The GBPUSD charts below, 240-minute, 60-minute, 30-minute and 15-minute, all indicate that the GBPUSD will potentially retrace before continuing higher. Here's why:
- The 240-minute chart stochastics is above the 80 line indicating, on the highest timeframe, the market is overbought. Any time a market is over-extended, it is like a car running on empty. It needs fuel to propel price into new highs. The retracement is what provides the fuel for the price to move into higher ground.
- The 60-minute chart shows both the Stochastics and the ADX is overbought (confirmation between two technical analysis indicators that the market is over-extended). Additionally, instead of the volume expanding on the highs, the volume is decreasing. Again, showing that price needs more fuel to propel into higher ground.
- The 30-minute chart is a replica of the 60-minute chart: Stochastics overbought, ADX overbought, and buying volume decreasing.
- The 15-minute also shows decreasing buying volume and trend divergence on the highs (higher highs in price but lower highs on the Stochastics). Even though the pivot bar formation ended with a bullish bar, it is misleading because, more likely than not, the next bar will be bearish.
Identifying the retracement is only part of the trading equation - the other part is deciding how to trade these areas. For example, a trend trader may opt to wait for the price to retrace to either the 60-minute or 240-minute chart to ensure that support forms and that price will potentially continue up. The only purpose of identifying the retracements areas is to prevent the trader from "buying the high". Instead, the trend trader "buys the retracements".
However, a counter-trend trader may opt to trade the retracements. A retracement trader is likely to be quicker to enter and exit because he is aware that price can go against him very quickly, especially if the trend is very strong. The counter-trend trader often tries to "sell the high" but has to be quick to take profits or admit when they are wrong.