Forex Trade Idea: GBP/JPY Bearish Divergence

I’ve got my one eye on Guppy for quite some time now, patiently waiting for an opportunity to catch the forex downtrend on a pullback. Think it’s time to hop in?

On the pair’s 1-hour forex time frame, I’m seeing a descending trend line connecting the recent highs, and it looks like a retracement is underway. Using my trusty Fib tool on the latest swing high and low shows that the 61.8% level is closest to the trend line while the 50% Fib coincides with GBP/JPY’s WO and PWL levels, which have previously held as support.

So far this week, the inflection points such as the top and bottom WATR have also been holding quite well. Because of that, I’m inclined to set my entry and exit orders right around these levels. I’m also seeing a bearish divergence, with stochastic making higher highs and price making lower highs, convincing me to enter a small position at market.

GBP/JPY 1-hour Forex Chart

GBP/JPY 1-hour Forex Chart

There are no major reports lined up from the U.K. today, which suggests that risk sentiment could stay in the driver’s seat. Forex traders were in the mood to buy higher-yielding currencies yesterday but I’m not so sure that these market vibes might last. Global equities are still down, China ain’t lookin’ too good, crude oil is still droppin’ and BOE Governor Carney just admitted that they’re not ready to tighten anytime soon!

Even though the latest set of CPI and jobs reports from the U.K. came in better than expected, the lack of wage growth (average earnings index down from 2.4% to 2.0%) could continue to keep a lid on inflation and consumer spending. We’ve still got the U.K. retail sales report due by the end of this week and a 0.1% decline is eyed, so I’ll keep close tabs on that release then.

Here’s my game plan:

Short GBP/JPY at market (166.50) for 0.25% risk, max stop at 169.50 above the swing high and top WATR, initial profit target at swing low of 164.00.

Short GBP/JPY at 61.8% Fib (167.15) for 0.25% risk, max stop at 169.50, initial profit target at 164.00.

Remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly and make sure you check out our Risk Disclosure.

I’m only risking a total of 0.5% on this trade, assuming my higher entry order gets triggered, but I’ll be ready to add to my position and trail my stop if price breaks below 164.00. Of course, anything can happen in the forex market, so if the story changes I’ll be sure to reassess and adjust quickly if necessary. Stay tuned and let me know what you think about the trade setup in the comments section below!

  • forzion

    Nice setup, unfortunately the sentiment has improved a bit so it has rallied. I am also looking for short but i would like to enter in daily timeframe looking for possible breakout through 165,00 support level.

    • Cyclopip

      Bahh yeah, it was looking really neat from the technical standpoint but that surge in risk appetite last week took me out. I’m still gonna wait for a higher pullback on the longer-term time frames or possibly enter on a breakdown of those previous lows, too. Think we’ll see another run in risk aversion this week?

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