August 1 to August 5, 2011 Weekly Winner: A 27:1 Trade on GBP/JPY… No Kidding!

Before I show you how you could have caught a 27:1 trade, I suggest y’all check out my introductory post on the Weekly Winner to give you a better understanding of my framework.

August 1 to August 5, 2011: GBP/JPY Price Action Review

GBP/JPY Hourly Chart

GBP/JPY was a wild buckin’ bronco last week, but if you had played your cards right, it would’ve taken you on for a sweet, sweet ride!

The start of the week seemed normal enough. Price popped up to test the PWH and upper WATR before risk aversion set in and poor U.K. manufacturing PMI data took the pair all the way down to 124.50. However, the pair was able to recover, and it spend the next two days straight up chillin’ below the WO even though the U.K. published a couple of positive PMI reports.

Things went crazy on Thursday as the Bank of Japan finally stepped in to weaken the yen. It intervened directly in the markets, selling yen by the boatloads, and announced that it will be expanding its asset buying program. Of course, it did all this to decrease the attractiveness of the yen, which has been rising like crazy in response to safe haven flows.

But the jaw-dropping 27:1 setup that I spotted had nothing to do with the intervention! It was a matter of shorting GBP/JPY at the right place and at the right time!

Sounds too good to be true? Lemme break the setup down for you then, hommes!

Scroll back your charts a couple weeks and you’ll see that 128.30 was a major support and resistance level in the past. And whaddaya know, price was back in that area first thing on Monday! This time around, the PWH and upper WATR lined up perfectly with it, giving us more reason to consider this as a strong potential turning point.

If we had shorted at the PWH (128.30) and used a 50-pip stop, while adding to our position and moving our stop accordingly every 50 pips, we would’ve bagged a home run trade ! The trade would’ve ended within a matter of hours with the market stopping us out at around 124.80… And you’d be done for the year with a 27:1 return on risk, hommes!