What a difference a day or two makes in the forex market! Risk aversion hits big time after the weak China manufacturing data yesterday, kicking off a transfer of capital from higher-yielding currencies to “safe havens” like the Japanese yen–not so good for my long GBP/JPY position!
Original trade idea: Long GBP/JPY on Consolidation Break
The consolidation break out to the upside failed to follow through as the story on global risk sentiment changed on a dime! The pair broke below the consolidation pattern and continued to drop to my stop out level at 171.00 where I exited the trade.
Total: -200 pips/ -0.50%
This was something that I think caught most everyone by surprise, and another example of how “anything can happen in the forex markets.” We actually got two examples today when Bank of England Governor Carney basically changed forward guidance by saying that rates will remain low, despite the unemployment rate coming within a hair of the 7.0% target. This brought a round of pound selling by those traders who thought we would get a rate hike in the U.K. much sooner than later.
In hindsight, the setup and story was good, at least until the story changed. The first thing I could have done differently was to close at 172.00 when the market temporarily found support there during the Asia markets, but at the time I wasn’t sure if the China reaction would have long-term implications in currencies. The second thing was to adapt by executing a stop-and-reverse play for a short-term trade to try to take advantage of the new catalyst and momentum.
But I’m okay with going all the way to my stop; it was pre-planned, I kept my risk very small and I already accepted that is what I could lose. No biggie because I get to live and trade another day.
I still have my EUR/GBP short on at the moment, trading just 10 pips under my stop. I’ll let that ride since my risk at the moment is only 10 more pips, but I may close before the weekend. Stay tuned!