Big moves from Sterling this week, enough to break a rising trendline in GBP/JPY. Is this a break-and-retest forex setup and is this the start of a downside move?
Guppy recently broke a strong trendline that connected rising lows that go back to the end of September, after bottoming out around 181.00. This break was on the back of recent dovish comments by the Bank of England that interest rates to remain low ‘for some time.’ This is obviously a big catalyst for pound sentiment, and it may be the main driver for Sterling in the short-to-medium term. So, I’m looking for a bearish move on GBP, which makes the bounce higher a potential opportunity to draw in like minded forex traders like me.
I’m going with a simple “break and retest” setup in that if the pair retests the broken rising trendline area, I look to short with a small position since this is a bit contrarian to the recent trend and positive global risk sentiment. My stop will be above the Fibonacci retracement area, and my max profit target will be the next strong support area that has held well this month. Here’s what I’m doing:
Short half position GBP/JPY at 186.00, max stop at 187.75, profit target at 184.00
I’m only risking 0.50% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of about 1.14:1. 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!