. For example, these could be based on some momentum indicators like the MACD or RSI, or the trigger could be a moving average crossover or a price hitting certain areas of the Bollinger Bands, etc.