October 3 to 7, 2011 Weekly Winner: Double Bottom on EUR/JPY

Before I begin, I suggest you hit my introductory post on the Weekly Winner to give you a better idea of my trading framework. Finished? Alright, let’s go!

October 3 to October 7, 2011: EUR/JPY Price Action Review

EUR/JPY Hourly Chart

For the second week in a row, EUR/JPY started off on the wrong foot, as sovereign debt concerns weighed heavily on the shared currency. The bears were in full control, pushing EUR/JPY down nearly 200 pips from its opening price.

However, once the bears tested the 101.00 MaPs, they seemed to run out of steam and EUR/JPY bottomed out at that psychological level. Improved risk appetite, less dovish comments by outgoing ECB President Jean Claude Trichet, and talks of bank recapitalization by European finance leaders all helped the euro rally. Even rumors that the ECB may cut rates couldn’t keep the euro down, and eventually, EUR/JPY broke through the WO.

After spiking higher briefly due to some risk taking following the NFP release on Friday, the pair gave back its gains as Fitch downgraded the debt ratings of Italy and Spain. By the end of the week, EUR/JPY found itself just a few pips above its opening price.

Given the sharp drop at the beginning of the week, I wouldn’t have blamed you if you decided against putting up any long euro positions. Then again, some say that being a contrarian pays off, and if you were one last week, you would have been rewarded handsomely!

After dropping 200 pips, EUR/JPY was holding steady at the 101.00 handle, even forming a double bottom formation. Stochastic was also deep in oversold territory, giving you a potential buy signal. If you were feeling gutsy and felt that this was the bottom of the week, you could have bought at 101.00 with a 50-pip stop and aimed for just below the WO. This would have yielded an awesome 175 pips, good for a 3.5:1 trade! Sweet!

While it can be painful to try and catch falling knives, it is sometimes worth the trouble if it can yield great reward-to-risk ratios. Remember, as traders, we are after high probability setups that have good reward-to-risk ratios! Even if we lose a couple of times, as long as our winners are bigger than our losers, we’ll come out ahead!

Were any of you brave enough to put up a long EUR/JPY early last week?