Cross-Eyeing: Awesome Bullish Pennant on GBP/JPY – Trade Closed

Trade Closed: 2011-3-22 23:28:

GBP/JPY 1-hour Chart

Drats! Just when I thought I caught a winner, I got killed by the spread as my adjusted stop got hit! What’s worse, price eventually hit my profit target!

My trade was lookin’ as sweet my mama’s bunny pie, but unfortunately things didn’t quite work out too well for me.

Here’s a recap of what happened on my trade:

  • First position triggered at 131.75, as there was a breakout from the bullish pennant.
  • A couple of hours later, my second position was triggered at 132.25. At this point, I moved my stop to 131.75, my initial entry point. This was done in order to maintain the same level of risk on my trade while pressing my advantage.
  • Price retraced back to 131.77, but unfortunately, because of the wider spread on GBP/JPY, my stop loss was triggered.
  • GBP/JPY eventually rose up and tested 133.00 yesterday.

Stopped out at 131.75: -50 pips / -1.0%.

Because of the spread, that @#$%^& spread, I missed out on a 4:1 trade! If you take a look at my chart, price didn’t even touch my stop at 131.75. It was the spread that bumped me off.

You can imagine how disappointed and annoyed I am that such a small thing did me in. But hey, that’s trading! All the small details matter!

What’s important is that I learn from this little dud. So what lessons can I take home from this trade and what could I have done differently?

  1. Watch out for the spread.

    I love playing currency cross pairs, but one of the disadvantages of trading them is that they have larger spreads than the majors. What would normally be a 1 or 2 pip spread on EUR/USD could easily be 5 or 6 for EUR/JPY depending on your broker. Remember to factor this in when putting stop loss orders and choosing how many units to put in.

  2. I could have been more aggressive.

    In hindsight, I could have been a bit more aggressive on this trade. Yes, it was a breakout trade, but as you see in the chart, the four candles before the breakout were pretty short. This was a strong indication that if we saw a breakout, it could be a strong one.

    I know it’s not always good to be aggressive, but in this case, being aggressive would have been best. The range price was trading in got narrower and narrower, and price actually broke the pennant well below my entry point.

    I could have done better by adjusting my orders lower and entering earlier, perhaps at 131.40. If I had maintained a 50/1/1 stop-trail-add strategy, I would’ve caught a bigger chunk of the move and improved my reward-to-risk ratio to a sweet 6:1 in the process.

Overall, a bit of bad luck killed my trade, but no excuses here – this is what happens in the forex world. Just gotta bounce back on that horse and find the next awesome setup!

Trade Idea: 2011-3-20 23:42

GBP/JPY 1-hour Chart

While waiting for that EUR/JPY potential trade of the year setup to ripen, I happened to glance at GBP/JPY… and what do you know, I happened to like what I saw! That setup on the 1-hour chart of GBP/JPY looks pretty sweet to me!

First up, lemme give props to Big Pippin, who spotted this setup and graciously alerted me (by splashing water on me while I was asleep).

After popping up thanks to the intervention efforts by the G7, GBP/JPY consolidated for the rest of Friday and has now formed a bullish pennant. According to the BabyPips.com School of Pipsology, this is a bullish continuation candlestick formation, so we could see a breakout soon.

My trade idea is simple – buy the breakout! Of course, it ain’t that simple, and there are some Xs and Os to consider in taking this setup.

For one, it is a breakout setup and I do think that I could maximize my profits on this trade by going with a stop-trail-add strategy. I’m looking to go long at 131.75, which is above the falling trend line, with an initial stop of 50 pips. I’m thinking of adding to my position at 132.25, while moving my stop to my initial entry at 131.75. I will be aiming for 133.00, which has been a key area of interest in the past and could serve as resistance now.

Take note that the height of the pennant is roughly 200 pips. Still, I am wary of the potential resistance at 133.00. In addition, the top WATR is at around 133.10, so I doubt the pair can break above that area without going through a pullback first.

Besides, by aiming for 133.00, I will have a reward-to-risk ratio of 4:1, which is still pretty sweet in my opinion.

Fundamentally, I think this trade has plenty of support from both sides of the equation.

For one, a lot of the dust has settled regarding the tragedy in Japan. Markets are slowly regaining their confidence and risk appetite has been picking up. And now that the G7 has pledged their support to keep the yen from further appreciating, I think GBP/JPY will be facing considerable headwinds going down.

As for the U.K.‘s side, tomorrow, it will be rolling out its CPI report, which most are expecting to show a rise in inflation from 4.0% to 4.2%. I don’t think I have to remind y’all how big an issue inflation has been in the U.K. recently. I think if the actual results are able to match forecasts (or even better– exceed them) we could see a sharp rise in GBP/JPY.

Also, on Wednesday, the MPC meeting minutes are due. I know, I know, the last meeting had votes in favor of doves. But I think that the minutes may still serve as a catalyst for a strong pound rally if it shows that some doves are beginning to open up to the idea of rate hikes.

So again, just to recap, this is what I’ve got lined up for this trade:

Long GBP/JPY at 131.75, stop loss at 131.25, add to my position at 132.25, take profit at 133.00.

If you wanna keep yourself in the loop to see how this trade turns out, all you need to do is follow me on MeetPips.com and Twitter!

Peace!

  • wolfpup77

    I went long on Guppy last night @ 131.25 and spotted the bullish pennant immediately; up right now 125+ pips and, based on your analysis, am taking profit @ 133.00 as well. This couldn’t be more of a high probability trade right now!

  • wolfpup77

    I went long on Guppy last night @ 131.25 and spotted the bullish pennant immediately; up right now 125+ pips and, based on your analysis, am taking profit @ 133.00 as well. This couldn’t be more of a high probability trade right now!

  • Cyclopip

    @wolfpup77: Glad it worked well for you man! Is your position still open? Last Friday’s high at 132.50 has been a really stubborn resistance level. Hope you were able to take some profits off the table!

  • Cyclopip

    @wolfpup77: Glad it worked well for you man! Is your position still open? Last Friday’s high at 132.50 has been a really stubborn resistance level. Hope you were able to take some profits off the table!

  • wolfpup77

    At around 6:20 am EST this morning, GBP/JPY was lingering around the 132.90 – 132.98 level. I had the feeling right then and there that the 133.00 resistance was impenetrable (much like 82.00 was for USD/JPY last Friday morning), so I didn’t hesitate and CLOSED the dang trade @ 132.95. Good timing, because it eventually dropped a little over 80 pips right after that. All in all, +170 pips!

  • wolfpup77

    At around 6:20 am EST this morning, GBP/JPY was lingering around the 132.90 – 132.98 level. I had the feeling right then and there that the 133.00 resistance was impenetrable (much like 82.00 was for USD/JPY last Friday morning), so I didn’t hesitate and CLOSED the dang trade @ 132.95. Good timing, because it eventually dropped a little over 80 pips right after that. All in all, +170 pips!