Scaling Into a GBP/JPY Pullback

Guppy has pulled back quite a bit since nearly reaching the 190.00 handle in December. ¬†It’s now in a technical area for potential support, so will forex traders¬†jump in long here?

GBP/JPY 4 Hour Forex Chart

GBP/JPY 4 Hour Forex Chart

The correct answer to the question above is always “I don’t know,” but for me, there are a few fundamental considerations that has me more as a buyer than seller at these levels.

Fundamentally, I think the Bank of Japan‘s pledge to do whatever it takes to stabilize inflation and the economy will put pressure on the Japanese for a very long time as it did in 2014. And on over at the Bank of England, arguments for a rate hike are fading away as the data weakens, but relative to the yen, Sterling is still pretty attractive. But with data weakening in the U.K., we may continue to see weakness in Sterling in the short-term, which is why I’m scaling into a long position.

On the four hour chart above, the pair has already reached the 38% Fibonacci retracement area, which is just above the previous resistance area that held strongly in September 2014. I’ve already gone long at current levels with a very small position, and if there is further weakness, I also have a buy order for a very small position around the 61% Fibonacci retracement level.

My total position stop will be below the Fibonacci retracement area and major psychological level of 175.00, but I won’t hesitate to close early if the market environment calls for strong down moves (i.e., broad risk aversion sentiment). Here’s what I am doing:

Long half position GBP/JPY at market (180.70), stop at 174.00, profit target at 190.00
Long half position GBP/JPY at 176.50, stop at 174.00, profit target at 190.00

Remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly. Create your own ideas and don’t follow what I do. Risk Disclosure.

I’m only risking 1.00% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of about 2.47:1 if both positions are triggered. Of course, anything can happen in the forex markets, so if the story changes I’ll be sure to reassess and adjust quickly if necessary. Stay tuned!