Doing a Flip On AUD/JPY

Forex Trade Idea: 2014-05-22

Sentiment quickly changed on AUD/JPY this week, so I’m going to do what traders do: flip my bias to play what the market is giving me.

Before you move on, for those who are not familiar with my framework, signals, setups, or acronyms, please visit my discretionary trading framework blog.

AUD/JPY 1 Hour Forex Chart

AUD/JPY 1 Hour Forex Chart

I closed my last AUD/JPY trade because of the bearish reaction to the dovish RBA meeting minutes and the BOJ refraining from taking on additional stimulus measures at this week’s monetary policy meeting.  This brought on the sellers out of the woodwork and AUD/JPY, but it looks like pair has recovered to retest the broken support marked on the chart.  I’m not sure if there’s still juice left to squeeze out of  recent sentiment changes, but there are technical signals that could possibly draw in another round of sellers:

  • Bounce stalled at closely watched support & resistance areas: the Fibonacci retracement, moving average, major psychological level (94.00) area, broken support-turned-resistance
  • Stochastic indicating overbought conditions
  • Bearish divergence

I like to call this setup the “trifecta” because there are three different technical arguments to potentially draw sellers back into the mix, or at the very least, for bulls to lighten up on long positions.  So, I decided to take a shot on the combination of sentiment shift and technical setup for a short-term, nibble trade.  Here’s what I am doing:

Short half position AUD/JPY at market (94.05), stop at 94.80, max target at 93.00

Remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly. Create your own ideas and don’t follow what I do. Risk Disclosure.

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 1.4:1.  I’ll probably shut down early if that 61% Fib area doesn’t hold, and if it does go my way, I may consider scaling in another position and trail my stop if there is another catalyst for downside momentum.

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 by following me on Twitter and Facebook!