‘Sup fellas? As I promised last week, I’ll be doing a weekly price action review on the best setups on my favorite crosses. I call it “Cyclopip’s Weekly Winner,” and it’s similar to Pipcrawler’s “Pick of the Day.” This week’s Weekly Winner is none other than GBP/JPY!
By the way, in case you missed my introduction to Cyclopip’s Weekly Winner last week, you might want to read up to familiarize yourself with my framework.
The hours surrounding the BOE’s rate decision saw a notable strengthening of the pound. With inflation still at stubbornly high levels in the U.K., the central bank’s decision to sit on its hands has caused many to believe that it won’t be much longer until the BOE gives in to growing pressure to combat rising prices. Some even say we could see a rate hike as soon as the second or third quarter of 2011!
This bit of news was accompanied by yen weakness, which came into play and helped the pair break through the PWH (and top WATR). Take note that during this time, overall dollar strength was causing USD/JPY to rise, and this was one of the reasons behind GBP/JPY’s rally. Keep in mind that when playing crosses, it’s important to monitor other currency pairs to gauge overall currency strength and weakness.
While price did react to the PWH, we did not see a reversal as the pair eventually broke through. Still, there was a pretty sweet setup that we could have taken early in the week.
Over the past couple of weeks, a rising trend line had formed and on Tuesday, we saw a bounce off this trend line. With Stochastic showing overselling, and an indecisive candle forming right after testing the trend line, this could have been a solid setup. Going long after the candle closed at around 131.70, with an initial stop of about 80 pips and aiming for 134.00 would have been a nice trade idea.
An 80-pip stop would have been good, as it would place the stop below the bottom WATR and major psychological round figure at 131.00.
As for the profit target, looking back at prior weeks, we can see that 134.00 held as resistance, so this would have been a good place to take profits off the table. If we had taken this setup, we could have won a decent 230 pips, which would give us a sweet 2.8:1 reward-to-risk trade!
Now, if you’re a more aggressive and more experienced trader, there’s another setup that you could have gone with that would have been very lucrative.
Assuming you bought at 131.70, went with a smaller stop of 50 pips, and decided to add to your position every 50 pips while moving your stop in proportion, you still would have caught 230 pips, but you would have maximized your winnings by recording an amazing 12.5:1 reward-to-risk win!
How did that happen? Lemme explain:
Our original entry was at 131.70, which means that our original stop was 50 pips below at 131.20. When price moved up to 132.20, we would’ve added another full position, but moved our stop higher by 50 pips, bringing it up to 131.70. We would have repeated this process until either
a) our profit target is hit
b) or we get stopped out by the market.
Of course, in this example, we can say that it worked and hit our take profit because we are seeing everything in hindsight. But remember that the purpose of this exercise is to realize setups that we may have missed. Hopefully in the future, we won’t miss setups like these in the future, and not only will we take them, but we will learn how to maximize them as well.
We repeat though, adding to a winning position is NOT EASY. It can be psychologically difficult and it is strategy that should only be left to more experienced traders.