Shorting the AUD/JPY Pennant – Faked Out!

Trade Closed: 2012-08-06 23:30

AUD/JPY 4-hour Chart

AUD/JPY broke out last week, but unfortunately for me, it turned out to be a fake out! Doh!

I actually got triggered late on Thursday, as the markets were disappointed with Draghi’s comments following the ECB interest rate decision. The yen rallied, causing AUD/JPY to drop and break the support line of the pennant.

However, support at around 81.60 held quite nicely, and price simply bounced from that area. What really did me in though was the release of better-than-expected U.S. non-farm payrolls data.

The report printed job gains of 163,000, which was way above the consensus 100,000 expectation. The markets reacted positively to the news, and we saw a strong risk rally take place, with commodities, equities, and higher-yielding currencies all edging higher. And of course, this absolutely killed my trade!

Stopped out at 82.60: -80 pips / -0.75%

Tough loss to swallow, as my fundamental analysis was initially correct and the ECB did disappoint the markets. In hindsight, one thing I could have done differently was to close my position ahead of the NFP report. Then again, there was no telling that it would come in that much higher than projected. After all, the past few releases all failed to hit their targets.

Anyway, gotta shake this loss off and move on to the next setup! Thanks for following, fellas!

Trade Idea: 2012-08-02 01:30

I happened to read Forex Gump’s dos and don’ts of trading the ECB rate decision and I realized that we have a major event risk on tap today. Since this event can cause large moves on the charts, I figured it could lead to some breakouts on the charts.

So I looked around, searching for a breakout setup that I could play. Low and behold, I chanced upon this gem on AUD/JPY:

On the 4-hour chart, you can see that the pair has been hanging just below a major resistance zone.

AUD/JPY 4-hour Chart

Zooming in to the 1-hour chart, I was pleased to find that a pennant had formed as well… the perfect opportunity to play a breakout, bros!

AUD/JPY 1-hour Chart

I decided to play this trade with a bearish bias because I think the markets could end up disappointed after today’s ECB rate decision. Of course, if that happens, we’ll probably see a strong sell-off on risk aversion.

Why the bearish bias, you ask? For starters, the ECB set the bar of expectations really high last week when ECB President Mario Draghi promised to preserve the euro, so the markets are expecting a lot from today’s decision.

From what I understand, the ECB probably won’t cut rates and won’t introduce another round of its LTRO program. The move that seems most likely is the revival of the Securities Market Program, which is iffy on its own since it doesn’t have the support of Germany. In any case, I don’t think this move will be enough to satisfy the markets and lead to new highs, so I’m siding with the bears.

But of course, I know there is a chance that the markets may extend their rally after the ECB decision, so I decided to set up my trade this way:

Sell stop at 81.80, stop loss at 82.60, profit target at 79.60.

I didn’t enter at market and instead set a sell stop below 82.00 so that if the market decides to go crazy and pop up, I’ll be safe from harm. My stop loss is just above the recent high.

As for my profit target, I’m aiming for the very bottom of the 4-hour range, though I’m open to exiting earlier if market conditions tell me to do so. I’m putting 0.75% of my account on the line because this trade offers a pretty sweet reward-to-risk ratio (2.75:1, son!).

I’d like to hear what you guys have to say about this trade idea. Share your thoughts in the comment box below!

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7 comments

    • cyclopipcyclopip Post author

      The NFP report really did us in. I’ll have an update up soon!

      I hope you didn’t risk more than what’s stated in your trading plan! 

      Reply
  1. Camelman

    MM = Market Makers. It shows 82.74 as high on my screen. Just enough to trigger some stops. I am not sure what “Sell Stop” is? but its 81.74 now, so you are in ? Thanks for your posts

    Reply
    • cyclopipcyclopip Post author

       A sell stop is when you set an order to sell at a price lower than the current price.

      Yes, mate! I got triggered a few hours ago. But so far, the market hasn’t budged much. It’s still hanging around my entry point.

      Thanks for you comments, bud!:)

      Reply
  2. Camelman

    It seems too tight for volatility expected. I think MM might just run it to 82.60 just to catch stops and let it fall if news were bad. My 2 cents :)

    Reply

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