August 8 to August 12, 2011 Weekly Winner: Retracement on GBP/JPY Yields 250-pip Winner!

Before I show you how you could have caught a 250-pip winner, I suggest y’all check out my introductory post on the Weekly Winner to give you a better understanding of my framework.

Last week, I stayed clear of yen pairs as I was concerned that the BOJ would do more to weaken the yen. I still feel that my concerns were justified. After all, the BOJ had just intervened in the markets and with the SNB mentioning the possibility of pegging the franc to the euro, interventions were still the talk of the town.

August 8 to August 12, 2011: GBP/JPY Price Action Review

GBP/JPY Hourly Chart

My bias, however, prevented me from seeing this sweet setup on GBP/JPY. After breaking through the bottom WATR early in the week, GBP/JPY retraced a bit and retested 126.70. Popping up my ever handy Fibonacci retracement tool, I see that this level actually lined up with the 38.2% Fib level. This would have been a sweet short opportunity!

Looking at other factors, going short on the pair may have been a good call as well.

First, risk aversion was the dominant theme early in the week, as we saw commodity and equity markets drop across the globe.

Second, the U.K. wasn’t exactly releasing positive reports left and right. In fact, GBP/USD was breaking through a key support level as well, which was a signal that the pound was weak.

One way I could have played this setup was to go short at 126.70, using a wide stop of 125 pips. This would have put my stop past the 61.8% level, giving it a lot of room to breathe. I could have set a target at around 124.20, which lined up with the PWL. I would have caught the full 250-pip move, giving me a 2:1 trade.

Again, this was a little tricky, just because of the intervention factor. Aside from that though, this was a really good setup, and teaches us that the Fib tool can be really handling in catching retracements off big moves. The next time I see a strong sell off on a Monday, I’m gonna remember this setup and use Fibonacci levels to help me spot entry points!