Adding another simple technical setup to my portfolio of open forex trades, this time a short on GBP/JPY after today’s pullback higher. Will the previous consolidation area draw in sellers?
It’s my usual setup of selling into strength, this time in Guppy who has been driven lower mainly by a weakening British pound. It’s the uncertainty of the upcoming Parliamentary elections in the U.K. (and the uncertainty of future U.K. fiscal policy) that has forex traders lightening up on Sterling, and I think there’s a good chance of that to continue with U.K. data continuing to come in weaker. Plus I see potential for global risk sentiment to succumb to fear with talks of deflation and weakening in emerging markets (specifically China), potentially pushing capital to “safe haven” situations like buying the Japanese yen.
With that in mind, I’ll take this pullback higher to the previous consolidation area between 178.00 – 179.00 as an opportunity to test that thesis by scaling into a short position from here on up to the 61% Fibs for a swing position. My max stop will be a wide one, far above the 61% Fib, and my target will be the next major support area last seen October 2014. Here’s what I am doing:
Short half position at market (176.16), max stop at 179.50, max profit target at 175.00
Short half position at 177.60, max stop at 179.50, profit target at 170.00
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 2.76:1 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.
Also, I’m adjusting my stop on my AUD/CAD short to breakeven at .9700 and closing my additional sell orders at .9850. It’s now a risk free trade and will likely close ahead of the upcoming Bank of Canada monetary policy statement this Wednesday. Stay tuned!