The pound sterling has our attention today. We have been keeping a close eye on this chart since it broke down at the start of the month and began to form a range trade.

Since Dec. 8, ther have been a five consecutive days where the candlesticks have shown indecision. The first three are clear doji stars and the following two are as well, when taken together.

Now, we have pushed to the top of the range and set up one of our favourite types of trades.

Doji stars are a great way to key in on what is usually a big move. When a market ranges like GBP/USD has, a breakout is usually a powerful event. When a range becomes established, it also gives you good, clear guidelines on where to put your orders. In short, a series of doji stars followed by a push to the upside are a technical traders’ dream.

So what’s the trade? Will GBP/USD breakout and shoot higher? Or will it go back to the bottom of the range?

On the daily chart, we can see that the RSI and stochastic are both showing bottoms and turning higher. But let’s take a look at the hourly chart.

This chart is showing the opposite — the RSI and stochasic are overbought. This is called divergence. It’s when two different charts are giving different signals and unfortunately, it’s common. In a breakout scenario, it’s almost inevitable.

Taking a closer look at the hourly chart, we can see that the parameters of the range are from 1.6167 to 1.6373. Already today, we have come very close to the top of this range but as we can see, it’s offering strong resistance.

The way to play both sides of this trade is by trading with very tight stops. One way to do it is sell the top of the range with a stop 15-20 pips above. If the stop is hit, turnaround and go long. This leaves you vulnerable to a false breakout but allows you to profit in either direction.

A variation of the same trade is to but a buy order in 10 pips above the range with a stop 15 pips inside the range. If you get stopped out or if the market breaks down and starts to fall back into the range, you can spin around and go short at around 1.6350.